Medical Loss Ratio

Last Updated 3/15/17

Issue: The federal Affordable Care Act of 2010 (ACA) created the first uniform minimum Medical Loss Ratio (MLR) standard. The ACA-MLR requires health insurance issuers in the individual, and small group markets, and large group market to spend at least 80% and 85%, respectively, of their premium income on medical care and health care quality improvement, leaving the remaining 20% or 15% for administration, marketing, and profit. The ACA also requires such plans to provide an annual rebate to consumers (enrollees) if they do not meet these requirements. The MLR rules became effective on January 1, 2011.

Overview: The ACA established a Medical Loss Ratio (MLR) that is now the national minimum standard that must be met by insurers selling major medical insurance policies. The MLR is the financial target that insurers are required to meet. It requires individual, small group and large group health plans to report their MLR, which represents how much of a health care premium is being spent on medical and medical-related expenses and how much is being spent on administration, fees and profits.

For individual and small group insurance plans, an annual minimum of 80% MLR is required by the ACA; large group insurance plans are required to have an 85% MLR. The ACA-MLR is not based on each individual’s policy history, but on an insurer’s annual aggregate performance within each market (individual, small group, or large group) and state. In addition, the ACA-MLR does not extend to self-funded health insurance plans, which are plans where the employer is responsible for the payment of covered claims. The requirements made by the ACA differ from many individual state MLR laws that generally just compare medical claims to earned premium.

Insurers must provide a rebate to consumers if the percentage of premium expended for medical care and health care quality is less than 85% in the large group market and 80% in the small group and individual markets.  In 2011, insurers owed 12.8 million consumers a total of 1.1 billion dollars in rebates, according to Congressional Research Service. These numbers were significantly lower two years later in 2013. In 2013, insurers owed 6.8 million consumers, almost half from 2011, a total of 332 million dollars in rebates, less than a third of the 2011 total. A consumer would not receive a rebate if their insurer met the MLR requirements.

Insurers may subtract state tax, local tax, some federal taxes, and license payments and fees from the earned premium used in the denominator of the MLR calculation. Companies can add quality improvement expenses to incurred claim amounts to the numerator used in the calculation of the MLR. Expenses that may or may not be considered quality improvements for determining the ACA-MLR are still being evaluated.

Status: The ACA requires the NAIC to establish uniform definitions and standardize methodologies for calculating the MLR and rebate amounts. The NAIC approved changes to the Annual Statement blanks form. A Medical Loss Ratio Blanks Proposal was approved by the NAIC full membership in 2010 in order to capture detailed information that can be used by regulators to  gain a directional sense of a company’s MLR prior to the actual MLR calculation that is submitted to the federal Center for Consumer Information and Insurance Oversight by insurance companies later in the applicable year. Blanks are the actual forms submitted by insurance companies to report financial information to state regulators.