According to the Affordable Care Act, health insurance companies must spend at least 80% (for individual and small group markets) and 85% (for large group markets) of their resources on medical claims and quality improvement efforts rather than administrative expenses or profit. The law also requires insurers to rebate any excess profits to their enrollees.
What is the MLR?
The medical loss ratio represents the percentage of funds that health insurance companies allocate to cover medical claims and enhance the quality of care for their members, as opposed to the amount spent on administrative expenses and profit margins. The Affordable Care Act (ACA) set minimum MLR standards, with insurers in the individual and small-group markets must spend at least 80% of premium revenue on these activities, and large-group policies must spend 85%.
MLRs can be impacted by a plan’s deductible level or market dynamics changes. The ACA allows insurers to account for these fluctuations by using a formula to make “credibility adjustments” to their MLRs.
In addition, the ACA requires that insurers report their MLRs publicly and gives consumers access to this information. This transparency helps keep health insurance companies accountable to their customers and pressures them to hold down the cost of their plans. Under the ACA, health insurance companies must pay rebates to their enrollees if they don’t meet the minimum MLR standard.
How is the MLR Calculated?
In general, an MLR is calculated by dividing the cost of medical claims (including expenses for healthcare quality improvement activities) by premiums collected over a given period, minus federal and state taxes, licensing fees, and regulatory charges. However, the MLR rules under health reform allow for additional adjustments.
The MLR requirements ensure that insurance companies spend much of their premium on medical care and quality improvement rather than overhead and profits. If your insurer’s MLR falls short, they may be required to provide you with a rebate in future years.
You can check your insurer’s MLR reports using the Centers for Medicare & Medicaid Services’ MLR Search Tool. It allows you to select your desired reporting year, insurance company, and state or territory. The ACA also provides the option to adjust the MLR standard for a single individual market when it is determined that meeting the minimum requirement will destabilize the marketplace.
What is the MLR Reporting Requirement?
The Affordable Care Act requires health insurers to spend at least 80 percent of their premiums on enrollee medical claims and activities that improve care quality (85 percent for insurance companies in the large group market). Insurers that do not meet this requirement must rebate the difference to consumers.
In addition to incurred claims, MLR calculations must include expenses for improving healthcare quality, such as reducing medical errors, lowering infection rates, and increasing patient compliance with treatment. These expenses must be able to be objectively measured and must increase the likelihood of desired health outcomes.
The Centers for Medicare & Medicaid Services also uses a credibility adjustment to account for random statistical variation for Medicare Advantage plans. The details of this adjustment vary by plan.
What is the MLR Rebate Requirement?
Under the Affordable Care Act, health insurance issuers must provide data on the percentage of premium dollars spent on clinical services and quality improvement, referred to as the MLR. The law further requires issuers who do not meet minimum MLR standards to rebate their enrollees a portion of premium dollars.
In the commercial market, an MLR lower than a specified target produces a rebate to policyholders—premium x (target – MLR). Rebates are distributed to individual and small-group clients on a plan-by-plan basis.
In the Medicare Advantage (MA) and Part D Prescription Drug Plan (PDP) markets, the MLR rules are more complex than in the commercial market. In MA/PDPs, premiums paid for supplemental benefits such as vision care and dental services and profit margins from these supplemental services contribute to an issuer’s MLR. For this reason, MA/PDP MLR calculations can be more volatile than in the commercial market. However, a MA/PDP’s MLR must still be at least 80%.