Accounting-Based Regulation: Evidence from Health Insurers and the Affordable Care Act

Abstract

The Patient Protection and Affordable Care Act (ACA) requires that insurers spend a minimum amount of their premium revenue on policyholder benefits. The Act specifies enforcement via a combination of insurer self-reporting, government examinations, and payment of policyholder rebates in cases where insurers fail to meet the required spending amount. We find that insurers' reported estimates are consistently overstated in situations where more accurate estimates would have triggered rebate payments; publicly-traded insurers (particularly those exhibiting poor financial reporting quality) exhibit the strongest evidence of strategic over-estimating. In aggregate, we estimate that approximately 14 percent of insurers engage in strategic overestimates, and that insurer overestimates resulted in hundreds of millions of dollars in underpaid policyholder rebates. Our study illustrates how a combination of regulatory design choices and lax oversight can weaken the effectiveness of accounting-based regulation and have substantial economic consequences.

Do Health Insurers Manage Their Medical Loss Ratios? At What Cost?

“…Our results indicate that this distinction is important, particularly with regard to the salience of plan-level earnings incentives in managers' year-end claims estimates. Fourth, we find that insurers overestimate claims to avoid rebate payments in all three markets, whereas Eastman et al (2020) find no evidence of this in the Small Group market. 14…”

“…We show that managers of these latter plans exploit their MLR cushions by underestimating claims, thereby increasing earnings. Second, Eastman et al (2020) neither test nor control for plan-level earnings incentives, which likely affect health plan managers' year-end reporting discretion We show that such earnings incentives are highly relevant to managers' year-end claims estimates, especially when decreasing claims can help make a plan profitable. Third, Eastman et al (2020) do not examine FP and NFP plans separately.…”

“…Second, Eastman et al (2020) neither test nor control for plan-level earnings incentives, which likely affect health plan managers' year-end reporting discretion We show that such earnings incentives are highly relevant to managers' year-end claims estimates, especially when decreasing claims can help make a plan profitable. Third, Eastman et al (2020) do not examine FP and NFP plans separately. Our results indicate that this distinction is important, particularly with regard to the salience of plan-level earnings incentives in managers' year-end claims estimates.…”

“…In a contemporaneous study, Eastman et al (2020) provide evidence that insurers overestimate claims to avoid rebate payments in the Individual and Large Group markets but not the Small Group market. Our study differs from Eastman et al (2020) 2014) also find statistically significant but very small increases in quality improvement costs in the Individual market. They find no significant increases in quality costs in the Small Group market.…”

“…They provide evidence that SG&A cost stickiness declined in the post-ACA period and conclude that the MLR provisions encourage managers to exhibit more cost cutting behavior in revenue decreasing periods. Eastman, Eckles and Van Buskirk (2020) provide evidence that insurers overstate claims to increase their MLRs and reduce rebate payments, but they do not explore claims understatements or the effects of plan-level earnings incentives on claims estimates. Plummer and Wempe (2016) provide evidence on how the ACA provisions related to physician-owned hospitals affected the hospitals' formation, ownership and capacity and led them to increase their use of assets and employees.…”