Why the Medical Loss Ratio Matters to Insurers and Consumers

The medical loss ratio (MLR) standard requires health insurance companies to separate their marketing and administrative costs from their actual medical claims. These expenses are then reported publicly each year.

The MLR standards require that insurers spend a certain percentage of premiums on clinical care and quality improvements. If they meet the standard, they can give consumers rebates.

Costs

The medical loss ratio refers to the portion of premiums an insurance company pays for their customers’ medical expenses and initiatives that enhance healthcare standards. The rest goes to administrative costs, marketing, profits, and agent commissions.

Each year, insurers must report their MLR to the federal government. If the MLR is less than a certain percentage set in the ACA, insurers must send rebates to their policyholders.

The ACA’s minimum medical loss ratio rules protect consumers by capping insurers’ profits and overhead. This regulation is essential to the ACA’s effort to stabilize the individual health insurance market. Until recently, the market had been characterized by substantial losses for many insurers and excessive profit for others. These roller-coaster conditions could be attributed to a combination of factors, including ongoing changes to the market’s rules. The ACA’s minimum loss ratio rules can help reduce these cyclical patterns. However, these rules also have some unintended consequences and incentive effects.

Transparency

Only recently, it took time for consumers to determine how much of their health insurance premiums went towards paying medical claims and what was kept by the insurer as administrative costs and profits. The public can access this information thanks to the Affordable Care Act and its MLR rules.

The MLR requires that a minimum percentage of an insurer’s health insurance premium be spent on medical claims and quality improvement activities; the rest can go toward administrative costs, fees, and profits. Insurance companies must meet MLR requirements annually; if they fail to do so, they must provide rebates to their policyholders.

While the MLR rules provide important consumer protections, they have unintended consequences and incentive effects. In particular, the rules permit “credibility adjustments,” which may lead to lower claim costs than expected when premiums are established. It can cause insurers to reduce overhead and ultimately pass the savings onto consumers through lower premiums.

Requirements

Thanks to the Affordable Care Act and its regulations, you can now track where your health insurance premiums are going. Insurers must publicly report their medical loss ratio on an annual basis. A percentage of their premium income goes towards medical and quality improvement efforts rather than administrative expenses, marketing, fees, and profits.

In addition, the ACA mandates that if an insurer’s MLR falls below a minimum standard of 80% for individual and small group policies or 85% for significant group policies, it must provide rebates to enrollees. These rebates are typically given as a check or deposited into the credit or debit card account used to pay for the policy.

But some health insurers are cheating the system to avoid having to offer you these rebates. 

Rebates

Also known as the 80/20 rule, the medical loss ratio (MLR) limits the amount of premium dollars health insurers can keep for administration and profit. If an insurer fails to meet the MLR standard, it must pay rebates to consumers. These rebates may be a deduction in an enrollee’s health insurance plan or a check sent to the individual or their employer, who paid the premium on their behalf.

The ACA’s MLR rules protect consumers by ensuring that most premium dollars are spent on medical claims and quality improvement costs rather than administrative overhead and profits. The rules also prevent large insurers from using one lousy year to recoup past losses through higher profits in subsequent years by calculating MLR limits on a three-year rolling average. This balancing act provides essential consumer protections and benefits.