Value of health insurance hard to determine, experts say

New Jersey consumers will receive an estimated $106 million in health insurance rebates from insurance companies that fail to comply with the Medical Loss Ratio provision of the Affordable Care Act, according to a Kaiser Family Foundation report based on insurer filings to the National Association of Insurance Commissioners.

But health care experts said that amount could change dramatically when final calculations are submitted to the state Department of Banking and Insurance in June, since the state's MLR calculations differ from those of the federal government — which require individual and small group insurers to reimburse consumers if their annual administrative expenses exceed the governments' 20 percent cap on their total premium income.

According to Joel Cantor, director of Rutgers University's Center for State Health Policy, while the state's MLR system for the individual and small-group insurance markets precedes the federal government's provision by two decades, this is the first year that large group insurers will be regulated at any government level and required to pay rebates if they do not comply with the ratio.

"If the amount of money that an insurance company pays out for actual benefits falls below the percentage of the total premium, then insurers have to pay a rebate to their consumers," Cantor said. "It's a way of ensuring that administrative expenses are capped relative to the medical expenses."

According to Tara Adams Ragone, a research fellow at Seton Hall University School of Law's Center for Health & Pharmaceutical Law & Policy, in the individual and small-group markets, both the federal and state government cap an insurer's administrative expenses at 20 percent of its premium income, leaving the rest for health care claims and quality improvement activities. But Ragone said the way in which the state calculates its ratio is not the same as the federal government's formula.

According to Ragone, the federal government allows insurers to include quality improvements, like physician training, within the 80 percent threshold for premium income spending on health care claims, and they also can deduct taxes and fees from their administrative expenses. In New Jersey, quality improvements and taxes are not included in the MLR calculation, so it is harder for an insurer to satisfy state MLR requirements. Ragone said if the state requires an insurer to issue a larger rebate to consumers, it will have to take into account the amount of rebates the insurer had already distributed under federal law.

The new federal provision requires rebates to be issued by Aug. 1, 2012, while New Jersey currently requires insurers to issue reimbursements by Dec. 31, 2012. Ragone said the extra time will give insurers a better opportunity to ensure compliance with state law. According to Cantor, this is the first time the state's large group insurers will be required to issue rebates, though the new federal MLR rules will not greatly impact or constrain them.