Kokomo Tribune; Kokomo, Indiana

September 27, 2013

Justifying rate increases and spending

By Ken de la Bastide Kokomo Tribune
Kokomo Tribune

---- — [Editor’s note: With significant portions of the Affordable Care Act to be implemented starting on Jan. 1, 2014, the Kokomo Tribune is running a series of stories exploring how the personal responsibility mandate, the expansion of Medicaid and the new health exchanges will affect consumers.]

Q: It’s my understanding that at one time health insurance companies kept as profit of 5 cents of every premium dollar and now put as much as 50 cents in their pocket as profit.

The Affordable Care Act will limit the amount insurance companies can put into their pockets to between 15 and 20 cents of every premium dollar, depending on the market. Furthermore, the insurance companies must justify any premium increases to regulators, rather than just arbitrarily increasing premiums because they feel like it.

If so, when do these rules take effect and where does the consumer report/question premium increases?

A: The Affordable Care Act addresses insurance premiums and justification of rate increases in an effort to reduce the cost of health care. The two provisions are designed to hold health insurance companies accountable to consumers and ensure American families receive true value for their premium dollars, Kathy Young, CEO of St. Joseph Hospital, said.

Young said these provisions are known as the 80/20 rule, also called the Medical Loss Ratio rule, and Rate Review.

“Under the 80/20 rule, insurance companies are required to report how much they spend on health care and how much they spend on administrative costs, such as salaries and marketing,” she said. “If an insurance company spends less than 80 percent of individual and small group premiums or less than 85 percent of large group (usually 50 employees or more) premiums on medical care and efforts to improve quality care, they must rebate a portion of the premium that exceeded this limit back to consumers.”

Rebates can be paid in four different ways: A rebate check in the mail; lump sum reimbursement to the account used to buy insurance; reduction in future premiums; or, if insurance is through your employer, the employer must use the rebate to benefit employees.

Health insurance companies do not keep 50 cents of every premium dollar as profit, Craig Dunn, a financial planner with Liberty Financial said.

“That is a major myth,” he said. “In fact, health care insurance margins are generally under 5 percent. In 2009, when the Affordable Care Act was passed, United Health, WellPoint and Aetna profit margins were all below 4.5 percent.”

Dunn said in 2012, the ACA began requiring the 80/20 rule and insurance companies are also now required to publicly justify rate increases.

Young said Rate Review is the provision of the ACA that protects consumers from unreasonable rate increases.

“Insurance companies must now publicly justify any rate increase of 10 percent or more before raising premiums,” she said. “However, this does not apply to grandfathered plans.

“Although it is not yet clear how consumers can question rate increases,” Young said, “it is the intention of the ACA to make the process more transparent and fair.”

Readers can submit their questions on the Affordable Care Act to Enterprise Editor Ken de la Bastide at ken.delabastide@kokomotribune.com or by mailing them to Kokomo Tribune, care of Ken de la Bastide, 300 North Union St., Kokomo, IN, 46901.