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What is a health insurance rebate?

A nice surprise is coming in the mail to millions of Americans -- a check from their health insurer. These rebates are part of an effort to curb the rising costs of health insurance, under the Affordable Care Act, also called Obamacare.

health insurance rebateThe health care reform law requires insurers to maintain a medical loss ratio of at least 80 percent, which means that for every premium dollar they collect, insurers must spend at least 80 cents on patient care and quality improvement.  It's called the 80/20 rule.

It’s meant to keep insurers from spending too much on administrative expenses and overhead, such as marketing, profits, and the salaries and bonuses for corporate executives. The Affordable Care Act passed in 2010, and the 80/20 rule took effect in 2011.

How health insurance rebates work

Insurers that don't meet the 80/20 rule must send their customers a notice informing them about the new requirement, how much the insurer spent on patient care and quality improvement, and how much money it will provide as a rebate.

The customers can receive a rebate in one of several possible ways:

• A rebate check in the mail.
• A reimbursement to the account that they used to pay the premium by credit card or debit card.
• A reduction in future premiums.
• Their employer providing one of the above, or applying the rebate in another manner, such as improving employees’ health benefits.

The rebates must be paid by Aug. 1 each year.

The 80/20 rule applies to individual health plans and the group plans that employers offer. However, it doesn’t apply to self-insured plans, where a very large employer (typically an employer with 1000 employees or more) directly pays all the claims with its own money and hires a third-party administrator to manage the health plan. Most employers with 1,000 or more employees self-insure their plans.

Health plans for large groups must spend at least 85 percent of the premium dollars on patient care and quality improvement, versus the 80 percent required of individual and small group health plans. Generally, it’s considered a large group health plan if the employer has more than 100 employees, and it’s considered a small group health plan if the employer has 100 or fewer workers.

How much health insurance rebates cost

In June, the U.S. Department of Health and Human Services (HHS) estimated that 8.5 million Americans were due to receive $500 million in rebates this year. The average rebate is about $100 per family. HHS estimated that 77.8 million American consumers saved $3.4 billion in 2012 upfront on their premiums as insurance companies started operating more efficiently. 

"The health care law is providing consumers value for their premium dollars and ensuring the money they pay every month to insurance companies goes toward patient care," HHS Secretary Kathleen Sebelius said in a news release.

There are three main ways for insurance companies to make sure they comply with the 80/20 rule:

• Spend more on patient care.
• Spend less on overhead.
• Lower the premiums they charge to customers.

A report from the Government Accountability Office concluded that most insurers already met the 80/20 standard before the law was passed. It also found that most insurers planned to reduce commissions to insurance brokers as a result of the new 80/20 rule.

The health care reform law passed after a long period of steeply rising health insurance costs. Since 2003, health insurance premiums increased by 80 percent, almost three times faster than wages (31 percent) and inflation (27 percent), according to the Kaiser Family Foundation, a California-based nonprofit organization that researches health care issues.

Kaiser Family Foundation also found that annual premiums for employer-sponsored family health coverage rose 4 percent this year, compared to last year, with workers on average paying $4,565 toward the cost of their coverage.

For consumers facing rising premiums each year, the rebates may make health coverage more affordable, as well as improving the quality of their health care.  

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