Insurers required to spend at least 80 percent of premiums to pay medical claims, or else return money via rebates or added benefits

A concept pioneered in New Jersey has led to $9 billion in insurance premium savings nationally over the past three years, including $3.4 million returned directly to New Jersey consumers in 2013 alone.

The savings stem from a provision of the Affordable Care Act that requires insurers to spend at least 80 percent of premiums on medical claims. For larger businesses insurers’ share of premiums spent on claims must be at least 85 percent.

Perhaps the most important impact of what are called minimum loss ratios is how they have affected how insurers set their rates, according to federal officials.

When New Jersey reformed its health insurance system in 1992, it instituted minimum medical losses in the individual and small group markets. The change, which went into effect in 1995, required that at least 75 percent of premiums in these markets be spent on claims; the requirement was later raised to 80 percent.

The minimum loss ratio, also known as the “80/20 rule,” is intended to make sure that money collected by insurers actually goes to pay medical claims. If a health plan spends less than the required minimum on claims, it must refund policyholders the difference between what it spent and the minimum.

In 2013, three insurers had to refund premiums in New Jersey: Nippon Life Insurance Co. of America, which had to refund $2,357,487; Oxford Health Plans (NJ) Inc., $932,301; and Monumental Life Insurance Co., $144,602.

All three were required under the ACA to give refunds to large-group plan customers –- a new wrinkle, since the earlier state law only applied to the individual and small-group markets. On the other hand, no insurers had to offer refunds in these smaller markets last year.

It was a significant change from 2012, when small-group rebates totaled $6.63 million, while large-group rebates amounted to $4.14 million.

While $1.93 billion has been returned to consumers in rebates nationally since the ACA medical loss ratios went into effect in 2011, federal officials estimate that a much larger amount — $7.29 billion – was saved in lower premiums.

“While refunds serve as a stopgap measure to ensure that consumers receive the required value for their premium dollars, consumers are also saving money upfront because companies are charging lower premiums and operating more efficiently than they would have in the absence of the 80/20 rule and other health care reforms,” according to a federal Department of Health and Human Services report released this week.

Insurers can rebate the money either directly through a check or lump-sum reimbursement, or by reducing future premiums. In the case of employers like New Jersey’s large-group plans, employers can also choose to pay the refund through more generous benefits.

In New Jersey, the rebate recipients encompass 404 large-group employer plans providing coverage to 24,101 people. They include Nippon Life Insurance Co. of America’s 101 group plans covering 4,903 people; Oxford Health Plans’ 257 plans covering 11,606 people; and Monumental Life Insurance’s 46 plans covering 7,592 people.

Critics of the ACA, including the Heritage Foundation, argued after Obamacare was enacted that minimum loss ratios actually reduce incentives for insurers to be more efficient in managing care, since they will be not be able to keep the money saved.

But supporters of the provision say that evidence is already building up through the rebates and downward pressure on premiums that the rule is paying off.

“We are continuing our work on building a sustainable long-term system, and provisions such as the 80/20 rule are providing Americans with immediate savings and helping to bring transparency and accountability to the insurance market over the long term,” HHS Secretary Sylvia M. Burwell said in announcing the rebates.