With payer rebates expected to increase in 2021 as a partial result of the pandemic, several health insurers are taking steps to mitigate the crisis’ effects through proactive premium relief and extended cost sharing coverage.
The Patient Protection and Affordable Care Act (ACA) requires payers to spend a minimum percentage of each premium on healthcare or quality improvement: 80% for individual and small group plans and 85% for large group plans.
Rebates are determined based on the average adjusted medical loss ratio (MLR)—roughly, claims paid divided by premiums collected—over the past three years. Adjustments are based on plan size and other factors, and self-funded plans are exempt. Rebates can be direct payments or other vehicles, such as premium credits or reductions.
The 2020 plan year so far has seen dramatic reductions in the volume of care sought and delivered, as providers canceled elective procedures and healthcare consumers put office visits on hold. Outward cash flows are lower as a result. At the same time, congressional and state-level actions have required health insurers to pay in full for COVID-19 testing and related services. And while a few states have mandated zero patient cost sharing for coronavirus treatment, many insurers have voluntarily committed to this nationally.
While the impact of COVID-19 on next year’s rebates is still evolving, the reductions in surgeries and office visits and any other disruptions could contribute to large rebates for 2021. Already for this year, initial estimates published in mid-April by the Kaiser Family Foundation point to 2020 rebates nearly doubling those in 2019, which had reached a record $1.4 billion. From 2012 to 2018, national rebates totaled $500 million or less annually.
With the pandemic continuing into the summer and possibly beyond, HRI has identified at least three key uncertainties for payers, including: when and where elective procedure volumes and office visits will return; the total size of testing and treatment costs and whether the federal government will require payers to cover all of these costs; and how unemployment and enrollment churn will evolve throughout the year.
Despite these uncertainties, payers are responding in ways that affect the numerator or the denominator of this ratio and taking other measures to put any unplanned cash availability to work.
While most health insurers are addressing premiums not by lowering them but by lengthening grace periods for nonpayment, HRI found at least seven payers that have announced plans to provide direct premium relief to consumers. With more cash on hand than anticipated, payers may use this strategy to maintain membership as well as members’ health.
These payers are acting in line with other insurance sectors, which in some cases have seen state agencies such as the California Department of Insurance order the return of premiums across lines of business including passenger and commercial automobiles, commercial property and medical malpractice.
Additionally, most large payers have eliminated out-of-pocket costs for COVID-19 testing, and a subset did the same for treatment. While most waivers are expiring in June or July, as does the federal CARES regulation, continuing cost-sharing coverage will further raise the medical loss ratio numerator.
Plans have also taken steps to help providers with cash flow by prepaying or accelerating transfers to them. Medicare did so and is reevaluating the program. Paying providers in advance allows hospitals to offer COVID-19 and other services at a time when other revenues are down temporarily.
Capital freed up by artificially low expenses is useful beyond adjusting 2020 medical loss ratios, including building reserves of risk-based capital to help cover costs of COVID-19 and any other unscheduled events, or buttressing plans for organic or inorganic growth, in particular as possible deals emerge among payers and providers that have become distressed targets.
Regardless of the selected approach, plans can update epidemiological, financial and actuarial modeling to more accurately predict not only next year’s rebates but also their ultimate premium requests to states. In addition, payers can continue to coordinate with employers so that they may remain compliant with the Paycheck Protection Program and Employee Retention Credit eligibility rules that involve health insurance coverage maintenance.