Insurance Companies Send Out Rebate Checks; Economists Get Nervous

Insurance Companies Send Out Rebate Checks; Economists Get Nervous
September 20, 2012
by David Kestenbaum - NPR Morning Edition

Nearly 13 million Americans have gotten, or will soon be getting, rebates from their health insurance companies. This is because of a provision in the Affordable Care Act (aka Obamacare) that's supposed to force insurance companies to run better.

But while the idea of getting a check from your health insurance company may sound great, some economists worry this rule could actually make health insurance more expensive.

The provision requires that health insurance companies spend at least 80 percent of premiums on health care. In other words, of the money we pay them for our health insurance, at least 80 percent has to be spent on actual health care.

"A lot of insurance companies run fairly high overhead rates," says Kathleen Sebelius, the secretary of Health and Human Services. "And those overhead rates, which go to everything from CEO salaries, to marektiing, to agent and broker fees ... don't really add to anbody's health benefit."

Under the new rule, more than 20 percent of the premiums insurance companies collect goes to overhead and profit, they have to give out refunds. The average refund people are getting is about $150. That adds up: Over $1 billion has been returned to customers, according to Sebelius.

"I can't tell you how many people have called or written or written or showed up and said, 'I got a check from my insurance company,'" she says. "They are just flabbergasted. "

But as is sometimes the case, what is popular with the people is not so popular with economists. I called up six health care economists. No one thought the provision would do much good, and several thought it could be harmful.

Jonathan Gruber, an economist at MIT, likes the Affordable Care Act. He actually helped craft the law. But he's wary of this particular provision.

The rule has the potential to do exactly the wrong thing, he says — to drive up the cost of health care.

The rule says that insurance companies have to spend at least 80 percent of the premiums they collect on actual health care, and no more than 20 percent on overhead.

So if you're an insurance company, you could make sure you're in compliance by reducing unnecessary overhead. That would be great for everybody.

But there's another possibility. Since 80 percent of premiums have to be spent on health care, insurance companies have less incentive to keep health care costs down. They have less incentive to negotiate with hospitals that want to charge higher rates and doctors who want to order potentially unnecessary tests.

"I worry there that there's an incentive in that direction," Gruber says. "I absolutely do."