As we all know by now, the Affordable Care Act produced the most comprehensive changes in the history of the health insurance industry. Aside from giving states the option of running their own health insurance exchanges, where individuals and small business employers may shop for health insurance, the law also made sweeping changes to the operations of health insurance companies themselves.
One such change involves the amount insurance companies can charge employers (or, as the case may be, individuals) for their health plan premiums. Called the medical loss ratio, this formula essentially controls the cost of health insurance by allowing insurance companies to charge only enough to cover the cost of claims plus 15 to 20 percent to cover their own operating costs.
Specifically, insurance companies must allocate no more than 15 percent to the cost of premiums billed to large companies with more than 50 employees, and 20 percent to premiums for individuals and small businesses with fewer than 50 employees to cover their operating and marketing costs.
Premiums are calculated in the preceding year by estimating the cost of providing coverage (paying claims) plus the amount allowed for operating costs. At times, however, the medical coverage paid may be less than the amount estimated for paying claims. If insurance companies pay less than 80 or 85 percent on claims (depending upon whether the plan is a large business, small business, or individual policy), then technically they have violated the ACA by overcharging for premiums. This situation is remedied by sending rebates to individuals or companies who were overcharged.
Rebates are sent to employers if they are the ones who paid the health insurance premiums or to individuals if they pay their own premiums. In the event of workers who pay part of their premiums, then the appropriate percentages will be refunded to both employee and employer. For example, a small business owner who pays 50 percent of his employee’s health insurance premiums would receive a rebate for 50 percent of the overpayment from all employees, while each employee would be eligible to receive a refund of 50 percent for their own overpayment.