Will You Get a Health Insurance Rebate?

For businesses and individuals alike, health insurance costs have been among the fastest-growing and most onerous expenses you have to pay. With premiums seemingly rising each and every year, it's increasingly difficult to manage your health-care risk without breaking the bank.

But as part of the health-care reform law that passed two years ago, health insurance companies committed to paying out a certain minimum of the premiums they collected to go toward medical-care claims and productivity enhancements. As it turns out, several insurers haven't met the tests that the law spells out, and as a result, those insurers will have to refund premiums to their customers.

No small change
The amount of the rebates is truly staggering. According to analysis cited in TheWall Street Journal, the rebates could add up to between $1.2 billion and $1.3 billion. Among major insurers, UnitedHealth Group (NYS: UNH) is seen taking the biggest hit at more than $300 million, while Aetna (NYS: AET) comes in at more than $175 million and WellPoint (NYS: WLP) could pay just under $100 million. Some other insurance companies, including Cigna (NYS: CI) and Coventry Health Care (NYS: CVH) , will also pay out rebates, with Coventry's liability estimated at about $50 million.

The idea behind the rebates is fairly simple, even if the mechanics are somewhat complicated. The health-care reform law required insurance companies to spend at least 80% of the premiums they collect from individuals and small businesses on medical claim costs or expenses to improve the quality of care. For large employer insurance plans, the corresponding figure is 85%. In essence, the law limits the amount of money that insurance companies can retain to cover their own administrative costs and to keep as profit.

Detailed calculations from the Kaiser Family Foundation further divide the money across those three coverage groups. According to Kaiser, almost one in every three individual policyholders will get rebates that could average more than $125 per person. More than a quarter of covered workers at small businesses would receive just over $75 on average, while just shy of one in five covered employees of larger businesses would get an average rebate of $72.

Big variance
But don't get your hopes up too soon. Expected refunds vary widely across states. For instance, according to Kaiser's analysis, individual policyholders would get the biggest average rebate at $305 per person. Those in Hawaii, Maine, and the District of Columbia, however, probably won't get any rebates at all. Similar disparities exist among small and large business insurance rebates as well, although the results aren't consistent from state to state -- some states that are giving individual policyholders rebates won't give them to businesses, and vice versa.

What you'll get
The big question is how much of any rebate money that insurance companies eventually pay out will go into your pocket. If you have individual coverage of your own, then the savings will go directly to you, whether it comes in the form of a check or through reductions in the premiums you pay for your ongoing coverage.

Workers, on the other hand, may not be so lucky. With employer health insurance plans, employers pay the actual premium cost, so any rebate would come back to them rather than to you. Some employers may return a portion of the rebate to their workers, but others may conclude that because they're subsidizing employee health-care coverage with contributions of their own, they should reap the benefit of a rebate.

Finally, for investors in health insurance companies, the rebates shouldn't come as a big shock. Companies have known about the law since it passed, and most have created reserves to account for the expected rebates. Only if amounts turned out to be far more than expected would there likely be any impact on insurer stocks.

Stay healthy
Of course, with the validity of the health-care reform law still up in the air as the Supreme Court deliberates, trying to guess what's next for the health insurance industry is next to impossible. But after paying so much for your health-care coverage, it'd be nice to be on the receiving end of a check for a change.

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At the time thisarticle was published Fool contributor Dan Caplinger expects no rebate. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of WellPoint. Motley Fool newsletter services have recommended buying shares of Coventry Health Care, UnitedHealth Group, and WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy always pays you back.

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