In yesterday's address to support his signature health care law, President Obama highlighted the fact that some Americans have already received insurance rebates and lower premiums as a result of the Medical Loss Ratio requirement. In fact, the president said rebates are being sent for 8.5 million Americans this summer, averaging $100 each.

Who will receive a rebate check?

The Medical Loss Ratio Explained

The Medical Loss Ratio (MLR) provision requires health insurance issuers to spend at least 80 cents (in some cases 85 cents) of every premium dollar on medical care and quality improvement or reimburse the difference.

Under Obamacare, insurance companies must submit information to the government on the proportion of premium revenues they spend for clinical services and quality improvement. Insurance companies in the individual and small-group markets are required to spend at least 80 percent of premium dollars directly on medical care, while insurance companies in the large group market are required to spend at least 85 percent. The remaining percentage can be used for administrative costs, including profit. If an insurer fails to meet this metric, they must provide a rebate to their customers.

The MLR requirement took effect last year with the result being that those companies (and only those companies) that spent more on administrative costs than allowed by law will send rebate checks to their customers. That amounts to $1.1 billion in total refunds, according to CNN.

Much of that rebate money will not be going directly to individuals, though.

Instead, the rebate checks will be mailed to employers who provide insurance. Nevertheless, they are required to use the money to benefit their insured employees in some way.


Unfortunately, not everyone sees the MLR provision as lowering premium costs. This includes some insurers.

Last year, for instance, Blue Cross Blue Shield of North Carolina issued a statement on the MLR requirement. Noting the many interim and final rules, bulletins, and notices intended to clarify and regulate how MLR will be implemented, the company took exception to the fact that one particular rule required them to send notices of a rebate to their customers by a certain date. "This will likely add administrative expenses, counter to the goals of the MLR provision."

Others, such as Robert Book, contend that the MLR rule may raise the price of premiums. A contributor to Forbes, he writes that an insurer may actually be able to make more money by raising the premium and paying a higher rebate. "For example, if average medical costs are $8,000 per family, the insurer could charge a premium of $10,000 and owe no rebate, leaving $2,000 for administrative costs and profit. Alternatively, they could charge a premium of $11,000. Assuming medical care costs still average $8,000, they would owe rebate of $800 to bring their total loss ratio to 80% of $11,000. This would leave them with $2,200 for administrative cost and profit - a gain of $200 compared to the no-rebate case. In general, for every extra dollar of premiums, the insurer can rebate 80 cents and keep 20 cents."

Others argue that this wouldn't happen in a competitive market, since consumers would not want to pay the higher premium.

However, with subsidies given to some participants in the health care exchanges, it can no longer be considered a competitive market; and even in a competitive market, the MLR requirement may still add up to higher premiums, Book argues.

Because the amount insurance companies have to pay varies from year to year, companies have to set aside reserves in low-cost years to avoid going bankrupt in high-cost years. "This is not just prudent from a business perspective; it is also required by law in most states. But the MLR makes that more difficult. In low-cost years, insurers will have to pay rebates, making it more difficult to set aside enough reserves. The only way to make up for that is to increase premiums."

Other economists worry over this matter. Ultimately, how insurance companies, which must make a profit to remain in business, decide to price their products given the new MLR rule will be the deciding factor.

Change Ahead

The Christian Science Monitor reports that even some of Obama's allies in the labor unions no longer support the law. Union leaders say companies may be limiting weekly work hours to avoid providing the coverage that is required for employees who work 30 hours or more.

Additionally, not everyone who is uninsured is expected to take the opportunity to get coverage, and that could have terrible ramifications for the economic underpinnings of the system. The Congressional Budget Office estimates that about six million people would rather pay the tax penalty for not having insurance in 2014. No numbers have been placed on how many of those will be the young and healthy adults needed in the system to offset costs for older, sicker beneficiaries.

During yesterday's speech, the president noted that some states are anticipating lower premiums because of the health insurance marketplaces that allow consumers to comparison shop for insurance coverage. In particular, he mentioned California, Oregon, Washington, and New York. Obama said the program is working the way it was supposed to with "better benefits, stronger protections, more bang for your buck." Obama said Americans saved $3.4 billion last year alone because of the lower premiums that are a result of the efficiencies required by the law.