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

The Accounting Review, Forthcoming

59 Pages Posted: 6 Dec 2018 Last revised: 7 Apr 2020

See all articles by Evan Eastman

Evan Eastman

Florida State University

David L. Eckles

University of Georgia - Department of Insurance, Legal Studies, Real Estate

Andrew Van Buskirk

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Date Written: April 3, 2020

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.

Keywords: Earnings Management, Regulation, Health Insurance

JEL Classification: G18, G22, I13, I18, M41, M48

Suggested Citation

Eastman, Evan and Eckles, David L. and Van Buskirk, Andrew, Accounting-Based Regulation: Evidence from Health Insurers and the Affordable Care Act (April 3, 2020). The Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3282300 or http://dx.doi.org/10.2139/ssrn.3282300

Evan Eastman

Florida State University ( email )

College of Business
Tallahassee, FL 32306
United States

David L. Eckles

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

Athens, GA 30602-6254
United States

Andrew Van Buskirk (Contact Author)

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

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