As part of the Affordable Care Act (ACC), health care insurers will rebate $500 million this summer to consumers who purchased health insurance under a provision in the law that requires companies to spend a certain portion of premiums on consumers or refund the money. Specifically, ACC forbids most insurance plans from keeping more than 20 percent of premiums charged for profit and overhead—it is the so-called 80/20 rule, which forces insurers selling individual and small group plans to spend at least 80 percent of the premiums they charge consumers on actual medical care, rather than administrative overhead or profit (the threshold for large group market plans is even higher at 85 percent).

I think this is a good thing because it gets more of the premium dollars spent on health care services and less on overhead.  Furthermore, it appears to be leading to a reduction in premiums, at least in some cases. Insurers in the individual market have already taken steps to lower premiums. I am getting my information from the Kaiser Family Foundation, a very reliable source, which estimates that individual plan sellers lowered rates by $856 million in 2011 and $1.9 billion in 2012 to conform to the 80/20 ratio.  Moreover, Kaiser reports that small and large market insurers may end up doing the same by lowering their premiums or cutting down on their administrative costs by making their businesses more efficient.

Look at it this way—if you were an insurance executive, would you want to collect more in premiums than needed for medical services just to turn around and issue checks to millions of your policy holders each year?  Or would you prefer to lower the premiums in the first place?  We are seeing the latter occur.

So, who gets the $500 million? According to the Department of Health and Human Services, approximately 8.5 million Americans will receive the rebates with an average rebate of about $100 per family. While that is down from last year’s average rebate by about $50 per family, it is a good sign that the pressure is on for insurance companies to do something about premiums. Being in health care administration, I would like to see more spent on direct health care and less on multi-million bonuses to CEOs of large insurance companies (which we have read about too often).