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New federal law could refund health insurance dollars to you

Under a new federal rule, only 15 percent or 20 percent of a patient’s health insurance premiums can go toward things like salaries, bonuses and marketing at your health insurance company. That could mean extra cash in the pockets of millions of health insurance consumers.

However, critics say the rule could drive some health insurers and health insurance agents out of the market -- and leave consumers with fewer insurance options.

health insurance medical loss ratioThe U.S. Department of Health and Human Services estimates that under its new rule, up to 9 million Americans could be eligible for a total of $1.4 billion in rebates. For consumers with individual health insurance (rather than policies obtained through employers and other groups), that could mean an estimated rebate $164 per person.

Don’t spend that money yet, though. Rebates won't start being issued until 2012. The rebates must be paid by Aug. 1 each year.

The new spending rule affects nearly 75 million insured Americans. It took effect in 2011 under the federal health care reform law.

Patients versus profit

The rule -- known in the health insurance industry as the "medical loss ratio" provision -- requires health insurers to spend 80 percent or 85 percent of consumers' premiums on direct care for patients and efforts to improve the quality of care. Health insurance companies that exceed those thresholds must return the premium difference to policyholders.

Health insurance companies that sell policies to individuals and small groups fall under the 80 percent cap. Insurers that sell policies to large groups fall under the 85 percent cap. If at the end of the year a small-group insurer spent just 78 percent of its premiums on care and quality improvement, it would have to refund the difference of 2 percent.

Timothy Jost, a consumer representative for the National Association of Insurance Commissioners, says the refunds likely will come in the form of checks or in premium reductions for the following coverage period.

“The basic idea of medical loss ratios is to drive efficiency. Consumers don’t buy insurance to pay for overhead and profit; they buy it to pay for medical care," Jost says.

The Department of Health and Human Services estimates one-fifth of American consumers who buy health insurance in the individual market are part of plans that put less than 70 cents of every premium dollar toward patient care and health care quality improvement. Another one-fourth of those consumers are in plans that earmark 70 to 75 cents of every premium dollar for patients.

Jost says many health insurance companies already comply with the new rule, but it could cause problems for smaller insurance companies.

“I think most of the big plans and national insurers are at that level, but I have heard of some small insurers with medical loss ratios as low as 55 percent,” Jost says.

Dylan Roby, a research scientist with the UCLA Center of Health Policy Research, says more than half of the states currently don’t have laws restricting how much money health insurers spend on patient care versus corporate operations.

In early January 2011, California Insurance Commissioner Dave Jones signed an emergency order giving him legal power in that state to enforce the new 80 percent spending mandate for individual health insurance policies -- even if Congress blocks the U.S. Department of Health and Human Services from enforcing it.

Interfering with the free market?

While officials like Jones have embraced the new spending scenario, it's gotten considerable pushback from the health insurance industry.

health insurance medical loss ratios

Kelly McGivern, president of the Ohio Association of Health Plans, says there are gray areas about which expenses qualifying as improving the quality of health care. She points to fraud-fighting programs, which help save money but won't be calculated in the new spending formula. McGivern also expresses concern that commissions for insurance agents are excluded from the formula.

Interfering with the free market by mandating these spending limits could prompt some health insurers to stop selling policies, McGivern says.

“Insurers can’t jeopardize their financial existence as a company by participating in marketplaces where they will be expected to give rebates,” McGivern says.

Health insurance agents already are feeling the pinch, as some companies have begun cutting agents' commissions, says Jason Butcheon, an independent broker and partner at Professional Business Insurers in Hartford, Conn. He says agents help small businesses by scoping out the best rates, handling claims and answering questions about coverage.

Faced with lower commissions from health insurers, "some agents will ultimately leave the industry, and that will hurt the consumers or businesses that depend on them," Butcheon says.

Jost, the consumer representative, says he thinks health insurers will survive, and will be able to maintain profitability by bringing down costs and rooting out inefficiencies. Also, he says, health insurers will be more careful about requesting rate increases because the additional amount of money they'd gain in insurance premiums could trigger rebates to consumers.

“Is it more important that insurers make big profits, or do we do something about health care costs that are bankrupting consumers?” Jost asks.

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