Improving Value

Medical Loss Ratio

The Medical Loss Ratio (MLR) measures the proportion of premium revenues spent on clinical services and quality improvement. A goal for our health spending is to have a high ratio, so less of our dollars are going to administrative expenses.

Traditionally, this ratio is higher for larger insurance pool due to the ability to spread fixed administrative costs across a larger amount of premium revenue. Prior to changes instituted by the ACA, the average MLR was 89.5 percent in the large group market, 85.0 percent in the small group market, and 78.8 percent in the individual market.¹

The ACA included a provision that went into effect in 2012 and requires insurers to spend at least 80 percent of premium dollars on medical claims and quality improvement.² Insurers in the large group market must meet a higher standard—85 percent in medical claims. If these standards aren’t met, insurers must rebate the difference to policy holders.

The policy objective of the ACA’s MLR rule was to improve value for consumers by requiring insurers to provide a fair amount of return on premium dollar in healthcare and reduce excessive administrative costs.

There is some limited evidence that shows the MLR rule has, in fact, caused insurers to adjust administrative costs in response to the rule. This effect has been mainly in the individual market (which exhibited the highest levels of administrative spending) and has been more pronounced among for-profit insurers.³ HHS reports that 77.8 million consumers saved $3.4 billion up front on their premiums in 2012.⁴ However, it should be noted that it is difficult to disentangle the impact of the MLR on premiums from other ACA provisions such as rate review and other factors.⁵

Over time we expect that insurers will adjust administrative costs to meet the requirements of the rule, and premium reductions and rebates will moderate. In fact, rebates dropped from $1.1 billion in the first year of MLR requirements to $500 million in the second year.⁶

One study that examined MLR for nine publicly-traded insurers from 2008 to 2013 found that the ACA’s MLR rule had little effect on health plan’s administrative spending.⁷ Authors speculate there are several reasons for this:

• Most plans already met the MLR requirements;
• Exemptions and adjustments were granted to the plans most likely to trigger rebates—small insurers, those offering high deductible plans, mini-med plans, and expatriate plans; and
• HHS gave several states permission to allow insurers in their state to temporarily increase their MLR thresholds for the individual and small group markets.

Notes

1. These estimates by GAO use the ACA definition of MLR which is slightly different from historic treatment. U.S. Government Accountability Office, Private Health Insurance: Early Indicators Show That Most Insurers Would Have Met or Exceeded New Medical Loss Ratio Standards (October 2011). 

2. Self-insured employer plans, which accounted for a majority of covered workers, are exempt from the ACA’s MLR requirements but typically have high (ie, desirable) ratios.

3. Mccuel, Michael, Mark Hall and Xinliang Liu, "Impact of Medical Loss Regulations on the Financial Performance of Health Insurers," Health Affairs, Vol. 32, No. 9 (September 2013).

4. U.S. Department of Health and Human Services, Consumers saved $3.9 billion on premiums in 2012, Press Release (June 2013). 

5. Cox, Cynthia, Gary Claxton and Larry Levitt, Beyond Rebates: How Much Are Consumers Saving from the ACA’s Medical Loss Ratio Provision?, Kaiser Family Foundation (June 6, 2103).  

6. GAO, Early Effects of Medical Loss Ratio Requirements and Rebates on Insurers and Enrollees (July 2014). 

7. Day, Benjamin, et al., “The Affordable Care Act and Medical Loss Ratios: No Impact in First Three Years,” International Journal of Health Services, Vol. 45, No. 1 (January 2015).