It turns out that pigs do fly. Last month, insurer Aetna received approval from Connecticut regulators of its request to reduce premiums on individual policies by an average 10 percent, starting in September. Yes, you read that right: reduce the premium.
The decrease, which affects 15,000 consumers will save those policyholders $259 annually, on average.
"I think it's the shape of things to come," Timothy Jost, a law professor at Washington and Lee University and a consumer representative to the National Association of Insurance Commissioners, says of Aetna's move.
Under the health-care overhaul, insurers beginning this year must spend at least 80 percent of the premium dollars they collect on medical claims or quality improvement efforts. Administrative expenses and profits are limited to 20 percent or less of what they collect. Those that don't meet these new "medical loss ratio" standards have to refund the extra premiums collected to consumers. (In insurance lingo, medical claims paid are considered "losses.")
"[It] has to do with making sure consumers are getting value for their premium dollar," Sarah Lueck, a senior policy analyst at the Center on Budget and Policy Priorities, says of the new provisions.
While Aetna's move may not be unprecedented, it is also not the norm. "It certainly is possible" that premiums have been reduced on occasion for particular individuals or groups, says Robert Zirkelbach, a spokesman for America's Health Insurance Plans. But if so, the trade group's data, which track average premiums, don't show it. "Premiums are going up every year," he says.
Since 2005, the average family health insurance premium has increased 27 percent, according to the Kaiser Family Foundation's annual employer health benefit survey. (KHN is an editorially independent program of the foundation.)
Premiums are based on a number of factors, including claims, the price of medical goods and services, and regulatory requirements. As the economy continues to struggle, consumers have cut back on their use of medical services. The request for a rate decrease in Connecticut reflects this lower-than-anticipated use, says Aetna spokesman Mohit Ghose.
That's where the medical loss ratio, or MLR, requirement comes into play, say health-policy experts. "If you have an insurer whose costs are leveling off and it continues to increase premiums, then there's going to be a day of reckoning," says Jost. "They'll have to pay a big rebate." By lowering premiums now, Aetna avoids this eventuality.
The Obama administration estimates that starting in 2012 the MLR provisions may result in as many as 9 million people being eligible for rebates totaling $1.4 billion; in the individual market, where people who don't get insurance through their workplace can purchase coverage, the average rebate could be $164 per person.
Elsa Obuchowski would like to be one of them. The Norwalk, Conn., resident, who is a freelance textbook editor, pays $520 a month for a UnitedHealthcare policy with a $2,500 deductible. This year, Obuchowski's increase was 4.5 percent, but in previous years it's been as high as 14 percent, she says. Even though her own premium won't be affected by Aetna's move, she's heartened by it. "It sounds very hopeful," she says.
Under the health law, insurers in the individual and small-group market must have a medical loss ratio of least 80 percent; in the large-group market, the figure is 85 percent. Self-insured companies, which pay employee medical claims directly, are exempt from the requirement.
The law permits states to request an adjustment to the MLR requirements for up to three years if meeting the standard might destabilize their individual markets, causing insurers to pull out and resulting in fewer options for consumers. To date, three states have been granted adjustments; nine other states and Guam have requested them.
Insurance industry representatives say the law's focus on the MLR doesn't address the rising costs of hospitalization, drugs and other medical care, and their effects on premiums. "Simply capping administrative costs and reviewing premiums doesn't get at the main drivers of health-care costs and thus health insurance premiums," says Zirkelbach.
In 2010, Aetna's individual policies had a medical loss ratio of 54.3 percent, according to the Connecticut Insurance Department's document approving the rate decrease. Aetna attributes the low MLR to people who signed up for coverage but didn't use it. "In the case of 2010, we saw lower utilization than we expected across the board," says Ghose.
Medical loss ratios are often lower in the individual market than they are for large groups, says Lueck. Reasons vary: Individual plans can deny coverage to people who aren't healthy; in addition, the policies tend to have higher deductibles and less-comprehensive benefits. Both factors can result in fewer, smaller claims, putting downward pressure on the medical loss ratio.
In addition, insurers sometimes have high administrative expenses, and not only because they have to review and approve people for coverage in the individual market. Jost says a review of commissions paid to brokers found that insurers sometimes paid them as much as 40 percent of the first year's premiums. "That's more than they spend on drugs, and far more than on primary
care," he says.
"If you ask the consumer, 'Do you think more should be spent on pharmaceutical costs or on agents and brokers?' what do you think they'll say?" asks Jost.