MLR Rebates

I haven't written about the ACA's Medical Loss Ratio (MLR) program in over a year. Here's a very simplified explainer:

Ever since the ACA went into effect in 2011 (3 years before newly-sold policies had to be ACA compliant), to help reduce price gouging, insurance carriers have been required to spend a minimum of 80% of their premium revenue (85% for the large group market) on actual medical claims.

Put another way, their gross margins are limited to no more than 20% (or 15% in the large group market). Remember, that's their gross margin, not net; all operational expenses must come out of that 20% (15%). The idea is that they should be spending as much of your premium dollars as possible on actual healthcare, as opposed to junkets to Tahiti or marble staircases in the corporate offices, etc. Anything over that 20% (15%) gross margin has to be rebated to the policyholder.

I haven't written about the ACA's Medical Loss Ratio (MLR) rule in awhile. I was pretty obsessed with it a few years ago, and I still check in on it from time to time, but otherwise I've mostly moved on to other things.

HOWEVER, the MLR rule is still pretty important...and while the dollar amounts I'm about to discuss aren't much more than a rounding error in terms of federal budget numbers, it's possible that the could play a small role in helping get a much larger project moving forward.

Before I begin, here's a short refresher on how the MLR rule works:

I haven't written much about the ACA's Medical Loss Ratio (MLR) program this year. Here's a very simplified explainer:

Ever since the ACA went into effect in 2011 (3 years before newly-sold policies had to be ACA compliant), to help reduce price gouging, insurance carriers have been required to spend a minimum of 80% of their premium revenue (85% for the large group market) on actual medical claims.

Put another way, their gross margins are limited to no more than 20% (or 15% in the large group market). Remember, that's their gross margin, not net; all operational expenses must come out of that 20% (15%). The idea is that they should be spending as much of your premium dollars as possible on actual healthcare, as opposed to junkets to Tahiti or marble staircases in the corporate offices, etc. Anything over that 20% (15%) gross margin has to be rebated to the policyholder.

Back in March, I wrote up an exhaustive history of the House v. Burwell court case, which has seen more twists and turns than a small intestine.

I'm not gonna recap the whole thing yet again today (click the first link above for that), but I concluded the most recent chapter by noting:

Simply appropriating CSR payments and killing off Silver Loading would pay for more than 40% of the cost of massively upgrading the ACA (perhaps $250 billion of the $600 billion or so total 10-yr cost).

I honestly thought that I had written the final chapter in this absurd saga, which started two administrations, two House Speakers, three HHS Secretaries and three U.S. Attorney Generals ago when the Federal Circuit Court issued their final ruling last August, but apparently not.

Since this insanity has been grinding away for nearly seven years now, I'm pretty much just reposting my entire August entry, with an important update tacked on at the end.

Here's a quick recap:

• The ACA includes two types of financial subsidies for individual market enrollees through the ACA exchanges (HealthCare.Gov, CoveredCA.com, etc). One program is called Advance Premium Tax Credits (APTC), which reduces monthly premiums for low- and moderate-income. APTCs are the subsidies which have been substantially beefed up by the American Rescue Plan (the additional subsidies will be available starting in April in most states, soon thereafter in most other states).

• The other type of subsidies are called Cost Sharing Reductions (CSR), which reduce deductibles, co-pays and other out-of-pocket expenses for low-income enrollees.

• In 2014, then-Speaker of the House John Boehner filed a lawsuit on behalf of Congressional Republicans against the Obama Administration. They had several beefs with the ACA (shocker!), including a claim that the CSR payments were unconstitutional because they weren't explicitly appropriated by Congress in the text of the Affordable Care Act (even though the program itself was described in detail, including the payment mechanism/etc.)

Last summer, as part of my ambitious Medical Loss Ratio project, I not only broke out the exact dollar amounts and number of enrollees receiving rebates for every insurance carrier in every state in the country before the data was made publicly available, but I even took a crack at projecting just how much I expected individual market MLR rebates to be for every state in 2020 as well.

Historically, the ACA's MLR provision paid out between $100 - $400 million per year from 2012 - 2018 in rebates to individual market enrollees, averaging around $186 million per year...until last year. Here's what I originally projected 2019 payments (paid out in 2020) would likely look like last August:

If you use Anderson's 7% and assume the final, national weighted average for 2020 comes in at around 0.5%, that means roughly 6.5% of that $93.2 billion could end up having to be rebated to enrollees....or potentially 1/3 of up to $6 billion.

Way back in April (a lifetime ago, I realize), I noted that my prediction from over a year ago regarding the massive Medical Loss Ratio rebates which would likely be paid out this year to 2019 individual market enrollees was dead on target:

If you use Anderson's 7% and assume the final, national weighted average for 2020 comes in at around 0.5%, that means roughly 6.5% of that $93.2 billion could end up having to be rebated to enrollees....or potentially 1/3 of up to $6 billion.

The three-year rolling average means that the actual amount paid out would be 1/3 of that...perhaps $2 billion in September 2020.

Welcome to the latest chapter in the long, epic CSR Lawsuit Saga which has been slogging along for six years now.

Here's a quick recap (again):

• The ACA includes two types of financial subsidies for individual market enrollees through the ACA exchanges (HealthCare.Gov, CoveredCA.com, etc). One program is called Advance Premium Tax Credits (APTC), which reduces monthly premiums for low- and moderate-income. The other is called Cost Sharing Reductions (CSR), which reduces deductibles, co-pays and other out-of-pocket expenses for low-income enrollees.

• In 2014, then-Speaker of the House John Boehner filed a lawsuit on behalf of Congressional Republicans against the Obama Administration. They had several beefs with the ACA (shocker!), including a claim that the CSR payments were unconstitutional because they weren't explicitly appropriated by Congress in the text of the Affordable Care Act (even though the program itself was described in detail, including the payment mechanism/etc.)

One of the biggest non-COVID19 related healthcare policy stories in the news this week was the Monday ruling by the U.S. Supreme Court stating that yes, the federal government does, in fact, have to keep its contractual obligation to make $12 billion in payments legally owed to a bunch of health insurance carriers.

As I've explained many times over the years, the idea behind the ACA's Risk Corridor program was that the launch of the major ACA regulations starting in 2014 involved such a radical reworking of requirements for private health insurance policies (especially on the individual market) that it was unreasonable to expect insurance companies to be able to accurately predict how well or poorly they would fare under the new rules. While the "free market" is supposed to be a "sink or swim" environment, it was agreed that this was so dramatic a change that the carriers should be given "training wheels" of sorts to smooth out the bumpy ride for the first three years.

NOTE: BEFORE reading below, read my explainer from last November on the Risk Corridor Massacre lawsuit and potential Medical Loss Ratio implications.

OK, got all that? Good.

Well, sure enough, this morning the U.S. Supreme Court issued their ruling, and it wasn't even close:

A big Obamacare decision from SCOTUS this morning: The court rules 8–1 that insurers who lost money under the Risk Corridors program have a right to payment from the government AND damages for unpaid amounts. https://t.co/PjODO35oKe

— Mark Joseph Stern (@mjs_DC) April 27, 2020

This was an easy case. Only Justice Alito dissented, complaining that the court mandates "a massive bailout for insurance companies that took a calculated risk and lost." Dude really hates the ACA! https://t.co/PjODO35oKe