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Obamacare's $3 billion windfall to insurance customers

Consumers have gained more than $3.25 billion in benefits over two years from a Obamacare rule that financially compels insurers to keep a tight rein on overhead costs relative to the medical claims they pay out, a new report says.

The Commonwealth Fund report issued Tuesday found that even as insurers paid out less in consumer rebates for violating so-called medical loss ratio rule in the second year of the program, they ramped up slashing of administrative and sales costs, without increasing their profit margins.

As a result, consumers paid less than they might have otherwise shelled out for insurance, or received more in medical claims than they would have, the analysis found.

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Insurers paid out a total of about $1.5 billion in consumer rebates from 2011 to 2012 for not meeting the medical lost ratio requirement, which sets a strict formula for keeping overhead costs low compared to medical benefits paid out. The rationale for the rule is to ensure that peoples' premium payments be used mostly for actual health-care claims.

In addition to that, insurers reduced overhead by a total of about $1.75 billion in the same time period without increasing their profit margin, the Commonwealth Fund report said.

At the same time, the medical loss ratio requirement has not lead to significantly reduced competition among insurers, the Commonwealth Fund report found.

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"The Affordable Care Act has changed how health insurance is bought, sold and managed, and, on balance, those changes have produced substantial benefits for consumers without harming insurance markets," said Michael McCue, a Virginia Commonwealth University researcher who was the lead author of the Commonwealth Fund report.

"In its first two years, the MLR requirement contributed to significant reduction in insurance administration costs, a major source of health-care cost growth in the United States," said McCue, whose report relied mainly on data from the Centers for Medicare and Medicaid Services.

However, McCue told CNBC that the success of the requirement could lead in coming years to accelerated consolidation of the health insurance industry, since profit margins will become tighter. That, in turn, could decrease competition in the market.

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There were other criticisms as well.

"The medical loss ratio requirement does nothing to address the main drivers of health-care costs and puts an arbitrary cap on what health plans spend on a variety of programs and services that improve the quality and safety of patient care," said Clare Krusing, a spokeswoman for health insurance industry group, America's Health Insurance Plans. "Moreover, the health care reform law's $100 billion health insurance tax will cause premium increases that exceed the value of prospective rebates."

Indeed, McCue's research found that insurers were still spending relatively little on initiatives that could improve the quality of care for their customers, despite the fact that they receive credit for such spending in the MLR formula, and that it can help hold down costs from health claims.

Insurers spent an average of just 1 percent of their premiums on so-called quality improvements, which can include programs toe prevent hospital re-admissions, improve patient safety, and increase overall wellness.

The medical loss ratio rule, which took effect in 2011, requires insurers in the individual and small-group markets to use 80 cents of every premium dollar it receives to pay for customers' medical claims, or rebate the difference to their customers. Insurers in large-group markets must use 85 cents of every premium dollar toward medical claims, or rebate the difference.

"The medical loss ratio of the Affordable Care Act creates a higher-value insurance product for consumers," said Dr. David Blumenthal, president of the Commonwealth Fund.

McCue said the rule addresses the possibility that in the past some insurers "may not have been providing the full benefit that the consumer expected in their premium dollars."

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"The idea of the regulation is to make sure the plans are paying out more of those dollars for medical care . . . and not higher compensation for the CEO of the health plan," he said.

Erin Shields, a spokeswoman for the U.S. Health and Human Services Department, said, "Thanks to the 80/20 rule, many plans have already lowered premiums or improved coverage to meet the standard, and those that haven't have been held accountable by putting rebates back in customers' pockets.

A minority of insurers owed rebates in the first two years of the program. Although the number of insurers owing rebate shrank from 2011 to 2012, they shrank at a less dramatic rate than the total rebates they paid.

In 2011, insurers paid a total of $1 billion or so in rebates for failing to comply with MLR minimums. The average rebate for a customer that year was $108 in the individual market, $116 in the small-group market, and $99 in the large-group market.

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The total rebates paid shrunk in 2012 to about $500 billion as insurers became better at complying with the MLR. The average rebate likewise shrunk, to $95 in the individual market, $86 in the small-group market, and $57 in the large group market.

McCue said he expects the total rebates paid to continue to shrink in coming years as insurers better comply with the MLR requirement.

"I would expect a gradual decline, not that steep," he said.

He also expects a slowdown in the cuts to insurers' administrative and sales costs, because of the fact that those insurers have already spent several years targeting those costs.

In 2011, overhead costs were reduced by about $350 million, the Commonwealth Fund report found. But in 2012, the costs were reduced by $1.4 billion. The lion's share of those cost reductions came in the large-group market, where insurers chopped more than $785 million in costs. The other two sectors, small-group and individual, lopped off about $200 million apiece.

"It's going to be a real constraint for them to continue cutting those costs going forward," McCue said.

"You're going to have very thin [profit] margins for the health insurers," he said. "As a result of this, you may see more consolidation in the industry."

McCue's research had found that in the first two years of the MLR requirement "there was a modest reduction in the number of insurers with 1,000 or more members," but "this appears to continue a decade-long trend toward consolidation."

However, with thinner profit margins as a result of the ongoing effects of the MLR requirement, he said, some insurers, particularly smaller ones, may feel pressure to sell out to bigger, publicly traded insurers whose size gives them economies of scale.

—By CNBC's Dan Mangan.

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