Insurers on the Hook for $1Billion in Returns

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Insurers on the Hook for $1Billion in Returns
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Insurers on the Hook for $1Billion in Returns

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Changes in federal health regulations will force insurers to return up to $1 billion to both businesses and end consumers this year alone, according to a report from the non-partisan Kaiser Family Foundation. Goldman Sachs Group, Inc. estimates an even higher rebate total, at $1.2 billion. Kaiser estimates that approximately 31% of individual policy holders will be getting rebates, averaging $127 per person over about 3.4 million individuals. Approximately 28% of small businesses will also be getting refunds, receiving about $76 per employee.

The new federal health regulations include a provision that requires firms to comply with a certain medical-loss ratio, which is simply the share of premiums that pay for medical expenses. Under this arrangement, 80% of premium revenue from both individuals and small business, and 85% of premium revenue from large corporate policies must be spent on claims and health quality improvement. When an insurer doesn’t spend enough on health costs, the difference is refunded to the policy holders.

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Goldman Sachs Group, Inc. (NYSE:GS)  indentified the firms that will be providing major refunds in their analysis. This includes UnitedHealth Group Inc. (NYSE:UNH) at $307 million, Aetna Inc. (NYSE:AET) at $177 million and WellPoint, Inc. (NYSE:WLP) at $94 million. These amounts would have already been included in earnings results and projections, though as with all estimates, it is possible that the refunds are higher or lower than original projections. However, this is likely to have a minimal impact on earnings as a higher refund simply would be reflective of higher than expected profits from the policies, with the impact of the two changes mitigating each other. It is likely that insurers would have reduced premiums upon the change in regulation in order to avoid higher refunds.

The Wall Street Journal’s Anna Wilde Mathews reported that the estimates do not include all of the rebates that will be paid in California; however, the company’s again would have already provisioned these refunds in their results and estimates.

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