Insurance Companies Send Out Rebate Checks; Economists Get Nervous

Sep 20, 2012
Originally published on September 20, 2012 5:41 pm

Nearly 13 million Americans have gotten, or will soon be getting, rebates from their health insurance companies. This is because of a provision in the Affordable Care Act (aka Obamacare) that's supposed to force insurance companies to run better.

But while the idea of getting a check from your health insurance company may sound great, some economists worry this rule could actually make health insurance more expensive.

The provision requires that health insurance companies spend at least 80 percent of premiums on health care. In other words, of the money we pay them for our health insurance, at least 80 percent has to be spent on actual health care.

"A lot of insurance companies run fairly high overhead rates," says Kathleen Sebelius, the secretary of Health and Human Services. "And those overhead rates, which go to everything from CEO salaries, to marektiing, to agent and broker fees ... don't really add to anbody's health benefit."

Under the new rule, more than 20 percent of the premiums insurance companies collect goes to overhead and profit, they have to give out refunds. The average refund people are getting is about $150. That adds up: Over $1 billion has been returned to customers, according to Sebelius.

"I can't tell you how many people have called or written or written or showed up and said, 'I got a check from my insurance company,'" she says. "They are just flabbergasted. "

But as is sometimes the case, what is popular with the people is not so popular with economists. I called up six health care economists. No one thought the provision would do much good, and several thought it could be harmful.

Jonathan Gruber, an economist at MIT, likes the Affordable Care Act. He actually helped craft the law. But he's wary of this particular provision.

The rule has the potential to do exactly the wrong thing, he says — to drive up the cost of health care.

The rule says that insurance companies have to spend at least 80 percent of the premiums they collect on actual health care, and no more than 20 percent on overhead.

So if you're an insurance company, you could make sure you're in compliance by reducing unnecessary overhead. That would be great for everybody.

But there's another possibility. Since 80 percent of premiums have to be spent on health care, insurance companies have less incentive to keep health care costs down. They have less incentive to negotiate with hospitals that want to charge higher rates and doctors who want to order potentially unnecessary tests.

"I worry there that there's an incentive in that direction," Gruber says. "I absolutely do."

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Transcript

RENEE MONTAGNE, HOST:

Nearly 13 million Americans have gotten, or will soon be getting rebate checks from their health insurance companies. This is happening because of a provision in the Affordable Care Act aimed at forcing insurance companies to manage themselves better. The idea of getting a check from your health insurance company sounds great, but some economists worry the new rule could actually make health insurance more expensive.

David Kestenbaum, with our Planet Money Team, explains.

DAVID KESTENBAUM, BYLINE: The provision, covering something cryptically called the medical loss ratio, requires that health insurance companies spend at least 80 percent of premiums on health care. In other words, of the money we pay them for our health insurance, at least 80 percent of that has to be spent on actual health care. Which Kathleen Sebelius, the secretary of Health and Human Services, says, a lot of insurance companies do not do.

SECRETARY KATHLEEN SEBELIUS: A lot of insurance companies run fairly high overhead rates - 20, 25, 30 percent - and those overhead rates, which go to everything from CEO salaries to marketing, to agent, to a variety of things, don't really add to anybody's health benefit.

KESTENBAUM: So the rule says if insurance companies use more than 20 percent for overhead and profit, they have to give out refunds. The average refund people are getting is not huge. $150, Sebelius says. But add them all up, and insurance companies are giving back over $1 billion.

SEBELIUS: There's been over a billion dollars that actually went back to customers. And I can't tell you how many people have called or written or showed up and said, I got a check from my insurance company. I mean they are just flabbergasted. Something like that has never happened before.

KESTENBAUM: But as is sometimes the case, what is popular with the people is not so popular with economists. I called up six health care economists. None thought the provision would do much good, and several thought it could be harmful.

Jonathan Gruber is an economist at MIT. He's not one of those people you hear calling for the repeal of ObamaCare. He likes the law. In fact, he helped craft it. And while he can see the arguments for this provision, he is wary of it.

Were you in favor of this part?

JONATHAN GRUBER: I was not originally in favor of medical loss ratio restrictions, no.

KESTENBAUM: The rule has the potential to do exactly the wrong thing, he says, to drive up the cost of health care. Here's why. The rule says that insurance companies have to spend at least 80 percent of the premiums they collect on actual health care, no more than 20 percent on overhead. So if you're an insurance company, yes, you could make sure you're in compliance by reducing unnecessary overhead, and that would be great for all of us.

But there's another way. If 80 percent of premiums have to be spent on health care, well, just spend more money on health care. Stop trying to keep costs down. Doctors or hospitals, you want to be paid more, fine. We'll pay you more. You want to do extra tests, CAT scans, MRI's, that maybe aren't necessary. No problem the insurance companies might say.

GRUBER: It's stressful for us. It's expensive for us to fight you on the extra test you want to do. We don't have as much incentive to fight you anymore. Because basically all that fighting, all it does is just forces us to send rebate checks to consumers.

KESTENBAUM: Do you worry that will happen?

GRUBER: I worry there is an incentive in that direction. I absolutely do.

KESTENBAUM: For better or worse, we're trying it. Hopefully for better, he says.

David Kestenbaum, NPR News.

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MONTAGNE: You're listening to MORNING EDITION from NPR News. Transcript provided by NPR, Copyright National Public Radio.