Why your health insurance company may owe you money

The medical loss ratio rule requires health insurance companies to pay back any excess premium revenue they earn. But is it the best use of the money?

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Myles Ma, CPFCSenior ReporterMyles Ma, CPFC, is a senior reporter and certified personal finance counselor at Policygenius, where he covers insurance and personal finance. His expertise has been featured in The Washington Post, PBS, CNBC, CBS News, USA Today, HuffPost, Salon, Inc. Magazine, MarketWatch, and elsewhere.

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Health insurance companies estimate that they will send about $1.1 billion in rebates to their customers in 2023. [1] These rebates are the result of a provision of the Affordable Care Act called medical loss ratio, which limits how much premium income insurance companies can use for administration, marketing, and profits. Companies have to return any premium income above a certain threshold in the form of rebates.

What is medical loss ratio?

Medical loss ratio is the proportion of premium revenues insurance companies spend on clinical services and quality improvement, as opposed to administrative costs and profits. Insurance companies must spend either 80% or 85% of premiums on medical care under the Affordable Care Act, depending on the size of the market they serve. Insurance companies have to pay rebates if they don’t meet this standard in a given year. 

How is medical loss ratio calculated?

For health insurance companies in the individual and small group markets, the medical loss ratio requirement is 80%. For the large group market, which are plans that cover 51 or more employees (though in a few states you need to have 101 or more employees), the requirement is 85%. The ratio doesn’t apply to employers who self-fund their health insurance — most of which are large companies.

Costs that don’t count as “medical care” include executive salaries, overhead, and marketing. Another way of thinking about medical loss ratio is that if spending on these non-medical costs exceeds 20% (or 15% for large group plans), insurance companies will have to pay a rebate. The average medical loss ratio has fluctuated since the Affordable Care Act passed, from as high as 103% in 2015, to as low as 72% in 2020, likely because few people used medical care during the early part of the COVID-19 pandemic. [2]

The intention of the requirement is “to encourage health plans to provide value to enrollees.” [3] But are there better ways of doing it? 

What’s the point of medical loss ratio?

Dr. Caroline Plott, a resident at Johns Hopkins Medicine (she says her opinion doesn’t reflect that of her employer) says some of the money should instead go toward public health efforts. 

In an article published in JAMA in 2020 that she co-authored, Plott argues that insurance companies could support underfunded state public health departments. Funding for these agencies is set to be slashed after the recent debt ceiling negotiations. [4] Public health agencies are responsible for contact tracing, screening, health education, and helping people get treatment — especially crucial during a pandemic. Plott also suggests that insurance companies can fund public health efforts directly.

This spending could pay off for the companies over time.

“These interventions would ultimately be helping the health of the community and the people the health insurance company is insuring, and that would hopefully lower the cost over time,” Plott says.

It may be difficult to convince people this is the best use of the money, especially when the alternative is a check sent directly to them. The average rebate per person in 2022 was $205 in the individual market, $169 in the small group market, and $110 in the large group market (these amounts can sometimes be split between you and your employer). [5] But if you think of it as money you’ve budgeted for health care, conglomerating it together may be more impactful for the community than having people spend it on their own.

“If someone had a $30 rebate back, perhaps they could buy a gym membership for a month and work out and that would help their help,” Plott says, but if you collected $30 from a bunch of people, you can do bigger things like set up health screening programs and catch disease early or even prevent it.

While the worst part of the pandemic is over and the size of medical loss ratio rebates has since decreased, there’s still opportunity to use this money in a smarter way, Plott says, perhaps even to prepare for future pandemics. 

“It’s a way to use the traumas and challenges of that time and take the good ideas that came out of it so we can work toward a better future,” Plott says.

Image: GrapeImages / Getty