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Covered California and Obamacare related questions from consumers, employers and agents are answered by Phil Daigle with the best information available at the time. Archived entries may no longer be accurate as the Covered California and Obamacare knowledge-base is evolving quickly. TO REQUEST A PERSONAL RESPONSE INCLUDE EMAIL ADDRESS.

Risk Adjustment and MLR?

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Question: The insurance companies do not have any history with the exchange and are probably guessing the risk-profile of the customers. I understand that there is some mechanism built-in to make them whole if they guess wrong and lose a lot of money. (please correct me if I am wrong). My question is, if they find that they were too conservative and make too much profit — i.e. spend less than the stipulated percentage in patient care — are they still forced to give it back. Will it be refunded to the individuals, or to the government, or split equitably based on the subsidy amount.

Answer: The ACA law includes a “risk adjustment” provision that provides a behind-the-scenes mechanism to correct for market imbalances that occur if some insurers attract pools of subscribers whose expected medical costs are substantially greater or less than market-wide averages. It helps to accomplish this by subsidizing insurers that end up with a disproportionate share of high-cost patients and assessing competing insurers that — either through strategy or happenstance — end up with a better selection of health risks. Conversely, there is no mechanism to recover revenue from an insurer who does a better than average job of risk assessment. There is however and Medical Loss Ratio (MLR) regulation in the ACA that requires health insurance issuers to submit data on the proportion of premium revenues spent on clinical services and quality improvement. It also requires them to issue rebates to enrollees if this percentage does not meet minimum standards - at least 80% or 85% of premium dollars on medical care. If they fail to meet these standards, the insurance companies are required to provide a rebate to their customers.


0% MLR is absolutely not a reality. But hypothetically, if the requirement is that the insurance company must spend 80% of the premiums it collects on health care expenses, then it is only entitled to retain 20% for administrative expense, commissions to agents, and the other costs of doing business. In reality, however, the insurance company also is entitled to deduct the various licensing costs it bears with state and federal regulators (there is a new payment to the federal government to cover some of the tax credit subsidies), so if there is only premium income (including tax credits) the real number is closer to 65%-75% of gross premium = 80% MLR.

But your question is about the refund of excess premiums paid. This is a new area for everyone, so the rules may not be articulated well. If the insurance company refunds 100% of the excess to you, as it should, then either the insurance company or you can figure out what percentage of the premium tax credit is in that number.

So let’s use your numbers and do the math. Total premium for the year = $14,400. 70% of that = $10,080, which would be the refund amount. At $450 per month in actual payments, you spend $5,400. The refund to you would include $5,400 in premium tax credits.

So what exactly is that credit? According to the IRS, it is a “refundable” amount based on your household MAGI in relation to the Federal Poverty Level. So the IRS considers it your money. If you did not use it to pay any of your health insurance premiums, it would still be refundable to you when you file your tax return, and you could use that money any way you chose to.

Now what is it really? It is nothing more than another governmental redistribution of wealth — just a new form of welfare payments. The government is not using that money for itself, it is giving it to you in advance, but indirectly when you choose to accept the advance premium tax credits. So when the insurance company must refund excess premiums, it’s still your money, not the government’s, even though they wrote the check. With or without the credits — you would have paid that total amount all along. You are the party entitled to the refund.

On the other hand, if your income increases in mid-year, and you fail to notify the government about your good fortune, you could be the beneficiary of excess premium tax credits, and will have to repay that money to the government when you file your tax return.

The premium refund won’t happen for at least three more months. If they sent the tax credits to the IRS, now the IRS has to figure out how much it has to refund to you, which is not really what they need to do. Complex? Yes. That’s why 100% of whatever amount would have to be refunded will be sent to insureds not the IRS. If you owe the government anything, they’ll get it from you. If not in the current year, then in a subsequent year after they get around to checking your return.

Dear Max Herr:

Thank you very much for taking the time to respond in detail to my question.

The scenario (in my mind) that prompted me to ask that question, and is still not cleared up is as follows:

In a realistic scenario, not unlike my own situation — Unsubsidized premium for a family of 3 = $1200/month subsidy = $750/month Net payable premium = $450/month

If the situation you mentioned in your example of 0% MLR happens, however unlikely that scenario may be, the insurance company should refund 80% of $1200, or $960/month worth of premium. But to whom???

I find it inconceivable that I could potentially get $96012 = $11,520 of rebates, if I paid out only a net of $450/month or $45012 = $5,400. For the $0 premium insurances mentioned in recent NY Times article, the result would be even more bizarre.

I don’t want to beat this horse to death as it has quite a few hypotheticals — but the question was just to see if there was intellectual consistency in the policy and to understand the process better in my own mind.

Thanks again.

“Payments will be made to insureds who paid premiums, not the government that subsidized them.”

I answered your question in my opening comment above.

“If so, the customer would effectively end up paying a lower percentage of their income for the premium”

Well, that may be, but why are you troubled by that. The premiums that each person pays has nothing to do with their income, but their premium tax credits do. If a person receives a subsidy, that doesn’t affect the person’s income and it doesn’t change the premium — it only affect how much of a person’s income will be needed to cover the “unsubsidized” portion of the premium.

People are not required to use the premium tax credits in advance. They would be entitled to their full credit at the time they file their 2014 income tax returns.

None of that has anything to do with MLRs. That’s a function of the insurance company’s rate-setting mechanism and how much they pay in claims. Nothing else. What if 100% of an insurance company’s insureds had $0 in medical expenses in a year? The company would have an MLR of 0% and would be required to return 80% of the premiums. The premiums returned are NOT income to the insured because they were paid with after tax dollars.

Would the picture be any different if the premiums were 80% lower to begin with? No. the insured would simply pay less (or nothing at all) given the amount of any subsidy paid on their behalf. The person who chooses to forego advance premium tax credits can have 100% of them refunded at tax filing time.

Nothing is different under either scenario.

“shouldn’t the rebate go to the bucket the subsidy came from?”

Why would you think this is necessary? The subsidies are funded by taxpayers, not insurance companies. Without the subsidies, the higher cost would be the responsibility of the insured. But many more millions of taxpayers will not receive subsidies of any kind because they are either covered by group insurance or their incomes are above 400% of the Federal Poverty Level.

The government is not actually paying the premiums, it is supplying the subsidy in advance for those who choose to accept it. So why doesn’t the government pay it in advance to the taxpayer instead? LOL! What would most people do with that money? They certainly wouldn’t pay it to an insurance company — not 100% of them. This simply leaves the government in control — you don’t purchase insurance, you don’t get a premium tax credit.

Will persons who receive too much in the way of advance premium tax credits have to pay it back? Of course! Just the same as persons who receive excess advance earned income credits do — it will either be additional “tax owed” or subtracted from any “refund due” when a person files a 2014 federal income tax return in 2015.

“As the subsidy is is adjusted to cover the gap over a certain percentage”

Perhaps this is what is misguiding your thinking. The subsidy is simply based on a household’s percentage of income measured against the Federal Poverty Level. It is not a percentage of the premium — it is raw dollars attributed to a percentage of income. Those dollars may be used to purchase a plan on any of the four metal tiers. The subsidy is not greater for a Platinum plan than it is for a Bronze plan. There is no “gap” only a balance due each month for the amount of premium left unpaid after the premium tax credit has been applied.

My question was regarding the MLR rebates addressed in your last statement.

Would such a rebate based on MLR be issued to the customer even if the customer is receiving a subsidy? If so, the customer would effectively end up paying a lower percentage of their income for the premium than figured in the subsidy calculations. As the subsidy is is adjusted to cover the gap over a certain percentage, shouldn’t the rebate go to the bucket the subsidy came from?

“Conversely, there is no mechanism to recover revenue from an insurer who does a better than average job of risk assessment.”

Actually, insurers who fail to meet or surpass the 80% individual/85% group loss ratios are required to disgorge “profits” up to the applicable MLR. Payments will be made to insureds who paid premiums, not the government that subsidized them.

MLRs must be reported to state regulators and payments must be made by July 1 of the next calendar year. Several insurers were required to refund 2012 premiums in 2013.

As for the other part of your question about insurers whose claims experience is excessive, there are three temporary mechanisms in the ACA/HHS regs to help cover those losses. They are funded primarily with insurance company money.

This is in addition to the money insurance companies are required to pay to the federal government to subsidize Obamacare. In effect, the government “helps” consumers with premium tax credits and recaptures a substantial part of those credits through the additional, new fees imposed on insurance companies to participate in the exchanges.

It is no wonder that many people are seeing their cost of health insurance rise significantly. The insurance industry is not going to pay the full cost of Obamacare at the expense of profits. That’s one reason the 20%+ commissions I used to earn just three or four years ago are now down to around 4% (or less) of the annual premiums.

And I’m also busy enrolling individuals in Medi-Cal, for which I get exactly $0.

There are no winners in this game. Health insurers will eventually leave the individual market entirely. The hand writing on wall is already visible to those of us who understand these economic realities.

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