Health insurers must pay up or pay back

WASHINGTON — In 2011, the nation's new health care law required UnitedHealth Group to provide its health insurance customers $305 million in premium refunds because the company spent more than the law allowed on administration, marketing and profits.

One of the aims of the law is to make for-profit companies like United spend at least 80 to 85 percent of the premiums they collect on patient care and quality improvements. Companies that don't must pay back the difference to policyholders in cash or lower future premiums.

The idea is to enhance efficiency and effectiveness while balancing premiums and profits.

For now, a Star Tribune analysis of government data found, the trend is moving in that direction.

By 2013, United, the nation's largest health insurer, had cut its mandatory annual premium refunds to roughly $90 million. The country's other major insurers — Humana, Cigna, Aetna and WellPoint — also reduced their refund payments enormously from 2011 to 2013. Cigna led the way, almost wiping them out entirely.

"A lot more of [each] premium dollar is being spent on care by for-profit companies," said Mike McCue, an MBA from the University of Minnesota who now teaches health care finance at Virginia Commonwealth University.

McCue, an expert in so-called medical loss ratios that determine premium refunds, believes insurers will continue to adjust premiums rates and claims predictions in hopes of avoiding refunds.

Pushing premium dollars into patient care and away from other expenses is what U.S. Sen. Al Franken of Minnesota had in mind when he authored medical loss ratio legislation and helped get a version of it included in the Affordable Care Act.

"The more you spend on administration, marketing, CEO salaries and profits, the more health care is going to cost everybody," Franken said in an interview.

Franken, a Democrat, originally proposed that insurers spend 85 to 90 percent of premiums on care or be forced to refund the difference. He settled for a compromise of 80 to 85 percent, depending on whether coverage was for individual, small group or large group policies.

As a result, Franken said, health insurance costs are now rising more slowly than they have in decades. "What we hoped and thought would happen happened," he said.

Whether spending a bigger share of premium dollars on patient care improves health outcomes remains a matter of conjecture.

Washington and Lee University law professor Tim Jost said a big reason the new law set minimum standards and required companies that didn't meet them to issue refunds was that premium rates were increasing much faster than claims.

"After the economy collapsed [in 2007], claims were climbing at much lower rates than they had been," said Jost, one of the nation's leading experts on the Affordable Care Act. "But premiums kept going up at double-digit rates."

The results, according to Jost, were record profits for for-profit health insurers and record reserves for nonprofit insurers.

Premium refunds, he said, have forced companies of all kinds to set premiums and conduct business in ways that are "more realistic."

UnitedHealth Group has paid far more in premium refunds than any other insurance company in the country, roughly $545 million from 2011 to 2013. WellPoint is a distant second at $195 million.

On a per member basis, United's largest premium refunds and adjustments have come for people covered under individual policies. Using membership information provided by the U.S. Department of Health and Human Services, the Star Tribune determined that United paid refunds on individual policies that averaged $93.53 per member in 2011, $55.32 per member in 2012 and $30.36 in 2013. In contrast, rebates for large group policies were $25.89 per member in 2011, $10.07 in 2012 and $4.75 in 2013.

A United spokeswoman said in an e-mail to the Star Tribune that the company's "goal in pricing is to match expected medical cost increases with premiums … [O]ur rebate is less than one-half of 1 percent of UnitedHealthcare's total annual premium collected. We will continue to apply sound actuarial principles in determining our pricing and when, despite our best predictions, we do not meet … requirements, we will issue refunds."

David Heupel, a senior health analyst at Minneapolis-based Thrivent Financial, tracks United for investors. He doesn't see the size of the company's premium refunds "as saying United is doing a bad job." Rather, Heupel believes that United and other for-profit health insurers continue to search for the optimal balance that serves shareholders while meeting directives of the new health care law.

"They are trying to benchmark the allowable profitability and still offer a competitive package," Heupel said. "What you don't want to do is underprice on false assumptions."

That distinguishes for-profit companies from nonprofit companies, Virginia Commonwealth's McCue said. Nonprofit health insurers have traditionally spent more than 85 percent of premiums on care, he noted, so most nonprofits have not needed to refund premiums under the new law.

One for-profit strategy could be to predict claims and set premiums planning to pay a small rebate, added Washington and Lee's Jost.

"If you do have to pay rebates, you don't lose much," he said. "If you don't have to pay rebates, you maximize profits."

Besides, getting a refund might actually produce brand loyalty in customers, Jost and Heupel suggested.

But Steve Parente, a health care finance expert at the University of Minnesota, said companies would ultimately like to avoid refunds and are now pressing for ways to reduce costs more aggressively.

"They were interested in this before," he said. "But no one was holding them to a standard,"

Parente says United is "narrowing the hospitals and providers they deal with and negotiating rates" to cut costs and make sure they don't have to pay premium refunds.

However, Heupel does not think for-profit companies will ever spend more than the legally required 80 to 85 percent of premiums on patient care. Otherwise, they will cut into profit margins that are critical to maintaining stock prices.

"It's not like you get anything back if you get to 95 cents on the dollar," he said.

Jim Spencer • 202-383-6123