Medicare Supplement Refunds 101
From Telos Actuarial: For carriers with the Medicare Supplement insurance line of business, staying up to speed with regulatory reporting requirements is paramount. One such critical obligation that has been a cornerstone of regulatory compliance since the early 1990s is the Medicare Supplement Refund Calculation. Here are some valuable insights into how this complex process ensures that Medicare Supplement blocks of business meet minimum loss ratio requirements or if premium refunds are owed to policyholders. Join us as we unpack the key components of Medicare Supplement Refund Calculation Forms and their impact on both insurers and beneficiaries.
1. Purpose
These reports, officially called Medicare Supplement Refund Calculation Forms, are required annual filings to compare cumulative actual incurred loss ratios to benchmark targets and determine if refunds or premium credits are necessary. The reports are one of the state regulators’ tools to ensure that the products are meeting the minimum loss ratio requirement (i.e., 65% for individual forms and 75% for group forms). You can find the standard reporting template in Appendix A of the NAIC’s Medicare Supplement Minimum Standards.
2. Deadline
The reports are due by May 31st of the following year. For example, the reporting period of January 1, 2025, to December 31, 2025, has a due date of May 31, 2026.
3. Calculation Method
The refund is calculated to ensure the ratio of claims to premiums meets the benchmark loss ratio requirements. This is done on a cumulative basis, excluding the experience of policies issued in the reporting year.
Additional Details on the Calculation Method:
Benchmark Ratios: The calculation uses specific benchmark ratios that vary by policy year. For each issue year cohort of individual policies, the benchmark starts out at 44% and gradually increases to 65% by year 15. Issue year cohorts of group policies start out at 51% and increase to 75%.
Actual-to-Expected Ratio: The form compares the actual experience (incurred claims divided by earned premiums) to the expected experience (benchmark ratios).
Credibility Factor: The calculation of the actual experience loss ratio includes a credibility factor based on the number of life years exposed. Values for the credibility factor range from 0% for a fully credible block of 10,000 life years to 15% for a minimally credible block of 500 life years. The credibility factor is added to the actual loss ratio to limit the chances of triggering a refund prematurely.
Refund Trigger: If the actual-to-expected ratio is less than 1, it indicates that the actual experience is better than the benchmark ratio and can trigger a refund.
Refund Amount: The refund is calculated as the cumulative earned premium times the difference between the actual and benchmark loss ratios.
Aggregation: Experience is aggregated for each state and plan by coverage type (Individual vs Group). Experience for High Deductible plans may be required to be combined with the experience on the non-High Deductible plans of the same plan letter.