Assessing the Financial Performance of Health Insurers Paying a Rebate under ACA

Abstract

Purpose: Affordable Care Act (ACA) requires health insurers across the three major commercial markets of individual, small group, and large group to pay a regulated percentage amount of their premium dollars paid out in medical expenses and quality care improvement activities. This law is referred to as “Medical Loss Ratio (MLR) Regulation. The aim of this study is to conduct a descriptive analysis of the financial performance of health insurers that paid rebates compared to health insurers that did not pay a rebate from 2012 to 2013. This analysis was also conducted within for-profit vs. non-profit ownership as well.
Methods: The study identified 2,111 credible insurers in 2013 with 21 percent paying a rebate and 1,940 credible insurers in 2012 with 23 percent paying a rebate. The study applied a non-parametric approach, specifically the median test, to assess the difference in the median values of each financial performance ratio by rebate vs. non-rebate insurers as well as within ownership categories.
Results: In 2012 and 2013 within the individual market, rebate health insurers generated a profit margin of over 5 percent compared to an operating loss position for non-rebate health insurers. For the small and large group markets, rebate insurers earned profits in excess of 6 percent for both study periods while non-rebate insurers earned profit margins between 1 to 2 percent. In addition, for-profit rebate insurers had higher profit margins than non-profit margins within the individual and small group markets.
Conclusion: Rebate insurers had significantly higher administrative cost ratio for each year and higher profit margin. Within the ownership categories, the majority of insurers that did not comply with MLR regulation and paid a rebate were for-profit. Therefore for-profit entities place a greater value on profitability. One reason may relate to the fact that over 60 percent of these insurers were affiliated with publicly-traded insurance companies, whereby there is greater financial pressure from stockholders and analysts to maximize profitability, especially within the short-term. A second reason may stem from the uncertainty that corporate owners face in finding the right balance of maintaining a regulated profit position and complying with the regulation of the law.