Recently, I got an envelope from my new health insurance company containing a check made out to me for $460. A few days earlier, I’d gotten a check from my old health insurance company for $60. What’s going on?
ACA Health Insurance Rebates
The answer is that I’m one of about 13 million Americans getting rebates totaling approximately $1.3 billion from their health insurance companies. Some people will get credits against future premiums, while others will receive checks in the form of the rebates. If you paid your bill with a debit or credit card, you may get a credit to your account if you are due an Affordable Health Care Act rebate.
The rebate checks and credits can be as large as $600 or as small as $1, according to an estimate by the Kaiser Family Foundation. The average rebate should be about $151, according to a Federal government website on the Affordable Care Act (ACA), the law that set up the national health plan.
How the Rebates Work
The rebates are required by the ACA, which mandates that starting in 2012, individual health insurance plan providers can spend no more than 20 percent of the premiums they collect on administrative costs such as employee salaries and marketing expenditures. Insurers that provide plans for employers can only spend 15 percent of premiums on administrative costs.
The ratio of 80/20 (85/15 for company-sponsored plans) between administrative costs and medical-related costs is called the medical loss ratio. Whether it’s an employer-sponsored plan or an individual plan, an insurer who exceeds the allowable medical loss ratio has to rebate the difference to policyholders.
For example, if an individual health insurance provider spent 25 percent of premium income on administration, that’s 5 percentage points more than what is allowed. So, the insurer would have to rebate 5 percent of the premiums you paid in the prior year. If you paid $1,000 for insurance over the year, you should get a $50 rebate, a plus for your personal finance!.
If you work for a company that gets a rebate for an employer-sponsored plan, the rebate is split according to how much of your premium you pay. So, if you pay half the premium and your employer pays the other half, each of you should get 50% of the rebate.
However, your employer may elect to apply your share as a credit against future premiums, or use it to pay for more employee benefits. Either way, track it properly with the best finance software so that you can understand the true amount you spent on healthcare in the year that the rebate represents.
Kaiser estimates that $426 million in rebates will go to individuals who buy their own health insurance. The balance will usually be paid to employers, who will decide how to pass it on to employees.
What Should You Do with the Rebate Money?
Clearly, you should double-check any letters you get from your insurance company about now — the checks are supposed to be mailed by Aug. 1. An envelope that appears to contain an explanation of benefits or some other routine correspondence may in fact hold a nice check or announcement of a credit for you.
And what should you do with the money? Well, if you’re given a credit against future premiums, that’s what it will have to go toward. Otherwise, you can spend it how you like. Either way, consider the rebate income for tax purposes.
Since this is the first year for the rebates, it’s difficult to know whether insurers will pay rebates next year or, if they do, whether it will be more or less. Because of the way the law is written, insurance providers may be able to devote more spending to health education programs and similar initiatives, which will classify the expenditures as medical-related expenses. That would reduce their need to pay rebates.
They may, however, wind up paying even more next year. One individually-insured person I know received a notice in May that her premiums were going up. Then, just two months later, she got a rebate because she’d already been paying too much. Unless that insurance company spends more on medical care in the next year, or spends less on administration, her 2013 rebate could be even larger.
“Is Your Health Insurance Rebate in the Mail?” was written by Mark Henricks.
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on your taxes, your investments, the law or any other business and professional matters that affect you and/or your business.