When I worked at Blue Shield of California, I learned that the Affordable Care Act’s premium rebate formula has a glitch that rewards insurers who overcharge. The insurance industry, which has reaped over $700 million from the flaw, has kept it a secret until now.
Under the ACA, insurers must pay rebates whenever medical expenses account for less than 80% of premiums charged for coverage sold to individuals or small employers. The rebate amounts are calculated by subtracting what the insurer actually spent on medical care from 80% of the premiums collected.
The problem with the formula is that it enables insurers who set premiums too high and are required to pay rebates to earn higher profits than if the premiums they set meet the standard.
How the rebate formula encourages overcharging
Assume medical expenses for individual coverage turn out to be $400 a month and ...
|
Insurer A charged a monthly premium of $500 |
Insurer B charged a monthly premium of $600
|
Rebate amounts would be calculated as: |
Insurer A: ($500 x 0.8) - $400 = 0 |
Insurer B: ($600 x 0.8) - $400 = $80 |
Resulting in insurer profit and administrative expense allowances of: |
Insurer A: $500 - $400 = $100 |
Insurer B: $600 - $400 - $80 = $120 |
And net customer costs of: |
Insurer A: $500 – 0 = $500 |
Insurer B: $600 - $80 = $520 |
What can be done about the problem? The formula could be easily rewritten to increase rebates to a level where the incentive to overcharge is eliminated—or better yet, to a level where insurers pay a bit of a penalty for overcharging. Since the formula is written in law, changing it would require legislation. While moving any kind of bill on Obamacare through Congress would he a huge lift, this might have some appeal on both sides of the aisle.
As I noted in a lengthier article on this for health insurance.org:
It would offer Republicans a way to tamp down premium hikes that will be announced just before the November elections without adding to government spending, and would offer Democrats a way to strengthen Obamacare’s consumer protections. In addition, polling shows that majorities of both Democratic and Republican voters support the rebate provision, so giving it more teeth would likely be broadly popular.
There may also be an alternative way to solve the problem, which would be for states to take action on their own. The Affordable Care Act allows states latitude to set stricter rebate standards than those written into the federal law. However, it’s unclear whether that would include revamping the formula. That’s something lawyers will need to consider.
Fixing the rebate formula would admittedly provide only modest relief, but Obamacare enrollees could use all of the help they can get.