A recent study from the American Accounting Association suggests that health insurance companies are overestimating costs associated with patient care to avoid triggering rebate provisions in the Affordable Care Act.
“What we found is that the more likely companies were to be forced to issue refunds to policyholders, the more likely those companies were to overestimate forthcoming costs – which would allow them to reduce or avoid paying the refunds,” said Andrew Van Buskirk, study co-author and associate professor of accounting at Ohio State University.
Language in the ACA requires insurers to spend at least 80% of their premium revenue on policyholder benefits like paying claims. If an insurer fails to meet that threshold, it is required to refund the difference to its policyholders. Between 2011 and 2017, insurers refunded about $4 billion to policyholders, according to the American Accounting Association.
In order to track costs and revenues, the ACA requires health insurers to file annual reports of their premiums, estimated claims, and a relative measure of claims to premiums called the “medical loss ratio” (MRL). Each year’s MRL includes both claims that have already been paid and an estimate of claims the insurer will have to pay in the future for events that have already happened.
Insurance companies base each year’s MRL on a rolling three-year average. The American Accounting Association’s study found that insurers’ reported estimates were consistently overstated in situations where more accurate estimates would have triggered higher rebate payments.
“We estimate that about 14% of insurers engage in strategic overestimation, costing policyholders hundreds of millions of dollars in unpaid rebates,” said Evan Eastman, study co-author and assistant professor of risk management at Florida State University.
“If you create an incentive, companies are going to respond to that incentive,” said study co-author David Eckles, professor of risk management and insurance at the University of Georgia. “In this case, that means overestimating costs to avoid paying rebates. Regulators could limit those incentives by focusing solely on paid costs each year, or by incorporating a clawback provision to account for previously overestimated costs.”
“Accounting-based regulation can be a powerful tool,” Van Buskirk said. “But the lack of ACA provisions to prevent manipulation, and the lack of oversight, limits the effectiveness of the regulation.”