Texas Tech University Health Sciences Center
Exploring Obamacare Refunds - The 80/20 Rule

Exploring Obamacare Refunds - The 80/20 Rule

exporing-obamacare-refunds-the-8020-rule- image0The Affordable Care Act or Obamacare has many provisions. I believe it has both good and bad provisions and have written as much on numerous occasion in this column and said so in speeches and lectures to classes and different groups. One of the good provisions, in my opinion, is the one that if an insurance company is not spending at least 80 percent of the premium dollars it collects on medical care, it has to send money back to the people who paid the premiums. This is called the “80/20 rule.”

Recently the U.S. Department of Health and Human Services (HHS) released a list of health insurance companies that owe Texans nearly $14 million in refunds due to the aforementioned provision. I have included that list at the end of this column.

The “80/20 rule” is designed to protect the purchasers of insurance, as a group, from paying a lot more in premiums than the insurance company pays out in fees for covered medical services incurred by the purchasers of insurance during the year. Insurance is about sharing risk.

Let me give you a simple example that I just made up (this is not real.) Say that everyone at the HSC agrees to place $5 dollars in an annual fund or “pool” and from that pool we would pay claims for anyone whose vehicle has glass damage from a hail storm while sitting on the school’s parking lot. I think we have about 2,500 employees on this campus, so that would be $12,500 in our hail damage auto glass insurance pool. Most years we do not have hail damage to windshields so we could refund all of the money to the people who paid it to the pool (or maybe 80% or $10,000, so each person who paid in would get $4 back.) But, one year, we have 30 windshields that are damaged and it costs $350 each to replace them. The pool would be out $10,500. Eighty percent of $12,500 (what we received in premiums),again, is $10,000 and that amount would have been exceeded by $500 in payouts, therefore no money would be refunded that year. As previously mentioned, insurance is about risk and some years are just plain unlucky or whatever phrase you want to use to describe them.

This rule is also known as the medical loss ratio rule. In the individual market health insurance market, the companies have to spend at least 80 percent of premiums on medical care or other activities to improve health care quality and for larger groups, 85 percent must go for those purposes.

According to HHS, the average refund will be $80 per family, and refunds were due by the first of August. Insurers can make up the difference by writing a check, crediting customers’ accounts or making reductions in future premiums. If insurance was purchased through work, employers must provide a refund. This sounds like a bit of an accounting headache—but, it is for a good reason.

Here is the list of health insurers owing refunds to Texans:

Company / Refunds in the Individual Market / Refunds in the Small Group Market / Refunds in the Large Group Market

American Alternative Insurance Corp. / $0 / $231,427 / $0
American National Life Insurance Co. of Texas / $291,855 / $0 / $0
American Specialty Health Insurance Co. / $0 / $0 / $356
Companion Life Insurance Co. / $0 / $29,514 / $22,907
Connecticut General Life Insurance Co. / $1,002,432 / $0 / $0
Freedom Life Insurance Co. of America / $147,686 / $0 / $0
Golden Rule Insurance Co. / $903,712 / $0 / $0
Humana Insurance Co. Inc. / $0 / $0 / $251,468
Independence American Insurance Co. / $155,535 / $0 / $0
Insurance Co. of Scott and White / $1,903,176 / $0 / $0
John Alden Life Insurance Co. / $91,862 / $0 / $0
Mid-West National Life Insurance Co. of Tennessee / $784,019 / $0 / $0
National Foundation Life Insurance Co. / $68,664 / $0 / $0
Standard Life and Casualty Insurance Co. / $201,869 / $0 / $0
Standard Security Life Insurance Co. of New York / $4,442 / $0 / $475,751
The Chesapeake Life Insurance Co. / $99,062 / $0 / $0
The MEGA Life and Health Insurance Co. / $1,456,558 / $0 / $0
The United States Life Insurance Co. in the City of New York / $136,152 / $0 / $0
Time Insurance Co. / $4,474,028 / $0 / $0
Trustmark Life Insurance Co. / $0 / $786,194 / $73,381
United Healthcare Life Insurance Co. / $98,932 / $0 / $0