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You are here: Home / Anderson On Health Insurance / MLR rebates, negative premiums and option values

MLR rebates, negative premiums and option values

by David Anderson|  January 21, 20228:46 am| 9 Comments

This post is in: Anderson On Health Insurance

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Some people have been effectively paid to buy health insurance on the ACA marketplaces.

What do I mean by this?

The ACA requires individual market insurers to spend 80% of qualified premiums on qualified claims or quality improvement expenses.  If, over a 3 year period, an insurer spends less than this amount, they have to write a check to the policy holders of the last year that reduces premium so that the medical loss ratio (MLR) is updated to 80%.  The check is usually written twenty months after a policy is purchased (the 2021 checks will be written August/September 2022 for instance).  The size of the check is a function of the proportion of gross premiums a policy holder pays.  This means that people with higher value plans and who are older and from larger families get larger checks than younger families with skinnier policies.

Note the important phrase above is “GROSS PREMIUM”.

Many ACA buyers are subsidized. They pay NET PREMIUMS that are often much less than the gross premium.  Some people pay nothing in monthly premiums.  If they purchase an ACA plan that generates an MLR rebate for that policy year, they are effectively getting paid to buy insurance.

Some MLR rebates are fairly idiosyncratic.  An insurer might have a shock year like 2018 where every insurer massively overpriced due to mis-estimating how many people would be chased out of the marketplaces due to political uncertainty.  But before and after that one off shock year, normal-ish years resumed so the MLR rebate is not particularly predictable nor anticipatable when plans are purchased.  Some MLR rebates are somewhat predictable ahead of time. Insurers could have a big shock ear like 2018 and then in 2019 and 2020 have very profitable years as they still could have high premiums relative to claims and low competition.

Can we think of buying an ACA plan as buying both health insurance and also buying an option on an MLR rebate?

There is some probability that at the point of purchase that an MLR rebate will be generated for a particular plan.  The probability is seldom 100% but in many areas for certain plans the probability is well above 0%.  There is variance on the size of an MLR rebate ranging from zero to a lot.   Some people have an expected MLR rebate of effectively zero.  Some people have an expected MLR rebate that could be quite large ($1,000 +).

Does this drive decision-making?

Do people realize that when they purchase ACA health insurance plans, there is a possibility that their plan choices could lead to a potentially big MLR rebate check.  Do people who are are exposed to a higher probability of a big pay-off choose differently which plans they are buying to reflect the lagged effects of an MLR rebate on premiums.  Do they buy a plan that has a high probability of an MLR rebate that has higher initial premiums than they otherwise would have if they were not taking into account MLR rebate probabilities?

This is a messy problem.  It requires knowledge of the MLR mechanics and history.  It involves long lags.  It involves optimal rational maximization problem solving under many axis of uncertainty.  It is a nasty problem.

My hypothesis is we should not see effects due to informational and behavioral frictions.  But I’m curious about this.

 

 

 

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Reader Interactions

9Comments

  1. 1.

    WaterGirl

    January 21, 2022 at 9:47 am

    Interesting post, Dave!

    I also love your featured image. :-)

  2. 2.

    David Anderson

    January 21, 2022 at 10:08 am

    @WaterGirl: I’m trying to throw this idea out there for an econ grad student to pick up and run with as either their field paper or a dissertation paper as I want to know the answer but I don’t have the tools or time to acquire the needed tools to do this myself.

  3. 3.

    Old School

    January 21, 2022 at 10:08 am

    @WaterGirl:

    I also love your featured image. :-)

    I don’t see any image.  What was it

    Edit: I see it in the wing of the previous post, but not on this page.

  4. 4.

    WaterGirl

    January 21, 2022 at 11:10 am

    @Old School: Yes, in WordPress, you can select a “featured image”.

    Now a logical person might think that “featured image” would be the image that is featured in the post.  But no!

    The featured image is what shows up in social media posts, in a little circle or square if you use an RSS reader, and in our case, in the fly-out that shows you the previous or next posts

    You can have an image in the post itself, but that’s not the featured image.  Gah!

  5. 5.

    WaterGirl

    January 21, 2022 at 11:12 am

    @David Anderson: Do you think that maybe half of dissertation subjects are chosen because some professors have deliberately planted seeds in the hopes of getting grad students to do exactly that?

    You think you are choosing, and in one sense you are, but your strings have been pulled by someone else?

    Not saying that’s a bad thing, but I wonder how self-aware grad students are, in terms of recognizing what’s going on.

  6. 6.

    David Anderson

    January 21, 2022 at 11:47 am

    @WaterGirl: Well more than half would be my guess, with a decent amount of awareness on the part of the grad student.

    The best dissertation is a defended dissertation that has been accepted by the committee.  A dissertation, hopefully, is not the author’s best work that they’ll ever do.  Instead it is the validation and proof of concept that they can create new knowledge that is field relevant in a format that the masters in the field as represented by the committee deems to be acceptable.

    So a student who listens to their advisor that Topics A,B, C and D are interesting and plausible and achievable within a  reasonable time period avenues of inquiry while Issue E and F are awesome but are realistically 10-15 year slogs while H, I and J would be nice contributions but the data does not exist and won’t exist without Congress changing several laws that they have no interest in changing, while K, L, M,N and O are bat shit crazy is well ahead of a student in completing their dissertation than someone wandering blindly for a few years.

  7. 7.

    WaterGirl

    January 21, 2022 at 12:20 pm

    @David Anderson: What a perfect description!

  8. 8.

    StringOnAStick

    January 21, 2022 at 1:47 pm

    I knew there was a reason I didn’t pursue a PhD…

  9. 9.

    sab

    January 21, 2022 at 3:13 pm

    @WaterGirl: Your explanation reads like some of Mayhew-Andersobn’s posts, whizzing right over the top of my head.

    ;)

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