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Evan Eastman, eeastman@business.fsu.edu
David Eckles, deckles@uga.edu
Andrew Van Buskirk, van-buskirk.10@osu.edu
David Twiddy, david.twiddy@aaahq.org 941-556-4115

April 30, 2021

Study: Insurers Are Overestimating Costs, Lowering Rebates Owed to Policyholders

FOR IMMEDIATE RELEASE

Lakewood Ranch, Fla. _ A recent study finds health insurance companies are overestimating costs associated with patient care to avoid triggering rebate provisions in the Affordable Care Act (ACA).

“What we found is that the more likely companies were to be forced to issue refunds to policyholders, the more likely those companies were to overestimate forthcoming costs – which would allow them to reduce or avoid paying the refunds,” says Andrew Van Buskirk, co-author of the study and an associate professor of accounting at Ohio State University.

At issue is language in the ACA that, broadly speaking, requires insurers to spend at least 80% of their premium revenue on policyholder benefits – such as paying claims. If insurers don’t meet that threshold, they’re required to refund the difference to their policyholders. From 2011-2017, insurers refunded approximately $4 billion to policyholders.

To track insurance costs and revenues, the ACA requires health insurers to file annual reports of their premiums, estimated claims, and a relative measure of claims to premiums called the “medical loss ratio,” or MLR. Each year’s MLR includes both claims that have been paid and an estimate of claims the company will have to pay in the future for an event that already happened. For example, some injuries may require multiple medical interventions across multiple years.

Insurance companies base each year’s reported MLR on a rolling three-year average. So, the MLR report for 2018 includes claims estimates from 2016, 2017 and 2018. The most recent year’s figures would include both estimated and realized costs related to events that took place in 2018. But the figures reported in 2018 for the 2016 year should include fewer estimates and more paid costs, making the older estimates more accurate. In short, this gave the researchers a way to track the accuracy of cost estimates in each year.

What the researchers found was that insurers’ reported estimates were consistently overstated in situations where more accurate estimates would have triggered higher rebate payments.

“We estimate that about 14% of insurers engage in strategic overestimation, costing policyholders hundreds of millions of dollars in unpaid rebates,” says Evan Eastman, co-author of the study and an assistant professor of risk management and insurance at Florida State University.

“If you create an incentive, companies are going to respond to that incentive,” says David Eckles, co-author of the study and a professor of risk management and insurance at the University of Georgia. “In this case, that means overestimating costs to avoid paying rebates. Regulators could limit those incentives by focusing solely on paid costs each year, or by incorporating a clawback provision to account for previously overestimated costs.”

“Accounting-based regulation can be a powerful tool,” Van Buskirk says. “But the lack of ACA provisions to prevent manipulation, and the lack of oversight, limits the effectiveness of this regulation.”

The paper, “Accounting-Based Regulation: Evidence from Health Insurers and the Affordable Care Act,” is published in The Accounting Review.

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