What Is a Medical Loss Ratio?

The ACA imposed new medical loss ratio rules for most health coverage

Medical loss ratio (MLR) refers to the percentage of a health plan's revenue that's used for medical care and quality improvements, as opposed to administrative costs. The Affordable Care Act (ACA) imposed minimum MLR requirements for individual/family and group health insurance, as well as Medicare Advantage plans.

Health plans that spend too much on administrative costs—and thus fail to meet the MLR requirements—must send rebates to plan members (or to the federal government, in the case of Medicare Advantage plans).

Health insurance is also regulated at the state level. States can set minimum MRL requirements for Medicaid managed care plans, and they can impose MLR requirements for individual/family and group health plans that are stricter than the federal requirements.

This article will explain how medical loss ratios are calculated, the medical loss ratio rules that health plans must follow, and what happens if they don't.

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What Are the Medical Loss Ratio Requirements Under the ACA?

One of the goals of the ACA was to ensure that private health plans operate as efficiently as possible, spending the majority of their premium revenue on patient care rather than overhead expenses like salaries and marketing, and in profits. To achieve this, the ACA imposed minimum medical loss ratio standards.

MLR Rules

Under the ACA, individual/family health plans and small group health plans must have medical loss ratios of at least 80%, and large group health plans must have medical loss ratios of at least 85%. Medicare Advantage plans must also have medical loss ratios of at least 85%.

In most states, "small group" means up to 50 employees, but there are four states (California, Colorado, New York, and Vermont) where businesses with up to 100 employees are considered small groups. Large group health plans are purchased by businesses with 51 or more employees (or 101 or more in California, Colorado, New York, and Vermont).

If a health plan is sold in the individual/family market, on-exchange (only on the public exchange) or off-exchange (plans that are ACA compliant but sold off the ACA's exchanges), it must spend at least 80% of its premium revenue on medical costs and quality improvements (i.e., it must have an MLR of at least 80%). The same is true if a health plan is sold in the small group market.

For health plans sold in the large group market or the Medicare Advantage market, the minimum MLR is 85%.

For the individual/family and group markets, states can set stricter MLR rules if they choose to do so. Most states choose to default to the federal standards, but there are some exceptions. For example, New York has an MLR requirement of 82% of individual and small group plans. Massachusetts imposes an even higher MLR requirement, at 88%.

Self-insured health plans are not subject to MLR rules. These plans cover most people in the United States who have employer-sponsored health insurance. This means that the employer pays for medical costs with its own money rather than purchasing health coverage from an insurance company.

Self-insured plans typically contract with health insurance companies to administer the coverage, but it's the employer's money (rather than the insurance company's) that's being spent to pay claims.

How Is Medical Loss Ratio Calculated?

Medical loss ratio is calculated by adding the amount a health plan spends on medical claims and quality improvement activities and dividing that amount by the total premium revenue that the plan collects.

Quality improvement activities can encompass a wide range of initiatives but must generally improve such areas as patient outcomes, hospital readmissions, patient safety, medical errors, and medical information technology.

If a health plan has an MLR of at least 0.8 (that is, 80%) in the individual or small group market, or at least 0.85 (that is, 85%) in the large group market, it's in compliance with the federal MLR rules.

What Happens If a Health Plan Doesn't Meet the MLR Requirements?

If health insurers in the individual/family market don't meet the MLR requirements (meaning that they spend more than 20% of their premium revenue on administrative costs), they have to send rebates to their enrollees or reduce their upcoming premiums by the amount of the rebate. MLR rebates must be issued by the end of September each year.

If health insurers in the employer-sponsored market don't meet the applicable MLR requirements (80% for small group plans and 85% for large group plans), they must send rebates to the employers that purchased those plans for their employees.

When rebate checks are sent to an employer, the employer can choose whether to use the money to reduce employees' future premiums, provide enhanced benefits, or simply issue rebate checks to each plan participant.

In both the individual and group markets, MLR rebates are based on a three-year rolling average of MLR amounts. So, the checks that were sent to consumers in 2021 were based on average MLRs for 2018, 2019, and 2020.

Have Medical Loss Ratio Requirements Been Effective?

The ACA's MLR requirements took effect in 2011. Insurers that weren't in compliance with the new rules had to start sending rebate checks in 2012. Checks have been sent to consumers on an annual basis since then.

From 2012 to 2021, insurers sent around $9.8 billion in rebate checks, including rebates sent to individuals and employers. The largest rebates were sent in 2012 (when insurers were first adjusting to the new rules) and in 2019, 2020, and 2021, after premiums had risen sharply in the individual/family market.

The federal government maintains a page on which you can see a breakdown of the rebates that have been sent each year in the individual/family, small group, and large group markets, including the list of insurers that had to send rebates each year.

An analysis of health plans that were offered in 2010 determined that the majority were already meeting the new standards, but many were not. That was particularly true for the individual/family market, in which only 43% of enrollees were in plans that would have met the new MLR standards if they had been in effect that year.

But by 2016, 95% of the people enrolled in individual/family coverage were in plans that met the new MLR guidelines. So, in general, the MLR rules have been effective: Most enrollees are in plans that comply with the MLR rules, and rebates are sent annually when insurers miss the mark.

There are concerns that the open-ended nature of the MLR rules is not conducive to reining in costs. In other words, an insurer that charges higher premiums will have a larger chunk of money to spend on administrative costs without going over the 15%–20% threshold.

But it's important to note that the MLR rules work in tandem with the rate review requirements imposed by the ACA and state insurance departments, ensuring that health insurance premiums are fair and actuarially sound.

State insurance departments review the rates that insurers propose (in Oklahoma and Wyoming, the federal government reviews rate proposals) and determine whether they're justified. If the regulators believe that the rates an insurer proposes are not justified, they can work with them to revise the rates before they take effect.

If hindsight shows that the approved rates were too high (because the insurers didn't have to spend 80%–85% of the premiums on medical care), the MLR rebates are used to essentially make a correction.

Summary

Medical loss ratio refers to the percentage of premium revenue that a health plan spends on members' medical care and quality improvements. Under ACA rules, at least 80% of premium revenue must be spent on medical care and quality improvements for individual/family and small group plans and at least 85% for large group plans.

The rest of the premium revenue can be used for administrative costs like marketing, salaries, and profits. Health plans that miss the MLR targets (spending more than 15%–20% of premium revenue on administrative costs) must send rebates to their enrollees.

A Word From Verywell

The ACA's medical loss ratio rules are designed to ensure that health plans charge premiums that are fair and in line with what's necessary to cover the cost of their members' health care.

If you're enrolled in a health plan that spends too much money on such things as marketing and administrative costs or whose profits are too high, you may receive a rebate in a future year. Depending on the plan, this might be offered as a premium credit, or you might get a check in the mail.

But don't worry if you never get a rebate check since most people are enrolled in health plans that do spend the bulk of their premium revenue on members' medical costs. These plans don't issue rebates because their premiums are already "right-sized" and cover members' medical costs without excessive amounts left over.

Frequently Asked Questions

  • Do most policyholders get an MLR rebate?

    No, most policyholders do not get MLR rebates. This is because most people are covered by health plans that meet the MLR rules or that are self-insured and, thus, not subject to MLR rules.

    In 2021, when total MLR rebates hit a record high of nearly $2.5 billion, there were still only a total of just over 11 million people who received rebates, amounting to about 3% of the U.S. population.

  • Are short-term health plans subject to MLR rules?

    Short-term health plans are not regulated by the Affordable Care Act at all. They are subject to various state rules and regulations, and some states do impose MLR requirements on short-term plans.

    These rules tend to be more lenient than the ACA rules that apply to regulated health plans, but there are some states that impose strict MLR rules on short-term plans.

    However, in states with strict MLR rules for short-term plans, there do not tend to be any short-term plans available. This is because the overall rules in those states are often unappealing to the insurers that market short-term health plans.

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15 Sources
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