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Obamacare's $3 billion windfall to customers

The Affordable Care Act required insurers to rein in overhead costs, and consumers saved big. But it also could hamper industry competition down the road.

By Money Staff May 13, 2014 11:40AM

This post comes from Dan Mangan at partner site CNBC.

CNBC on MSN MoneyConsumers have gained more than $3.25 billion in benefits over two years from a Obamacare rule that financially compels insurers to keep a tight rein on overhead costs relative to the medical claims they pay out, a new report says.

Medical doctor © tetra images, Getty ImagesThe Commonwealth Fund report issued Tuesday found that even as insurers paid out less in consumer rebates for violating so-called medical loss ratio rule in the second year of the program, they ramped up slashing of administrative and sales costs, without increasing their profit margins.

As a result, consumers paid less than they might have otherwise shelled out for insurance, or received more in medical claims than they would have, the analysis found.

Insurers paid out a total of about $1.5 billion in consumer rebates from 2011 to 2012 for not meeting the medical lost ratio requirement, which sets a strict formula for keeping overhead costs low compared to medical benefits paid out. The rationale for the rule is to ensure that peoples' premium payments be used mostly for actual health-care claims.

In addition to that, insurers reduced overhead by a total of about $1.75 billion in the same time period without increasing their profit margin, the Commonwealth Fund report said.

At the same time, the medical loss ratio requirement has not lead to significantly reduced competition among insurers, the Commonwealth Fund report found. 

"The Affordable Care Act has changed how health insurance is bought, sold and managed, and, on balance, those changes have produced substantial benefits for consumers without harming insurance markets," said Michael McCue, a Virginia Commonwealth University researcher who was the lead author of the Commonwealth Fund report.

"In its first two years, the MLR requirement contributed to significant reduction in insurance administration costs, a major source of health-care cost growth in the United States," said McCue, whose report relied mainly on data from the Centers for Medicare and Medicaid Services.

However, McCue told CNBC that the success of the requirement could lead in coming years to accelerated consolidation of the health insurance industry, since profit margins will become tighter. That, in turn, could decrease competition in the market.

There were other criticisms as well.

"The medical loss ratio requirement does nothing to address the main drivers of health care costs and puts an arbitrary cap on what health plans spend on a variety of programs and services that improve the quality and safety of patient care," said Clare Krusing, a spokeswoman for health insurance industry group, America's Health Insurance Plans.

"Moreover, the health care reform law's $100 billion health insurance tax will cause premium increases that exceed the value of prospective rebates."

Indeed, McCue's research found that insurers were still spending relatively little on initiatives that could improve the quality of care for their customers, despite the fact that they receive credit for such spending in the MLR formula, and that it can help hold down costs from health claims.

Insurers spent an average of just 1 percent of their premiums on so-called quality improvements, which can include programs toe prevent hospital re-admissions, improve patient safety, and increase overall wellness.

Courtesy CNBC 

The medical loss ratio rule, which took effect in 2011, requires insurers in the individual and small-group markets to use 80 cents of every premium dollar it receives to pay for customers' medical claims, or rebate the difference to their customers. Insurers in large-group markets must use 85 cents of every premium dollar toward medical claims, or rebate the difference.

"The medical loss ratio of the Affordable Care Act creates a higher-value insurance product for consumers," said Dr. David Blumenthal, president of the Commonwealth Fund.

McCue said the rule addresses the possibility that in the past some insurers "may not have been providing the full benefit that the consumer expected in their premium dollars."

"The idea of the regulation is to make sure the plans are paying out more of those dollars for medical care . . . and not higher compensation for the CEO of the health plan," he said.

Erin Shields, a spokeswoman for the U.S. Health and Human Services Department, said: "Thanks to the 80/20 rule, many plans have already lowered premiums or improved coverage to meet the standard, and those that haven't have been held accountable by putting rebates back in customers' pockets.

A minority of insurers owed rebates in the first two years of the program. Although the number of insurers owing rebate shrank from 2011 to 2012, they shrank at a less dramatic rate than the total rebates they paid.

In 2011, insurers paid a total of $1 billion or so in rebates for failing to comply with MLR minimums. The average rebate for a customer that year was $108 in the individual market, $116 in the small-group market, and $99 in the large-group market.

The total rebates paid shrunk in 2012 to about $500 billion as insurers became better at complying with the MLR. The average rebate likewise shrunk, to $95 in the individual market, $86 in the small-group market, and $57 in the large group market.

McCue said he expects the total rebates paid to continue to shrink in coming years as insurers better comply with the MLR requirement. "I would expect a gradual decline, not that steep," he said.

He also expects a slowdown in the cuts to insurers' administrative and sales costs, because of the fact that those insurers have already spent several years targeting those costs.

In 2011, overhead costs were reduced by about $350 million, the Commonwealth Fund report found. But in 2012, the costs were reduced by $1.4 billion. The lion's share of those cost reductions came in the large-group market, where insurers chopped more than $785 million in costs. The other two sectors, small-group and individual, lopped off about $200 million apiece.

"It's going to be a real constraint for them to continue cutting those costs going forward," McCue said.

"You're going to have very thin [profit] margins for the health insurers," he said. "As a result of this, you may see more consolidation in the industry."

McCue's research had found that in the first two years of the MLR requirement "there was a modest reduction in the number of insurers with 1,000 or more members," but "this appears to continue a decade-long trend toward consolidation."

However, with thinner profit margins as a result of the ongoing effects of the MLR requirement, he said, some insurers, particularly smaller ones, may feel pressure to sell out to bigger, publicly traded insurers whose size gives them economies of scale.

More from CNBC

May 13, 2014 1:01PM
Customers saved money my @ss. Anyone who isn't eligible for a subsidy like myself has seen the increase in our insurance premiums, and a decrease in take home pay because of the ACA. My paycheck doesn't lie.  How can you call that savings?
May 13, 2014 12:42PM

Propaganda anyone?

Come on MSN find some real news...

May 13, 2014 1:00PM

I received a huge windfall.

2013 -- $20.00 copay for each doctor visit.

2014 -- No copay but a $3300.00 deductible per person.

Now I cannot afford to go to the doctor if I needed to.

The only thing that is covered at 100% is wellness. Who goes to the doctor when they are well?

Oh and the windfall did not stop there it also affected my dental coverage. My dentist that I have seen for 3 years; I went there for a cleaning and then Cigna reimbursed me for the cleaning. Oh but wait Cigna sends me a letter stating that they overpaid and I had to reimburse them $45.00. The average dental cleaning should only cost $47.00. 

When I called Cigna they indicated to me that my dental coverage had changed as well. I am still fighting Cigna on this matter.



May 13, 2014 12:43PM
everyone gets rebates for the first 3 years, it expires at the next presidential election. He made the rebate expire this way so the next president, democrat or republican, can take the heat on why they don't get rebates anymore and have to pay more.. That's when everyone will start saying that its too expensive and people are being fined and paying more than they used to but by then its already too late.. 
May 13, 2014 1:30PM
Obama care what a joke its just more of taking it from one working man or womans pocket and giving it to a leech
May 13, 2014 1:14PM
I have read the comments on here and it is not surprising that everyone is complaining on here about this Obamasham. Everyone has had problems as a result of Obamasham and I will be seeing this very soon, also. Everyone's deductibles have sky rocketed and everyone is having problems with the over all costs involved. I have heard people around me speak very negative of the Obamasham. I mean EVERYONE!! Yes, it is a sham! Only a few favor it. The majority is against it and if we keep complaining about this and not do something about this at the polls in November and allow the liberals who helped vote this crap in, then we have helped them achieve this. GO TO THE POLLS and show these liberals how you feel about all this and clean out Washington! Keep big government out of our lives! They are destroying our healthcare system. Do you want that to continue?
May 13, 2014 1:23PM
What customer windfall?  My insurance rates went up more than 25% this year...  Thanks Obama!
May 13, 2014 1:19PM
Are they kidding with this one?? Is anyone supposed to believe this bs? 
May 13, 2014 1:31PM
Oh so you mean that payment I make each month that is double of what I had to pay before is actually in my favor?!? Whoda thunk it? Obamacare is as big a waste of money now as it has ever least when I had my  "subpar" insurance before I could afford to have other things.
May 13, 2014 1:27PM
"consumers saved big"?  What consumers?  The ones who now have their premiums subsidized?  The rest of us are spending more, not less.
May 13, 2014 1:37PM
You people @ MSN MONEY are nuts,or propagandists. Premiums and deductable are trough the roof on working families that don't get subsidies. For the people getting the typical liberal democrat handout its a great deal,for the rest of us obamacare is a disaster no matter how you spin it.
May 13, 2014 1:28PM

MSN news just keeps pushing more and more crap out the door!  The so called 7 million that have signed up are more like the 4 million! (There are over 300 million people in the US) Insurance companies "are cutting and not showing more profits", it's because they are cutting care and don't want to show the profits because they will need that money to support operations costs that STILL are not being covered by all the healthy people that are needed to make this all work.  Ain't going to happen.  MSN, you have once again shown just how ignorant you are and how you will report non-sense, knowing that the 47% are to ignorant to know any better.



May 13, 2014 12:57PM
Remember, your doctor or hospital doesn't have to accept Obamacare.  You may have to look elsewhere for health care.
May 13, 2014 1:17PM
Yeah and so they tell more lies, will it ever stop?
May 13, 2014 1:13PM
This moron is saying the government is more efficient than the private sector? Not possible. Competition brings down prices and improves quality. when you remove competition the reverse happens. I have friends that own small businesses and they're all complaining about how much their insurance has gone up. The money staff at MSN should wait until after they've completed the research before they smoke the weed.
May 13, 2014 1:04PM
Obamacare is rationed care and this proves quality of care will suffer going forward. Just try to call your provider and see how long you will wait on hold and how long it takes to get an answer once you are lucky enough to get through to someone.
May 13, 2014 1:13PM
This IS America! People can write whatever they want! It doesn't necessarily have to be true, a little true, slightly true, true at all. I can only see what's on my plate. My insurance costs more than ever and my wife's full time job is fighting over every single insurance claim because almost all of them get rejected for one reason or another. Insurance companies like to use "the claim was incorrectly coded" alot. Apparently one needs to be an expert in healthcare insurance claims in order to have any solid footing with the people at the insurance company, who are incented to deny your claim, increasing their bonus. Further, you can talk to ten different customer representatives on the same claim and get ten different reasons for why your claim was denied. It's all a farce, this article included.
May 13, 2014 1:22PM

Windfall?  What is the tax bill for subsidizing Obamacare?  Does it make revenue for the federal government so that it can offset citizen income tax or will the cost continue to go up?


No I don't really care about how many it has insured unless they are receiving subsidizes, or how many it pays for that would be treated in an emergency room. 


Health insurance and health care is a personal decision and not a place for the federal government.  The aggregate cost doesn't really matter.  However, this program effects on federal spending does matter to any taxpayer whose income tax increases or is not reduced because of this program.

May 13, 2014 2:54PM

To insure the uninsured, we first must  make the insured uninsured.  Then we make the formerly insured people pay more to become reinsured  so we can insure the uninsured for free. 
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