Medicare Supplement Refunds 101

Staying informed of regulatory reporting requirements is paramount for insurers and actuaries alike. One such critical obligation that has been a cornerstone of 
regulatory compliance since the early 1990s is the Medicare Supplement Refund Calculation. This comprehensive guide delves into the intricacies of these essential 
annual filings, exploring their purpose, methodologies, and filing deadlines. 

 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).  

2. Deadline

The reports are due by May 31st of the following year. For example, the reporting period of January 1, 2024, to December 31, 2024, has a due date of May 31, 2025.

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 policies, the benchmark starts out at 44% and 

  gradually increases to 65% by year 15.  The benchmark is calculated for each plan and is a weighted average of the benchmark for each issue year cohort. 

  It is important to note that these benchmark ratios are “fixed” and do not vary, even if the product is priced to higher durational and lifetime loss ratios.

• 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 expected 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.

4. What Happens When a Refund Amount Is Greater Than Zero?

When a refund amount is determined to be greater than zero, specific regulatory requirements dictate how and when refunds must be handled:

a) Who Receives the Refund?

• Refunds must be paid directly to policyholders who were covered under the applicable Medicare Supplement policies during the reporting period.

• If a policyholder has terminated their coverage but was active during the relevant period, they are still entitled to their share of any refund.

b) When Must Refunds Be Paid?

• Refunds must be distributed no later than September 30th of the year in which the report is filed.

• This ensures that policyholders receive their refunds promptly after insurers have completed their calculations and submitted their reports.

c) Interest on Refunds

• If refunds are not paid by September 30th, insurers may be required to add interest to any unpaid balance.

• The interest rate is often tied to state-specific rules or statutory interest rates (e.g., based on Treasury rates or other benchmarks). For example:

  • Some states mandate an interest rate equal to 10% per annum if refunds are delayed.

  • Others may use a lower rate tied to prevailing market conditions or state statutes.

• The purpose of adding interest is to compensate policyholders for delays in receiving their entitled funds.

 5. Submission Format

The reports must be submitted using specific forms as prescribed by each state's insurance department. Most states require the standard template to be completed 
while some states have developed their own version of the forms or have other additional reporting requirements.

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