It could be the first tangible sign for some families that health care reform is more than a contentious debate in Washington. And it could signal the beginning of big changes to the health insurance market, experts said.
Health insurance companies that spent more than a certain percentage of premium dollars in 2011 on items not related to paying actual medical claims will have to send out a notice and potentially a refund check by Wednesday.
For many insurance companies, that requirement was known as the 80/20 rule, in which they were required to spend 80 percent of premium dollars paying claims or provide a rebate.
In Georgia, that notice or check will be going out to nearly 250,000 people for a total of $19.8 million. Companies had the option of lowering premiums for next year or crediting the amount to a credit or debit card.
A lack of tangible benefits has probably added to the negatives surrounding the reform law up to this point, said Dr. W. David Bradford, a health economist and the Busbee Professor of Public Policy in the Department of Public Administration and Policy at the University of Georgia.
“People haven’t seen the benefits, unlike when Social Security was passed or Medicare was passed originally,” he said. “Those were controversial at the time, but the actual programs kicked in quickly after the laws were passed and signed. Pretty quickly, people began to see the benefits of it. This time, it hasn’t been the case.”
More than money, however, the refunds refocus debate on how the insurance market is regulated and where the new regulations might provide some disincentives for companies.
Checking claims for legitimacy does not count toward medical loss, which provides a perverse incentive to companies to pay claims without hiring people to double-check them, said Ed Haislmaier, a senior research fellow for The Heritage Foundation.
“The whole thing has a lot of backwards, unintended effects,” he said.
People generally like the parts of the reform law that would prevent companies from excluding people based on pre-existing conditions and from greatly varying premiums in a region based on age, gender or health status.
Bradford said those are referred to in the law as guaranteed issue and community rating, which begin in 2014, along with the requirement to have health insurance or pay an penalty. That requirement is necessary for the other two measures to be economically viable for insurance companies, Bradford said.
Some people “don’t know that you can’t have those things without requiring that
everybody purchase health insurance to avoid adverse selection,” he said.
Adverse selection would mean that while risk and price are set at an average for all people, sicker people are more likely to purchase insurance while healthier people are less likely, setting up a bad deal for the insurance company.
“There’s a real chance, I would say even a real probability, that if we implemented guaranteed issue and community rating without the mandate that the insurance markets would suffer badly, and many of them may collapse,” Bradford said.
One area of the insurance market might already be harmed by the new rule, referred to as Medical Loss Ratio. For policies sold to individuals, companies in Georgia were required to spend 70 percent on actual medical loss.
Some companies missed badly, with American General Life and Accident Insurance Co. not even reaching 50 percent. World Insurance Co. had to refund more than $1,100 per policy.
Companies that handle more individual insurance face much higher costs associated with issuing those policies than companies that write large group insurance, Bradford said. Those costs do not count in the medical loss column, putting them at a big disadvantage, he said.
“How we’re going to deal with these companies between now and the 2014 period (when other provisions kick in) is, I think, an unresolved issue,” Bradford said. “One of the implications is going to be a company that’s basically done individual policies only may not be able to live under the Medical Loss Ratio.”
Smaller and newer companies are also at a disadvantage, Haislmaier said.
“How are you going to grow your business if you don’t have some extra profits to reinvest?” he asked. “One of the effects will be to constrain the ability of small and start-up carriers to grow.”
If the election does not bring about changes that would appear to favor repealing all or parts of the law, insurance companies might start buying up competitors and consolidating the market into just a few major players, probably beginning in 2013, Haislmaier said.