What Is the Medical Loss Ratio and Why Does It Matter?

Consumers Have Received Billions of Dollars In MLR Rebates

The Affordable Care Act, enacted in 2010, made sweeping changes to the regulations that apply to health insurance coverage. One of those changes was a rule governing the percentage of premiums that insurance companies have to spend on enrollees' medical costs, as opposed to administrative expenses.

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Before the ACA, insurance companies could set their own guidelines. State insurance commissioners would review premium justification that insurers proposed, and although states could set their own minimum standards, the review process wasn't always robust. And if an insurer had particularly high administrative expenses, there wasn't much in the way of recourse for regulators or consumers.

But the ACA imposed a medical loss ratio (MLR) requirement, which specifies the maximum percentage of premiums that insurers can spend on administrative costs. If insurers exceed that limit, they have to send rebates to their members.

In the large group market, insurers must spend at least 85% of premiums on medical costs and healthcare quality improvements. In the individual and small group markets, the threshold is 80%. So insurers can spend at most 15% or 20% of claims revenue on administrative costs (depending on whether the plan is sold in the large group market, or in the individual and small group markets; note that the 85% minimum medical loss ratio requirement also applies to the Medicare Advantage market, but the enforcement rules are different for those plans ), and the rest of the premium dollars that the insurer collects have to be spent on medical claims and things that improve patients' healthcare quality. [In the early years of MLR implementation, some states received federal permission to set less-stringent MLR requirements, although those have all been phased out. States do have the freedom to set higher MLR standards; in Massachusetts, for example, insurers in the individual and small group market are required to have MLRs of at least 88% and in New York, they must have MLRs of at least 82% ]

"Large group" generally refers to insurance policies that are sold to employers with more than 50 employees. But in California, Colorado, New York, and Vermont, large group plans are sold to employers with more than 100 employees, as the small group market in those states includes employers with up to 100 employees.

What Were Insurers' MLRs Before the ACA?

The ACA's MLR rules went into effect in 2011. Before that, nearly two-thirds of insurers were actually already spending the majority of their members' premiums on medical claims, but there wasn't a mechanism in place for addressing the ones that weren't, unless states stepped in to impose their own rules.

And it varied significantly from one market to another. According to a Government Accountability Office analysis, 77% of large-group insurers and 70% of small-group insurers were already meeting the new MLR guidelines in 2010 (before they went into effect), but only 43% of individual market insurers were spending 80% of premium revenue on medical costs that year. And according to CMS data, over 20% of people with individual market insurance coverage in 2010 were covered by plans that were spending at least 30% of premium revenue on administrative expenses and in some extreme cases up to 50%.

It's important to note here that only about 6% of Americans have coverage in the individual market, whereas 49% have coverage in the employer-sponsored market, including large and small employers.

Administrative costs have always been lower when the insurer can cover more lives with each plan purchase. That's why the MLR requirements are more stringent for large group insurers than for small group and individual market insurers.

How Are the MLR Rules Enforced?

The ACA's MLR rules apply to all fully-insured plans in the individual, small group, and large group markets, including grandmothered and grandfathered plans. But it does not apply to self-insured plans (the larger the employer, the more likely they are to self-insure, rather than purchase coverage for their employees; 61% of all workers with employer-sponsored coverage are covered under self-insured plans ).

By July 31 each year, insurers report to CMS with their applicable revenue and expense data from the previous year. Insurers are deemed to have met the MLR requirements if they spent at least 85% of large-group premiums on medical care and quality improvements, and 80% of small group and individual market premiums on medical care and quality improvements.

Insurers that don't meet those targets have to send rebates to policy-holders, essentially reimbursing them for what amounting to premiums that were too high. The MLR requirements took effect in 2011, and the first rebate checks were sent out in 2012. Since 2014, the rebate amounts have been based on an insurer's three-year average MLR, rather than just the prior year's MLR.

HHS can impose monetary penalties on insurers that don't report MLR data, or that don't comply with the rebate requirements. 

Who Gets Rebates?

In 2019, nearly 9 million people got MLR rebates (either directly from their insurance companies, or passed through from their employers) that totaled more than $1.37 billion. That's a lot of money and a lot of people, but it's still less than 3% of the U.S. population, so most people are not getting MLR rebates.

But the total amount of MLR rebates sent out in 2019 was the largest it had ever been, and was nearly double the total amount of rebates that had been sent to consumers the year before. The 2019 rebates were driven in large part by rebates for people who buy their own health insurance (a small fraction of the total U.S. population) after premiums increased substantially for that market in 2017 and again in 2018. But even with the large rate increases and the large overall MLR rebates for the individual market, rebates were sent to only about 3.7 million individual market enrollees in 2019, which was less than a quarter of the total number of people who were enrolled in individual market plans as of 2018.

Of course, the ACA's MLR rules only apply to fully-insured employer-sponsored plans and individual market plans. They don't apply to self-insured group plans, or to Medicare and Medicaid, which cover a large chunk of the population (but there are separate MLR rules for Medicare Advantage and Part D plans, and for Medicaid managed care plans).

But even among health plans that are subject to the ACA's MLR rules, most are in compliance and do not have to send rebate checks. And compliance has improved over time. 95% of people with individual market health coverage were covered by plans that met the MLR requirements in 2016 (as opposed to just 62% of members in 2011). In the large group market, 96% of enrollees were in plans that met the MLR rules in 2016, and in the small group market, 90% of enrollees were covered by MLR-compliant plans by 2016.

MLR rebates are based on an insurer's entire block of business in each market segment (large group, and individual/small group). So it doesn't matter what percentage of your premiums were spent on your medical costs, or what percentage of your employer group's total premiums were spent on the group's total medical costs. What matters is the total when all of the insurer's members' premiums are combined, and compared with the total amount that the insurer spent on medical costs and quality improvements.

Obviously, it wouldn't work to look at MLR on a more individual level, since a person who stays healthy all year might only have a few hundred dollars in claims, versus a few thousand dollars in premiums, while a person who is very sick might have millions of dollars in claims, versus the same few thousand dollars in premiums. The whole point of insurance is to pool everyone's risk across a large population of insurers, so that's how the MLR rules work, too.

In the individual market, insurers that don't meet the MLR requirements simply send rebate checks directly to each policyholder, or credit the rebates so that they offset future premiums. But in the employer-sponsored market (large group and small group), the insurer sends the rebate check to the employer. From there, the employer can distribute cash to enrollees, or use the rebate to reduce future premiums or improve benefits for employees.

MLR rebates are generally not taxed, but there are some situations in which they are (including situations in which self-employed enrollees deduct their premiums on their tax return). The IRS explains the taxability of MLR rebates here, with several example scenarios.

How Much Are the Rebates?

After starting out at more than a billion dollars in 2012 (based on insurers' 2011 data), total rebates were much lower for the next several years, as insurers got better at right-sizing their premiums. But the rebates sent in 2018 were larger than they had been in any other year since 2011, and the rebates that were sent out in 2019 were larger than they had ever been, totaling more than $1.37 billion.

Each year, CMS publishes data showing the total rebate amounts and average rebates for households in each state that received rebates. In the first eight years, MLR rebates returned more than $5 billion to consumers:

  • $1.1 billion for 2011 (rebates sent in 2012) 
  • $519 million in 2012 (rebates sent in 2013)
  • $333 million in 2013 (rebates sent in 2014)
  • $469 million in 2014 (rebates sent in 2015)
  • $397 million in 2015 (rebates sent in 2016)
  • $447 million in 2016 (rebates sent in 2017)
  • $707 million in 2017 (rebates sent in 2018)
  • $1.37 billion in 2018 (rebates sent in 2019)
  • Rebates are expected to be larger than ever in 2019.

In 2019, the average person who received an MLR rebate got $154, but it varied considerably from one state to another, and from one market to another. People in Kansas who got rebates in 2019 received an average of more than $1,000 each, while people in seven states got no rebates at all, because all of the insurers in those states met the MLR requirements.

Insurers spend several months each year determining what their premiums should be for the coming year, and those proposed rates are double-checked by state and federal actuaries. But health claims can fluctuate significantly from one year to the next, and the projections that insurers use don't always end up being accurate. So the MLR rebates serve as a backstop, in case the insurers end up not needing to spend 80% (or 85% in the large group market) of premiums on medical costs and quality improvements.

For example, in 2017, when insurers were setting rates for the individual market for 2018, there was considerable uncertainty in terms of whether the Trump administration would continue to provide federal funding for cost-sharing reductions (CSR). Ultimately, the Administration terminated that funding, but that decision came just a few weeks before open enrollment started, and rates in most states had already been established. Insurers scrambled in many cases to adjust their rates in the days leading up to open enrollment, but many states had already advised insurers to base their rates on the assumption that CSR funding would be terminated, with lower backup rates that would be implemented if that didn't end up being the case.

But in Louisiana, regulators noted in September 2017 (a month before CSR funding was eliminated by the federal government) that insurers in the state had filed rates based on the assumption that CSR funding would end, and there was no backup plan in place to adjust those rates if the federal government decided to continue to provide CSR funding to insurers. Instead, the state clarified that the MLR rules would be used to sort it out later on, with enrollees receiving rebates starting in 2019, if they ended up having double funding for CSR (via higher premiums as well as direct federal funding).

Ultimately, that did not come to pass, as CSR funding was indeed eliminated. But Louisiana's approach to the situation is an example of how the MLR rules can be used to ensure that consumers are ultimately protected in situations where it's uncertain how claims will end up comparing with premium revenue.

CMS Is Allowing Insurers to Send MLR Rebates Early in 2020

The federal government has taken numerous steps to address the COVID-19 pandemic's impact on health insurance and access to health care. Among them is guidance issued by the Centers for Medicare and Medicaid Services in June 2020, clarifying that insurers have flexibility to estimate MLR rebate amounts and send them to consumers earlier than normal in 2020.

Under regular rules, MLR rebates are either sent out in a lump sum by the end of September, or credited to future premiums due after the end of September. But in 2020, insurers can choose instead to estimate how much they'll owe and send some or all of that money to members before September, or credit it to premiums in order to reduce the amounts that policyholders have to pay for their coverage. Insurers and the federal government will still fully reconcile the exact amounts of the MLR rebates later in the year, but this flexibility is designed to get money or premium credits to people as soon as possible, in an effort to help people continue to keep their coverage in force during the pandemic.

It's noteworthy that the MLR rebates that are sent out in 2020 are expected to be particularly large. This could make early payments particularly helpful for people who receive them.

How Would Democrats' Healthcare Reform Proposals Change the MLR Rules?

In March 2018, Senator Elizabeth Warren (D, Massachusetts) introduced the Consumer Health Insurance Protection Act, aimed at stabilizing and protecting health insurance coverage for consumers. The first section of the legislation called for increasing the MLR requirements for the individual and small group market to 85%, bringing them into line with the current large group requirements.

This legislation was co-sponsored by several prominent Senate Democrats, including Maggie Hassan (New Hampshire), Bernie Sanders (Vermont), Kamala Harris (California), Tammy Baldwin (Wisconsin), and Kirsten Gillibrand (New York), some of whom joined Warren in entering the 2020 presidential race. But Warren's Consumer Health Insurance Protection Act did not gain traction in the Senate in 2018.

The legislation does serve as a roadmap for what some progressive lawmakers would like to see, so it's possible that we could see tighter restrictions on insurers in future years. But there are also Democrats who support a push towards a single-payer system that would eliminate private insurers altogether, which would also eliminate the need for MLR requirements.

To be clear, many insurers, especially in the individual market, have had MLRs well above 80% over the last few years. Some have been in excess of 100%, which is clearly unsustainable and is part of the reason premiums increased sharply in the individual market in 2017 and 2018—insurers obviously cannot be spending more on claims than they collect in premiums.

But for some insurers, a switch to a higher MLR requirement in the individual and small group markets would force them to become more efficient. On the other side of the coin, however, people argue that the MLR rules don't incentivize insurers to put pressure on medical providers (hospitals, doctors, drug manufacturers, etc.) to reduce overall costs since premiums can simply be raised to keep up with increasing healthcare costs. Insurers just have to spend the bulk of those premiums on medical costs, but for consumers, the premiums can continue to rise at levels that are unsustainable without premium subsidization.

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