Health Insurers’ Claims and Premiums Under the Affordable Care Act: Evidence on the Effects of Bright Line Regulations

• Date: 01 March 2020
• DOI: http://doi.org/10.1111/jori.12272
• Author: Sandra Renfro Callaghan,William F. Wempe,Elizabeth Plummer
• Published date: 01 March 2020

HEALTH INSURERS’CLAIMS AND PREMIUMS UNDER THE

AFFORDABLE CARE ACT:EVIDENCE ON THE EFFECTS OF

BRIGHT LINE REGULATIONS

Sandra Renfro Callaghan

Elizabeth Plummer

William F. Wempe

ABSTRACT

The Affordable Care Act’s medical loss ratio (MLR) provisions require that

health insurers spend a minimum percentage of premiums on medical costs,

thereby limiting administrative costs and profits. Analyses of annual MLR

changes indicate that plans both below and above the minimum MLR

manage their ratios toward the minimum standard. Our finding that plans

with excess MLR manage their MLRs downward suggests that compliant

plans exploit their MLR “cushions,” thus increasing profits while typically

continuing to satisfy the MLR requirement. We show that 52 percent of

noncompliant plans in a given year subsequently become compliant, while

14 percent of compliant plans subsequently become noncompliant.

INTRODUCTION

The Patient Protection and Affordable Care Act (ACA) is among the most significant

and controversial pieces of legislation enacted in recent U.S. history (Diamond, 2011).

In addition to its provisions related to individual and employer mandates and the

establishment of insurance exchanges, the ACA also promulgated the medical loss

ratio (MLR) requirements for health insurers (ACA, Section 2718; Harrington, 2010a).

The MLR provisions are intended to decrease premiums by mandating that insurers

spend a minimum percentage of premium revenues on claims and certain other

healthcare costs, thereby limiting the percentage spent on administrative costs or

retained as profits. Noncompliant insurers (i.e., those with MLRs below the minimum

standard) must publicly disclose their noncompliance and pay rebates to

policyholders.

Sandra Renfro Callaghan,Elizabeth Plummer, and William F. Wempe are atthe Department of

Accounting,Neeley School of Business, TCU Box 298530,Fort Worth, TX 76129. Callaghan can be

contacted via e-mail: s.callaghan@tcu.edu. Plummer can be contacted via e-mail: c.e.

plummer@tcu.edu.Wempe can be contacted via e-mail: w.wempe@tcu.edu.The authors would

like to thank the anonymous referees and co-editor, and the editor of the Journal of Risk and

Insurance, Keith Crocker, for their helpful comments that improved this article considerably.

©2019 The Journal of Risk and Insurance. Vol. 9999, No. 9999, 1–27 (2019).

DOI: 10.1111/jori.12272

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Vol. 87, No. 1, 67–93 (2020).

In this study, we examine how the ACA’s new provisions have affected insurance

plans’ MLRs. Using MLR data for 2011–2015, we examine insurers’ annual changes in

MLRs to assess their sensitivity to the presence of the minimum MLR standard. We

examine not only the propensity of noncompliant plans to increase their MLRs, but

also whether compliant plans manage their MLRs downward toward the new bright-

line standard, thereby increasing profits while continuing to satisfy the minimum

MLR requirement. We conduct tests on plans segmented by market and tax status to

assess the relevance of those factors to the variance in annual MLR changes.

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Recognizing that a main objective of the MLR provisions is to control healthcare costs

and reduce premium increases, we also separately examine annual changes in

noncompliant and compliant plans’ claims and premiums. Finally, we examine how

noncompliant and compliant plans’ annual MLR changes impact their subsequent

compliance status.

We obtain data from insurers’ MLR Annual Reporting Forms filed with the Centers

for Medicare and Medicaid Services (CMS).

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This form provides claims, premiums,

and other information, separately by state and market serviced. Our sample includes

more than 2,000 insurance plans—both for-profit (FP) and not-for-profit (NFP) plans,

and plans offered in all 50 states. For 2015, premiums for all plans in our sample total

$344 billion, representing insurance coverage for 74.3 million individuals. The

number of plans in our sample decreased from 2,075 in 2011 to 1,748 in 2015—the net

effect of a 20 percent decrease in FP plans and a 4 percent increase in NFP plans. This

trend likely reflects FP plans’ reluctance to remain in markets with excessive risk/

reward ratios arising from volatile risk pools, difficult rate environments, and general

uncertainty associated with fledgling healthcare reforms.

We find that MLRs have markedly increased since 2011, and that average annual MLR

changes throughout 2011–2015 range from 0.4 to 2.6 percentage points, depending on

plans’ market and tax status. These results align with CMS reports indicating that

rebates declined in the first 3 years of the ACA—from $1.1 billion in 2011 to $332

million in 2013. However, CMS data also suggest that meeting the new standards

remains daunting, since rebates in 2014 and 2015 were $469 million and $397 million,

respectively—levels exceeding the 2013 trough (Centers for Medicare and Medicaid

Services, 2017). Descriptive statistics also indicate that MLRs in 2011 are significantly

lower for FP plans than for NFP plans, which is consistent with FP plans’ more salient

profitability concerns. Consistent with their lower baseline MLRs, we find that

increases in the MLRs of FP plans are more pronounced than those of NFP plans,

indicating that the MLR provisions differentially affected FP and NFP plans. Overall,

while statistics of this type are often cited as evidence that the MLR provisions are

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Markets include Individual, Small Group, and Large Group. The Small and Large Group

markets both provide coverage through employers, but operate quite differently (Kapur et al.,

2012). As explained later, tax status refers to whether a plan is taxable or tax exempt.

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Although state-mandated data exist, the ACA does not require insurers to report MLR data for

years prior to 2011. Thus, we cannot test changes in MLRs relative to a pre-ACA baseline with

data from a common source. The MLR provisions, first effective in 2011, were finalized in late

2010. If insurers responded in 2011, our study’s results will understate the increase in MLRs for

the first change year examined (2011–2012).

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