Affordable Care Act saved consumers $1.5 billion last year, but stronger rules may be needed to get more savings passed on to consumers

Consumers
saw nearly $1.5 billion in insurer rebates and overhead cost savings in 2011,
due to the Affordable Care Act’s requirement that health insurers spend at
least 80 percent of premium dollars on health care or quality improvement
activities, according to a new Commonwealth
Fund report. If health insurers don’t follow the rule, they must pay a
rebate to their customers.

Consumers
with individual policies saw reduced premiums when insurers reduced both
administrative costs and profits to meet the new standards, Michael McCue of Virginia Commonwealth University and Mark Hall of Wake Forest University, authors of the report, said. While insurers in
the small- and large-group markets achieved lower administrative costs, not all
of these savings were passed on to employers and consumers, as many insurers
increased profits in these markets.

“The medical
loss ratio requirements are intended to give insurers an incentive to be more
efficient and use most of their premium dollars for patient care,” Sara
Collins, Commonwealth Fund vice president for affordable health insurance, said
in a statement.

“This report
is encouraging, as it demonstrates that these new rules are improving value for
people buying health insurance on their own, which has traditionally been very
challenging,” Collins said. “However, it will be crucial to monitor insurers’
responses to this regulation over time to ensure that all purchasers and
consumers benefit from the savings the law is designed to encourage.”

The report looks
at how insurers selling policies for individuals, small-employer groups, and
large-employer groups in every state reacted to the Affordable Care Act’s
medical loss ratio requirement in 2011, the first year the rule was in place. Small-employer
groups have up to 100 workers, while large-employer groups have more than 50 or
100 workers, depending on the state.

Individual policies

The authors
found that in the individual insurance market improvements were widespread: 39
states saw administrative costs drop, 37 states saw medical loss ratios
improve, and 34 states saw reductions in operating profits.

Some states
had significant improvements. In New Mexico, Missouri, West Virginia, Texas,
and South Carolina, medical loss ratios improved 10 percent or more, while
administrative costs dropped $99 or more per member in Delaware, Ohio,
Louisiana, South Carolina, and New York.

However, the
report finds that in small- and large-group markets, medical loss ratios were
largely unchanged, and while spending on administrative costs dropped, profits
increased.

Small- and large-group policies

For example,
in the small-group market, administrative costs were reduced by $190 million,
profits increased by $226 million, and the medical loss ratio remained at 83
percent, unchanged from 2010. In the large-group market, insurers reduced
administrative costs by $785 million, increased profits by $959 million, and
kept their medical loss ratio at 89 percent, also unchanged from 2010.

Insurers in the individual market have a less stringent medical loss ratio
requirement – 80 percent compared to 85 percent in the large-group market – but
their higher overhead costs and lower medical loss ratios mean they have to
work harder to reach the new standard, the authors of the report said. As a
result, these insurers lowered both administrative costs and profit margins, which
reduced the cost of premiums.

On the other hand, insurers in the small- and large-group markets already have
medical loss ratios in the range of the required 85 percent, so while they
reduced administrative costs, they had the option of turning those cost savings
into profits instead of passing them along to consumers.

Insurers may
have taken profit increases in the small- and large-group markets to offset the
reduced profits in the individual market, the authors said. Many insurers sell
policies in all three markets, so any reduction in administrative costs could
have been spread across all three markets.

Possible stronger rules

The authors conclude
that stronger measures – such as rate regulation, tighter loss ratio rules, or
enhanced competitive pressures – may be needed to ensure that administrative
costs are reduced in all markets and savings are passed along to consumers.