While the coronavirus pandemic has taken a toll on dozens of industries in the U.S., health insurance companies are currently seeing skyrocketing profits. In the summer of 2020, large private health insurers such as Anthem, Humana, and UnitedHealth Group were reporting second-quarter earnings that were double from the year prior. But thanks to health insurance rebates, that might actually be good news for their customers.
It may come as a surprise that the health insurance industry would actually be thriving during a pandemic. However, there are a few simple explanations for the disparity.
Even with hospitals across the country overwhelmed by coronavirus outbreaks, patients are opting or being forced to postpone expensive, elective surgeries—including organ transplants, cancer treatments, and screenings. Likewise, even ill or injured patients have been avoiding doctors’ offices and emergency rooms for non-life-threatening issues out of fear of contracting the virus.
The Affordable Care Act was designed to prevent such a windfall for health insurers. Federal healthcare laws now mandate that insurance companies must put a fixed percentage of money earned from premiums toward their customers’ medical expenses in a rebate.
Health insurance companies are required to spend at least 80 cents per dollar collected from small businesses and individual premiums on healthcare; and 85 cents per dollar for large companies. That’s called the Medical Loss Ratio (MLR). The remaining 15-20% of revenue from healthcare premiums are allotted toward expenses such as administrative costs, overhead, and marketing—with anything left over to be kept as profit. Per the ACA, any additional revenue must be given back to consumers.
According to a report by the Kaiser Family Foundation, a nonprofit agency that focuses on major healthcare issues facing the nation, “individual and fully-insured group market insurers were on track to owe substantial rebates to consumers based on their margins” and MLR, as of June. Despite the fact that the summer months saw “indications that healthcare utilization was returning to more normal levels,” fall and winter surges will likely track with the previously collected data.
In lieu of handing out full rebates, insurers may instead choose to increase claim costs by offering COVID-19 costs without deductibles or waive fees for telehealth coverage.
But in either case, unless outbreak patterns were to change substantially in late 2020—with all evidence currently pointing to the contrary—the Kaiser Family Foundation believes that ACA MLR rebates will likely be “exceptionally large” across commercial markets as we enter 2021.
These MLR rebates are calculated by using an overall three-year ratio average. The 2021 rebates will be based on overall profits from 2018, 2019, and 2020—and 2018 and 2019 were both profitable years for insurers—and signs are still pointing to insurers likely owing substantial consumer rebates.
Another Kaiser Family Foundation analysis on MLR rebates from earlier in 2020 estimated that the payout could be as much as $2.7 billion across all markets—or, an average of $420 a person—not even factoring in the 2020 data. And yet, that nearly doubles the previous record high of $1.4 billion from 2019.
However, one major caveat is that consumers may not be seeing these finds anytime soon, despite the federal government urging health insurers to pay back excess funds more quickly this year due to pandemic hardships.
The law gives health insurance companies a three-year window to calculate how much money to pay back in MLR rebates while offsetting any errors in setting rates or factoring in unexpected expenses. These expenses could include the rising costs of COVID-19 treatments or forthcoming vaccines—or could even factor in those who had previously postponed medical treatment, screenings, or surgeries.
“They don’t actually know what’s coming around the corner,” Boston Consulting Group managing director Dr. Sanjay Saxena told the New York Times. “They can’t just write checks and give away the money.”