2023 Medical Loss Ratio Rebates
The Medical Loss Ratio (MLR) provision of the Affordable Care Act (ACA) limits the amount of premium income that insurers can keep for administration, marketing, and profits. Insurers that fail to meet the applicable MLR threshold are required to pay back excess profits or margins in the form of rebates to their enrollees.
In the individual and small group markets, insurers must spend at least 80% of their premium income on health care claims and quality improvement efforts, leaving the remaining 20% for administration, marketing expenses, and profit. The MLR threshold is higher for large group insurers, which must spend at least 85% of their premium income on health care claims and quality improvement efforts. MLR rebates are based on a 3-year average, meaning that rebates issued in 2023 will be calculated using insurers’ financial data in 2020, 2021, and 2022 and will go to people and businesses who bought health coverage in 2022.
We find that insurers estimate they will issue a total of about $1.1 billion in MLR rebates across all commercial markets in 2023, using preliminary data reported by insurers to state regulators and compiled by Mark Farrah Associates. Final rebate data will be available later this year. Some insurers have not yet filed their 2023 rebate estimates.
Estimated total rebates across all commercial markets in 2023 ($1.1 billion) are similar to total rebates issued in 2022 ($1.0 billion). In 2022, rebates were issued to 2.4 million people with individual coverage and 3.8 million people with employer coverage, though rebates may be shared between employers and employees. In the individual market, the 2022 average rebate per person was $205, while the average rebates per person for the small group market and the large group market were $169 and $110, respectively (though enrollees could receive only a portion of this as rebates may be shared between the employer and employee or be used to offset premiums for the following year). The estimated $1.1 billion in rebates to be issued later this year will be larger than those issued in most prior years, but fall far short of recent record-high rebate totals of $2.5 billion issued in 2020 and $2.0 billion issued in 2021, which coincided with the onset of the pandemic.
In 2022, the average individual market simple loss ratio (meaning that there’s no adjustment for quality improvement expenses or taxes and therefore, don’t align perfectly with ACA MLR thresholds) was 86%, meaning these insurers spent an average of 86% of their premium income in the form of health claims in 2022. However, rebates issued in 2023 are based on a 3-year average of insurers’ experience in 2020-2022. Some insurers experiencing relatively high loss ratios in 2022 nonetheless expect to owe rebates this year because those rebates also reflect their more profitable experience in the 2020 plan year.
The effects of the pandemic continue to be felt, as rebates this year include experience from 2020 and 2021. In 2020, there were several factors driving health spending and utilization down. Hospitals and providers cancelled elective care early in the pandemic and during spikes in COVID-19 cases in order to free up hospital capacity, preserve supplies, and mitigate the spread of the virus. Many consumers also chose to forego routine care in 2020 due to social distancing requirements or similar concerns. As insurers had already set their 2020 premiums ahead of the pandemic, many turned out to be over-priced relative to the amount of care their enrollees were using. Some insurers offered premium holidays and many temporarily waived certain out-of-pocket costs, which had a downward effect on their rebates.
In the small and large group markets, 2022 average simple loss ratios were 83% and 88%, respectively. Only fully-insured group plans are subject to the ACA MLR rule; about two thirds of covered workers are in self-funded plans, to which the MLR threshold does not apply.
Rebate Payment Logistics
The 2023 rebate amounts in this analysis are still preliminary. Rebates or rebate notices are mailed out by the end of September and the federal government will post a summary of the total amount owed by each issuer in each state later in the year.
Insurers in the individual market may either issue rebates in the form of a check or premium credit. For people with employer coverage, the rebate may be shared between the employer and the employee depending on the way in which the employer and employee share premium costs.
If the amount of the rebate is exceptionally small (less than $5 for individual rebates and less than $20 for group rebates), insurers are not required to process the rebate, as it may not warrant the administrative burden required to do so.
What to Expect in Coming Years?
Another year of higher loss ratios in the individual market may foretell further premium increases in 2024, as some insurers will aim for lower loss ratios to regain higher margins. In recent years, insurers in all markets had experienced a great deal of uncertainty in setting premiums during the pandemic. Looking ahead to 2024, some of that uncertainty may continue, specifically relating to pent-up demand or the health effects of missed and delayed care. Additional uncertainty in premium setting may come from the Medicaid continuous coverage unwinding, as millions of people are expected to lose Medicaid coverage in the coming months and may transition to other sources of insurance. Increases in provider wages and other costs due to inflation could lead to higher premiums. In the 2023 rate filings, Marketplace insurer actuaries cited increase in prices and utilization as drivers of the premium increases.
We analyzed insurer-reported financial data from Health Coverage Portal TM, a market database maintained by Mark Farrah Associates, which includes information from the National Association of Insurance Commissioners. The Supplemental Health Care Exhibit dataset analyzed in this report does not include data from California HMOs regulated by California’s Department of Managed Health Care. All individual market figures in this data note are for major medical insurance plans sold both on and off exchange. Simple loss ratios are calculated as the ratio of the sum of total incurred claims to the sum of health premiums earned.
Rebates for 2023 are based on preliminary estimates from insurers. Total rebates issued in 2022 differed by about 1% from estimated rebates. In some years, final rebates are higher than expected and in other years, final rebates are lower.