Open AccessDo Health Insurers Manage Their Medical Loss Ratios? At What Cost?
Author(s) -
Elizabeth Ruth Plummer,
William F. Wempe
Publication year - 2021
Publication title -
journal of insurance regulation
Language(s) - English
Resource type - Journals
ISSN - 0736-248X
DOI - 10.52227/23553.2021
Subject(s) - incentive , earnings , actuarial science , payment , business , patient protection and affordable care act , health insurance , discretion , expense ratio , reputation , health care , finance , public economics , economics , political science , law , microeconomics , economic growth , social science , closed end fund , sociology
We use plan-level data to examine a reporting incentive unique to health insurers—the federal Affordable Care Act’s (ACA’s) Medical Loss Ratio (MLR) provisions—which require that health plans spend a specified percentage of premiums on claims or else pay policyholder rebates. While there are no penalties for noncompliance with the MLR provisions, incentives for insurers to comply include avoiding political and reputation costs, reducing administrative burdens, and eliminating rebate payments. We find that health plans with pre-managed MLRs— i.e., the MLRs that would be reported without reporting discretion—below the required MLR overstate claims, thereby increasing their MLRs and reducing or eliminating rebate payments. Overall, results suggest that overstating claims reduced rebate payments by approximately $190 million to $325 million for 20112013; i.e., about 10–17% of total rebates actually paid. We also find that plans with pre-managed MLRs significantly greater than the minimum required MLR understate claims, thereby improving plan earnings while still complying with the MLR provisions. These understatements average between 14–34% of plans’ pre-tax earnings.