“Because of this new rule, because of the fact that it improves the value of the coverage that you purchase, last year alone, Americans saved $3.4 billion in lower premiums. That's $3.4 billion on top of these rebates.”
— President Obama, remarks on the Affordable Care Act, July 18, 2013
With the House of Representatives yet again voting to scale back President Obama’s signature health-care law, the president made a case for the law in an East Room ceremony.
The rebates the president refers to stem from the “80/20 rule” or “Medical Loss Ratio rule” in the law, in which insurance companies must rebate a portion of the premiums if they spent less than 80 percent of the premium on medical care and efforts to improve care. In 2012, insurance companies shipped about $500 million in rebates, according to the Department of Health and Human Services.
That’s real money, worth about $100 per family, though it should be noted that much of it actually ends up in the hands of the companies offering insurance--not actual familes.
But what’s the $3.4 billion the president mentioned? That seemed a bit fishy, so we decided to explore further.
Under the rule, insurance companies cannot keep more than 20 percent of the premiums for overhead and profits. (The rule is even stricter for the larger group market — 15 percent.) So there obviously would be an incentive for insurance companies to get their overhead down so they would not have to mail rebates to consumers.
But a June HHS report that a White House fact sheet cited gives few details about how this figure is derived. It simply makes an assertion: “In 2012, the 77.8 million consumers in the three markets covered by this 80/20 rule saved $3.4 billion upfront on their premiums because of the 80/20 rule and other Affordable Care Act programs.”
On a per-consumer basis, we are not talking about a lot of money — about $44 per insured individual. But it certainly adds up quickly.
An HHS official said the premium savings were calculated by looking at the difference between what insurers did not spend on patient care and quality improvement between 2011 and 2012, and then multiplying that figure against the number of claims filed in 2012. In other words, HHS assumed that all of the improvement was due to the Obamacare rule.
“It captures an estimate of the lower premiums consumers saw due to lower administrative costs and profits,” the official said. “We know that this reduction in premiums coincided with the MLR rules taking effect, so it is reasonable to infer that could be a cause.” The official added that other elements of the law, such as a required review of proposed double-digit premium increases, have also restrained costs.
Interestingly, the Kaiser Family Foundation did its own calculation in June of the premiums savings for just the individual market. Using a weighted market average, Kaiser came up with a figure of $1.044 billion in the 2011-2012 period. That compares to HHS’s estimate of $980 million for the individual market, which is reasonably close for such estimates.
One reason for the difference: HHS relied on data filed by insurers with the department, whereas Kaiser relied on market-average data provided by the National Association of Insurance Commissioners.
Kaiser also offered a variety of caveats about the statistic:
Of course, it is hard to know with certainty what premiums would have been if the MLR rules were not in place: We cannot know for sure how insurers would have priced their products or what rates regulators would have allowed (to the extent that they reviewed rates prior to the ACA). ... There are also data limitations. For example, prior to new reporting requirements put in place to enforce the MLR provision, there were not good data sources that break out premiums and claims on a consistent basis for major medical coverage by all types of carriers. In the initial years this data became available (2010 and 2011), there were some issues with the quality of the data, particularly regarding expenses for quality improvement and other new categories of administrative expenses that are reported on the exhibit.
Robert Laszewski, president of Health Policy and Strategy Associates, has argued that both HHS and Kaiser are producing figures based on flawed reasoning. He says health insurance companies pulled back in 2011 and 2012 because they missed their pricing objectives in 2010 because the growth of health-care costs slowed dramatically after the recession. He concedes that the new MLR rules have helped reduce expenses in some way, but questions whether officials can make the leap that the health-care law is 100 percent responsible.
“I am not sure my explanation is the right one but it is based upon how the health insurance market has worked for decades,” said Laszewski, who is a former insurance executive.
Kaiser acknowledged “potential limitations” in what the data actually show.
“While the pattern of increasing MLRs over the three years makes sense given the incentives under the ACA and reports of insurer behavior, we do not have comparable data from earlier years to tell us whether or not the 2010 MLR was typical for the pre-ACA period (though the available evidence suggests that it was),” Kaiser said. “Also, MLRs in 2011 and 2012 might be overstated because insurers simply underestimated how much health-care expenses would rise following the recession.”
“Since the Affordable Care Act took effect, insurers are now spending less of Americans’ premiums on administrative costs and more on care,” said HHS spokeswoman Joanne Peters. “This change coincides with the implementation of the medical loss ratio provision, and taken into consideration with other parts of the law, such as rate review for double digit premium increases, is resulting in Americans saving billions of dollars on premiums.”
The Pinocchio Test
We realize that a president cannot speak with footnotes. But there are enough unknowns about the actual impact of the 80/20 rule on premiums to call into question using the nice, round figure of $3.4 billion.
Kaiser came up with a slightly different figure for the individual market, and HHS, to its credit, did not tout an estimate that was larger. Thus we’re fairly convinced that this number was based on a reasonable methodology, though experts obviously disagree on what the numbers mean.
At the very least, however, the president should have made clear that this number is an estimate.
Check out our candidate Pinocchio Tracker