Health Reform s Value for Your Dollar Rule: Early Impact in Florida

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1 HEALTH DATA REPORT MAY 2012 Health Reform s Value for Your Dollar Rule: Early Impact in Florida SUMMARY Beginning in 2011, the Affordable Care Act required insurers covering small businesses and individuals to spend at least 80 percent of premiums on actual medical care and activities that improve the quality of care, or provide rebates to consumers if the standard isn t met. This new rule, known as the medical loss ratio or MLR rule, also shines a light on how insurers spend premium dollars with new reporting requirements and public disclosures. Consumers Union (CU) reviewed 2011 MLR results for major Florida insurance companies in the individual and small group markets. CU found that the new rule benefits consumers in some of the state s largest health plans with millions in forthcoming rebates and improved insurer efficiency. In addition, the rule may be moderating health insurance rates and rate increases, with at least one major insurer reducing average health insurance rates to meet the new MLR standard. CU also found that the insurers were profitable in 2011 even after rebates were taken into account. This report describes CU s findings about the impact of the new MLR rule in Florida during its first year in effect. Introduction A new rule that demands better value from health insurance companies is beginning to change business practices at some of Florida s largest insurance companies and consumers will soon be due millions in rebates, according to preliminary data released in April. Enacted as part of the Affordable Care Act, also known as the health reform law, the new rule says that insurers must spend at least 80 percent of premiums on actual medical care and activities that improve the quality of care for small businesses and individuals who buy coverage on their own. For large group customers, the standard is 85 percent. If insurers miss the mark, they must rebate policyholders the difference. 1 HEALTH DATA REPORT MAY

2 The goal of the new rule known as the medical loss ratio or MLR rule is to ensure that consumers get better value for their money by encouraging insurers to be more efficient. To avoid paying rebates, insurers must be smarter in how they spend their premium revenue on marketing, CEO salaries, broker commissions and other administrative costs and profit. The rule also brings broad new transparency and accountability to health insurers. It requires them for the first time to publicly disclose more details about how they spend premium dollars. By June 1 of each year, health insurers will file a report showing how much they spent on medical care and quality activities for the prior year. Starting in 2012, consumers will be able to view the reports by going to entering the name of their insurer, and choosing the Medical Loss Ratio tab. Other new financial reporting requirements related to the MLR rule allowed Consumers Union (CU) to examine the early impact of the new rule in Florida. CU examined filings that the major Florida health insurers made in April showing preliminary results of their 2011 earnings, spending, and profits in the individual and small group markets. CU also reviewed rate change information and certain rate filings on the state s insurance agency website. Here are highlights of what we found in Florida. Consumers are due millions in premium rebates The top individual market insurers estimate that they will give millions back to consumers, with Golden Rule and Humana expecting the highest rebates. The MLR rule went into effect on January 1, The first round of rebates must be paid by August 1, 2012, and will be based on insurers 2011 spending. Rebates may be in the form of refund checks or a credit toward future premiums. CU examined rebate estimates for the top Florida insurers covering at least 20,000 lives in the individual market or small group market. In the Florida individual market, the top health insurance companies expect to pay millions to policyholders, led by Golden Rule, which anticipates giving $15.7 million back to 67,781 policyholders. Humana has the second highest rebate amount, estimated at $12.3 million to 44,944 individual market policyholders from two affiliates, Humana Health Insurance Co. of Florida and Humana Insurance Co. 1 Chart 1 shows estimated rebates for the top insurers that expect to owe rebates to individual market policyholders. Two of the top individual market insurers, Blue Cross Blue Shield of Florida (now Florida Blue), and Aetna Health, do not expect 1 Policyholders in this report does not include dependents. Covered lives includes both policyholders and dependents. 2 HEALTH DATA REPORT MAY

3 to owe rebates to their individual market customers in 2012 for calendar year CHART 1: ESTIMATED 2012 REBATES TOP FLORIDA INDIVIDUAL MARKET INSURERS (in millions) Source: 2011 Supplemental Health Care Exhibits Part 1, filed with the National Association of Insurance Commissioners. *Humana includes Humana Health Insurance Co. of Florida, which estimates about $11 million in rebates and Humana Insurance Co., which estimates $1.4 million. Coventry includes Coventry Health Plan of Florida with $2.6 million in estimated rebates and Coventry Health and Life Insurance Co. with about $280,000. In the small group market where employers with fewer than 100 employees purchase coverage 2 the largest insurer, Blue Cross Blue Shield of Florida, expects to pay about $44.9 million in rebates to about 24,000 small businesses and other groups. The second largest insurer, UnitedHealthcare Insurance Co., estimates rebates of almost $19.9 million to about 22,000 small businesses or other groups. 3 Humana Medical Plan estimates $49,418 to 3,176 small groups. The other top small group insurers do not expect to owe rebates. They are Aetna Health, AvMed, Coventry Health Care of Florida, Neighborhood Health Partnership, and UnitedHealthcare of Florida, all with more than 20,000 covered lives in the small group market. 2 For the purpose of applying the MLR rule, Florida defines a small group as a business or other group with employees or members, but defines it as having 1-50 for other purposes. See Florida Office of Insurance Regulation, Informational Memorandum OIR-11-09M, December 28, The ACA allows states to define small groups as having up to 50 members until UnitedHealthcare Insurance Co. and UnitedHealthcare of Florida, Inc. are part of the UnitedHealth Group. While both subsidiaries sell small group plans, only UnitedHealthcare Insurance Co. expects to pay rebates. Neighborhood Health Partnership and Golden Rule are also part of the UnitedHealth Group. 3 HEALTH DATA REPORT MAY

4 The Kaiser Family Foundation reported that total rebates for Florida across all insurers could be as high as $49.7 million in the individual market and $65.3 million in the small group market. Total rebates, including individual, small, and large group markets are estimated at $148.6 million. 4 Insurance companies issuing rebates will send notices to policyholders with information about the rebate. Insurers will issue group rebates to employers who will share them with employees who paid premiums or otherwise use them to benefit employees, depending on the type of plan. These are preliminary estimates made by insurers and actual rebates reported by June 1 may differ slightly. The rule is improving value for Florida consumers Several insurers brought better value to their customers by increasing the portion of premiums that they spent on actual medical care, including spending on activities to improve the quality of care. For example, Golden Rule, which covers about 114,000 people in the Florida individual market, spent 67.5 percent of premiums on medical care in 2010, and spent 80.3 percent in 2011, as shown in Chart 2. 5 Connecticut General Life Insurance, part of Cigna, with 61,000 lives in the Florida individual market, spent 64.4 percent of premiums on medical care in 2010 and 74.1 percent in Blue Cross Blue Shield of Florida, with about 418,000 covered lives in the individual market, improved value from 79.2 percent in 2010 to 81.5 percent in The percentage of premiums spent on medical care refers to the total amount an insurer spent, on average, for all the people it covers in a certain market in the state, such as the individual market or small group market. These are preliminary MLR results and may not include some adjustments that some insurers can make for their final MLR reports to the U.S. Department of Health and Human Services. Therefore, final MLR percentages reported by June 1 may differ. 4 See Kaiser Family Foundation, Insurer Rebates Under the Medical Loss Ratio: 2012 Estimates, April Although Golden Rule has reported a preliminary MLR slightly above 80 percent, it has also reported that it estimates millions in rebates, indicating that it expects its final MLR to fall shy of the minimum. 4 HEALTH DATA REPORT MAY

5 CHART 2: 2010 vs PERCENT OF PREMIUMS SPENT ON MEDICAL CARE FLORIDA INDIVIDUAL MARKET, SELECT COMPANIES Source: 2011 Supplemental Health Care Exhibits Part 1, filed with the National Association of Insurance Commissioners. Rate increases appear to be moderating in Florida There is evidence in Florida that the new higher MLR standard is leading some companies to adjust rates downward. Humana Health Insurance Co. of Florida, for example, requested rate reductions as high as 12 percent in early 2011 in order to meet the 80 percent anticipated minimum loss ratio standard for Florida individual market customers, according to the company s rate filing. 6 The MLR rule impacts health insurance rates because health insurers use target medical loss ratios when they determine what their rates should be for a future time period. Insurance companies set rates by projecting what their medical claims costs will be in the future. Rates are set so that total premiums collected will cover those projected claims costs, as well as future administrative expenses and profit. To avoid paying rebates under the new MLR rule, insurers will now try to ensure that premiums are not more than 20 percent greater than projected medical costs. Insurers that traditionally have spent more than 20 percent on administrative expenses and profits will need to rein in those expenses. As a result, customers may see lower premiums or at least smaller increases. 6 Humana Health Insurance Co. of Florida, Actuarial Memorandum, Individual Major Medical, Filing # , pg. 1, filed with the Florida Office of Insurance Regulation (FOIR). The reductions were applied against a 12 percent annual increase to account for projected increases in medical costs, resulting in a 0 percent rate change for policyholders renewing after the February effective date. 5 HEALTH DATA REPORT MAY

6 The MLR rule gives insurers an incentive to more accurately predict future medical costs when Before the federal MLR rule went into effect, Florida law set a minimum medical loss ratio standard of 65 percent for most individual and small group plans, leaving 35 percent for administration and profit. 7 Further, in the past, when actual medical costs turned out lower than projected costs, insurers often could pocket the difference. With the higher MLR standard in place, insurers must give the money back to policyholders if actual medical costs fall below 80 percent of premiums. This means insurers now have an incentive to try to ensure that projected medical costs do not exceed actual costs. To avoid rebates, they may reduce rates or rate increases if cost growth trends begin to fall, as they have in the last few years with consumers using less healthcare than some insurers predicted and other factors contributing to a slowdown in growth. 8 In this way, the MLR rule makes it more likely that lower health spending and slowing medical cost growth will equate to lower rate increases or rebates for consumers. setting rates. The Florida Office of Insurance Regulation reported at least 20 instances in 2011 of insurers reducing base rates the average rates they charge on major medical or HMO individual and small group plans, compared to three reductions in 2010 and six in For example, Blue Cross Blue Shield of Florida reduced base rates for certain small business plans by 5.3 percent in September 2011 after increasing base rates by up to an average of 15.2 percent on those plans in June In Florida, a decrease in base rates may still result in a premium increase after other factors are applied; therefore, the effect is often a lower increase than would have been implemented if average base rates were not decreased. Various factors may contribute to rate changes, so not all may be related to the MLR rule. In some cases, rates may be lowered if plan benefits are reduced or if deductibles or other cost-sharing components of a plan are increased. And some insurers continue to raise rates in the double digits. Still, there are some signs of rate increases moderating in Florida. Florida has a rate review program in which regulators examine whether an insurer s medical cost projections and rate calculations are reasonable. The Florida Office of Insurance Regulation can disapprove requested rate changes if regulators find that rates would be excessive. However, by law, Florida does not review rates for several plans that are considered out-of-state, such as Golden Rule, Humana and others. 7 See Florida Administrative Code Rule 69O See In Hopeful Sign, Health Spending is Flattening Out, New York Times, April 28, 2012, 9 See Florida Office of Insurance Regulation, Accident and Health Rate Change Summaries, Calendar Years 2009, 2010, and 2011, available at 6 HEALTH DATA REPORT MAY

7 Additionally, the Affordable Care Act requires state regulators to review individual market and small group rate increases of 10 percent or more. 10 The Act set aside $250 million in additional funds for states to hire actuaries, improve their rate review, and provide more information to consumers about rates. Florida returned a $1 million federal grant for its rate review program. The Department of Health and Human Services has determined that Florida s rate review program is effective for in-state plans, but not for out-of-state plans, according to the Florida Office of Insurance Regulation. Insurers remain profitable Even after estimated rebates or business adjustments that increased spending on medical care are taken into account, the major insurers anticipating rebates earned profits on their Florida health insurance business. The preliminary results shown in Chart 3 demonstrate that insurers can offer greater value to their customers and still be profitable. CHART 3: NET PROFITS ON FLORIDA HEALTH INSURANCE BUSINESS TOP REBATING INSURERS (in millions) 10 The U.S. Department of Health and Human Services (HHS) reviews rates in a handful of states that lack an effective rate review program. However, HHS has no authority to disapprove a rate; it can only issue findings as to whether the rate increase is reasonable. 7 HEALTH DATA REPORT MAY

8 Most of the insurers were also profitable by another measure underwriting gain, which is premium minus claims, administrative expenses, and taxes. Underwriting gain does not include investment gains or losses as net profits do. After taking rebates into account, all but one insurer had underwriting gains on the lines of business subject to the MLR rule: the individual, small group and large group private commercial markets, as shown in Chart CHART 4: UNDERWRITING GAIN FOR FLORIDA LINES OF BUSINESS SUBJECT TO MLR, TOP REBATING INSURERS (in millions) Source for Charts 3 and 4: 2011 Supplemental Health Care Exhibits Part 1, filed with the National Association of Insurance Commissioners. Chart 3 includes profits only on fully-insured health care business in Florida. Chart 4 includes profits on comprehensive coverage in the individual, small group, and large group commercial markets. It does not include profits on Florida mini-med business or expatriate plan, which are subject to the MLR rule but have a transitional period to adopt to the standard in full. 11 Humana Insurance Co. had an underwriting loss of $834,972, but the company as a whole was profitable in Florida (see Chart 3). 8 HEALTH DATA REPORT MAY

9 Conclusion Early evidence showing the impact of the new MLR rule during its first year in effect shows that many of Florida s largest insurers are changing business practices or preparing for millions in rebates in response to the new law. At the same time, insurers remain profitable both in net profits on Florida business as a whole and on underwriting gain for lines of Florida business subject to the new rule. For consumers and small businesses, this means the rule is bringing greater value for their premium dollars. This report was written by Sondra Roberto, Consumers Union Staff Attorney, with assistance from Blake Hutson, Outreach Coordinator, and Marcus Denton, Outreach Assistant. 9 HEALTH DATA REPORT MAY