State Mandates
In Bulletin B 10-20 issued on March 20, 2020 by the Alaska Department of Commerce, Community, and Economic Development, insurers were encouraged to allow policyholders to self-audit and self-report changes in their exposure or risk profile and adjust premiums accordingly. Prospective reductions in premium or retroactive refunds of premiums to accommodate COVID-19-related changes in exposure or risk profile would not be considered a rebate or unfair discrimination to the extent they were reasonable and consistently applied.
On May 11, 2021, the California Department of Insurance issued Bulletin 2021-03 to address the issue of premium refunds. Experience had shown that COVID-19 changed the risk profile for many policyholders in various lines of insurance, where loss experience revealed that premiums were over-collected. Accordingly, the department directed insurers to report information about the additional premium relief that they were providing to consumers. Even after initial premium returns, premiums remained overstated. Accordingly, for the report of the first quarter of 2021, insurance companies were directed to include a supplemental report detailing how they planned to return the additional premiums owed for the months of March through December 2020.
On April 24, 2020, the Kentucky Department of Insurance advised insurers that it would not regard certain activities regarding premium adjustments and returns as unfair trade practices or unfair methods of competition. These activities included performing mid-term adjustments to retroactively or prospectively apply returned premiums according to the change in risk exposure, e.g., partially refunding premiums, crediting adjusted premiums toward subsequent payments, or similar reasonable methods of short-term relief to insureds that have pandemic-related changes in risk.
On May 12, 2020, the New Jersey Department of Banking and Insurance issued Bulletin 20-22 ordering insurance companies to issue partial premium refunds for specified personal and commercial lines of business, including workers compensation, medical malpractice, automobile and commercial liability, because of decreased policyholder activity due to the COVID-19 pandemic. Together with Order A20-03, certain insurers were also required to provide claim and premium activity reports related to Bulletin 20-22 to the Department on a monthly basis.
New York Assembly Bill No. A871, which is presently in Assembly Committee, would require insurers to make premium refunds and other adjustments to all policyholders impacted by COVID-19.[i] It would apply to various lines of insurance, including workers compensation, medical malpractice, automobile and commercial liability. The justification for the bill is that the COVID-19 pandemic severely curtailed activities of policyholders in both personal and commercial lines of insurance and caused the projected loss exposures of many insurance policies to become overstated or misclassified. This is especially true for policies where premiums are based partly on measures of risk such as number of miles driven, revenue, and payrolls, which have all been reduced significantly as a result of COVID-19.
Health Insurance Premium Refunds
Premium refunds by health insurers are mandated by the Affordable Care Act (“ACA”), which requires that insurance companies spend at least 80 percent-85 percent of the money they take in from premiums on health care services, such as doctors and hospital bills, and activities to improve health care quality, such as efforts to improve patient safety. No more than 15 percent-20 percent of premiums may be spent on administrative costs such as salaries, profits, and marketing. This is referred to as the “Medical Loss Ratio” standard (“MLR”). The MLR is intended to ensure that consumers get value for their health care dollars. The ACA requires health insurers to publicly report the portion of their premium dollars spent on health care costs, quality improvement, and other activities in each state they operate in.
The MLR for a given year is determined by a three-year rolling average, meaning that 2021 rebates will be calculated using insurers’ financial data in 2018, 2019, and 2020. Insurance companies must rebate premiums if they do not meet the ratios mandated by the ACA [45 CFR S 158.130-150]. In 2020, health insurers refunded an estimated $2.7 billion to ACA consumers based on the average of years 2017-2019, which was a record high. The total amount of premium refunds and average rebate amounts varied largely—in 2020, California insurers issued approximately $111 million in rebates with an average rebate amount of $88 while Oklahoma insurers issued approximately $89 million in rebates with an average rebate amount of $291. Id.
In recognition of the economic impact of the pandemic to policyholders, some insurers provided 2020 premium refunds on an accelerated basis. In addition, some insurers provided additional relief related to premium payments in the form of premium credits and other forms of discounts such as “premium holidays” where policyholders were not charged for one month’s premium.
Using preliminary data reported by insurers to state regulators, it is presently estimated that health insurers will be issuing a total of about $2.1 billion across all markets in 2021, which is the second-largest amount since rebates were first issued in 2012. One of the main reasons some insurers may have failed to meet the threshold in 2020 is that the pandemic drove health spending and utilization down, as elective procedures were cancelled and consumers were fearful to seek routine care. As a result, insurers generated higher levels of profits than they had anticipated when they set their 2020 premiums.
A handful of consumers can even expect lower premiums in 2022. The Vermont Department of Financial Regulation released a report in July 2021 examining the financial impacts of COVID-19 on Vermont’s commercial health insurance marketplace to determine whether further consumer premium relief is warranted. The report found that COVID-19 mitigation measures, such as postponing non-essential medical and surgical procedures, resulted in excess profits for health insurers in 2020. However, as pandemic conditions improved, much of the deferred medical care returned, resulting in potential losses in 2021. The Department determined that only two market segments – Cigna’s large group market and BlueCross BlueShield’s Medicare supplement market – had COVID-19 related profits when reviewing 2020 and 2021 together, totaling approximately $2.2 million in COVID-19 related profits, and proposed that eligible customers’ rates be lowered beginning in January 2022. However, based on a larger review of early rate filings in 13 states and the District of Columbia, most insurers appear to consider the COVID-19 pandemic to be a one-time event, with limited, if any, impact on their 2022 claims costs. For example, Kaiser Permanente in D.C. called the pandemic’s effects on its future costs “negligible.” Id. In Oregon, Regence Blue Cross Blue Shield, MODA, and PacificSource’s proposed 2022 rate changes do not include any adjustment for COVID-19. Id.
For the years 2021-2023, the full impact of COVID-19 on the calculation of MLRs remains to be seen. It is predicted that the loss of jobs and employer health insurance during the pandemic will lead to an increase in ACA enrollment. The cessation of elective procedures and visits during the immediate months following the government shutdown orders may have resulted in lower costs for insurers as less claims were covered; however, insurers also face the challenges of ascertaining costs faced in connection with emergency COVID-19 measures enacted by state regulators in efforts to provide relief for policyholders facing financial hardship. For example, some states and their insurance regulators required grace periods for non-payment of premiums and prohibition of lapse/non-renewal to provide relief to policyholders facing financial hardship during the pandemic. [See Conn. Exec. Order No. 78 (April 1, 2020)(60-day prohibition period on termination of policies based on non-payment of premiums); New York Exec. Order No. 202-38 (60-day moratorium on termination of policies).]
There may also be additional costs of COVID-19 treatment incurred by insurers such as testing and treatment, which may in turn affect whether insurance companies will meet the MLR. Under the Family First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), insurers are mandated to provide COVID-19 testing and vaccination without any cost sharing requirements and other medical management requirements.
Insurers across all lines of business will continue to deal with uncertainty and face new challenges for the foreseeable future. There may be fluctuating guidance from regulatory agencies, disruption to operations that could impact premium payment decisions, and further volatility in the healthcare sector, including continued legal challenges to the ACA. As actions transpire, trends should be monitored carefully to inform changes and all industry participants should demonstrate agility to meet the changing landscape.
Grace Pyun is an attorney at d’Arcambal Ousley & Cuyler Burk LLP where she represents insurance carriers in claims related matters, including bad faith and fraud litigation, rescission, and interpleader. Prior to joining DO&CB, Grace worked for the United States Department of Justice, where she investigated and litigated antitrust crimes and the Federal Deposit Insurance Corporation, where she litigated claims arising out of the 2008 Financial Crisis.
Tiffany C. Millioen is an attorney at d’Arcambal Ousley & Cuyler Burk LLP, where she focuses on representing insurance companies in commercial litigation and interpleader actions. Prior to joining DO&CB, Tiffany worked at Paul, Weiss, Rifkind, Wharton & Garrison LLP, where she represented clients in complex commercial litigation, regulatory investigations, and securities litigation.
James Lenaghan has been Of Counsel at d’Arcambal Ousley & Cuyler Burk since 2006. At DO&CB, he has represented insurers on claims defense and interpleader matters as counsel in New York and in conjunction with local counsel in other states. From 2006 to 2019, Jim served as Executive Director of the New Jersey Life & Health Insurance Guaranty Association. From 1985 to 2006, Jim worked on litigation and regulatory matters while serving as Associate General Counsel and in other positions in the Law Department at Metropolitan Life Insurance Company. Prior to joining MetLife in 1985, Jim worked on civil and criminal litigation for two law firms and in solo practice in Rhode Island and the District of Columbia.