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Health Insurers Made Billions Then Refunded Them

Health Insurers Made Billions Then Refunded Them
By Aditya Singh • Issue #11 • View online
While the US economy slipped into a recession, and while the federal and state governments were engaged in efforts to control the COVID-19 pandemic and distribute economic aid, American health insurers recorded record profitability.
Specifically, profit margins jumped from 3.0% in 2019 to 3.8% in 2020, translating to an increase around $9 billion.

Less Medical Services
To minimize exposure to the virus, and to free up medical resources and staff for treating those with it, in-person visits for non-urgent care decreased significantly while some providers proceeded to cancel elective surgeries.
In fact, this led to an ironic and rare decrease in overall health spending amid early stages of the COVID-19 pandemic. Year over year spending was
So what’s the significance of this?
Health insurance companies charge their members a monthly premium to be on the plan. The revenue from these premiums helps the insurer run its operations of covering medical services for its members, managing relationships with care providers, administrative costs, and marketing. Because of the cost of healthcare, most of the revenue from premiums goes to covering medical services.
Because suddenly people were using less medical services, the cost of healthcare services that insurers had to cover dropped, and with it, profit margins expanded.
Rebates
These profits, interestingly, didn’t last forever.
In 2021, health insurers paid around $2 billion in rebates back to members.
There’s a term in health insurance called the medical loss ratio (MLR). The MLR is a ratio that describes how much of the revenue in premiums goes to covering medical services. If an insurer’s medical service costs are 80% of the total revenue from premiums, the MLR of the insurer is 80%.
Something that the Affordable Care Act (ACA, aka Obamacare) did was establish a maximum MLR for private health insurers. Health insurance companies have to refund part of the premiums to their members if the MLR does not exceed a certain amount. For smaller plans, the cutoff is 80%, and for large group plans, that cutoff is 85%.
As people started going to seek non-urgent care, and as rebates were owed to members, many insurers like Cigna and UnitedHealth reported falling profits in 2021 relative to 2020.
Unexpected Results
This situation where unexpected world events can lead to a flip-flopping of the business side of healthcare is not particularly unique.
When the ACA took effect in the mid-2010’s, many health insurers saw profit margins drop as they had to cover new federally outlined essential health benefits (EHBs) and accept millions of new members.
However, profit margins sharply rebounded, because all of a sudden, the subsidies used to help middle income Americans afford health insurance and contracts through Medicaid’s expansion throughout the country led to more members on the plans of health insurance companies.
Source: National Association of Insurance Commissioners - US Healthcare Industry: 2020 Annual Results
Source: National Association of Insurance Commissioners - US Healthcare Industry: 2020 Annual Results
So what’s the point of taking note of all of this?
Well, for one thing, healthcare policy decisions can have contradictory outcomes, and many times, the outcomes may swing one way and then rapidly swing the other way within months.
Healthcare institutions take time to adapt to change. Even if they may benefit or have something to lose in the long-run, immediate effects can tell a different and sometimes deceptive story.
While it’s impossible to predict every possible outcome of a policy decision, it’s helpful to try assess proposals and rules from the context of “edge cases” where extraordinary circumstances might play out to affect long-term outcomes.
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Aditya Singh

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