Arizona, MLR and pay-fors?

Charles Gaba is pulling estimates for Medical Loss Ratio rebates in all states. He posted some eye-popping numbers from Arizona.

Individual market MLR rebates skyrocketed from 101,000 enrollees receiving $16.2 million last year to 96,000 receiving a whoping $92.3 million…averaging $959 apiece!
Nearly all of this comes from Health Net of Arizona…operating under the “Ambetter from Arizona Complete Health” (Ambetter, aka Centene, bought out Health Net last year…confused yet?).

It is a single insurer, Centene/Ambetter/HealthNet, that is driving almost all of the Medical Loss Ratio rebates for 2016-2018 that are currently being paid out now. Some folks will be getting checks back that are much larger than the net of subsidy premiums that they paid in.

• Medical Loss Ratio can be seen as the difference between how an insurer priced and how it should have priced with perfect information
• MLR rebates to subsidized buyers can be seen as a double dip on top of premium tax credits
• Switching the landing spot of MLR rebates for subsidized folks to the US Treasury could be a significant pay-for

MLR rebates are paid to policy holders who had a plan during the last year of the three year cycle.  The rebate is a gap filler between the actual claims expense ratio to the floor ratio of 80% in the individual and small group markets.  The rebates are sent to each policy holder in proportion to the total gross premium that they generated for the insurer.  Older buyers with large families who bought more expensive plans get a larger rebate check than a single twenty two year old buying the cheapest plan possible.

This does weird things that we need to think about.

MLR rebates are a post-facto correction for actuarial errors.  MLR rebates are paid out when the insurer significantly overpriced their premiums relative to claims.  The rebate brings the net collected premium back to within the normal range.  There is a significant delay and the distribution is funky, but this is the fundamental mechanic occuring when an insurer pays out MLR rebates.

Advanced premium tax credits (APTC) are paid out to the 100-400% Federal Poverty Level (FPL) insured in order to allow them to buy “affordable” insurance.  The APTC is calculated based on the premiums that the insured saw at the purchasing decision point.  If an insurer is sending out significant MLR rebate checks, that means the MLR check recipient, if subsidized, may have had their APTC based on over-inflated premiums.  They already benefited from higher than real APTC payments through no fault of their own.  An MLR check to someone who received APTC is a legal, double dip.

Non-subsidized enrollees who receive an MLR check are merely being made whole from paying too high of a premium completely out of their own pocket.

I think there is a good policy argument that the US Treasury should be at least a beneficiary of MLR rebates that are earned to individuals who receive APTC subsidies.  The Treasury paid too much in APTC on the original round of insurance choice.  Rejiggering the rebate formula so that MLR rebates are distributed in proportion to total paid premium by source could generate several hundred million dollars in pay-fors for the US Treasury.  A half billion dollar pay-for is a decent size downpayment for national reinsurance for catastrophic, multi-million dollar claims that are likely to become more common in the future.

When MLR was orginally designed, it was primarily intended to function as both a heavy club to beat up on the worse operators in the underwritten insurance space, seem to be a populist measure of beating up on all evil bastard insurers, and then from a more realistic point of view, pick up a little bit of actuarial/statistical noise every year.  The 2018 initiation of Silverloading was a major pricing shock combined with incredible policy uncertainty led to the proliferation of the possibilities of zero and net negative premiums.  Those consequences are unintended, weird and introduce potentially distortions to the market.   Congressional action to reroute MLR rebates as a function of net payment would remove some of the potential distortions.