Medical Loss Ratio: Getting Your Money's Worth on Health Insurance

Thanks to the Affordable Care Act, consumers will receive more value for their premium dollars because insurance companies are required to spend 80-to-85 percent of premium dollars on medical care and health care quality improvement, rather than on overhead costs. If they don’t, the insurance companies will be required to provide a rebate to their customers starting in 2012 for the 2011 reporting year. This policy is known as the “medical loss ratio” (MLR) provision of the Affordable Care Act.

Medical loss ratio applies to all health insurance plans, including job-based coverage and coverage sold in the individual market. However, insurance plans in the individual market often spend a larger percent of premiums on administrative expenses and non-health related costs, than job-based health plans.

Recognizing the variation in local insurance markets, the Affordable Care Act allows States to request a temporary adjustment in the MLR ratio for up to three years, to avoid disruptions to coverage in the individual market. This flexibility allows consumers to maintain the choices currently available to them in their State while transitioning to a new marketplace where they will have more options for coverage and more affordable health insurance through State-based Affordable Insurance Exchanges. This is one of many ways the Affordable Care Act is building a bridge from today’s often disjointed and dysfunctional markets to a better health care system.

The Department of Health and Human Services (HHS) has set up a transparent process for how States can apply for an MLR adjustment and what criteria will be used to determine whether to grant those requests.  States must provide information to HHS showing that requiring insurers in their individual market to spend at least 80 percent of their premiums on medical care and quality improvement may cause one or more insurers to leave the market, reducing access to coverage for consumers.  States must also show the number of consumers likely to be affected and the potential impact on premiums charged, benefits provided, and cost-sharing.  All application materials are posted on the HHS website.

The Indiana MLR Adjustment Application

The Indiana Department of Insurance requested an adjustment of the MLR standard to 65 percent for 2011; 68.75 percent for 2012; and 72.5 percent for 2013.  

After reviewing Indiana’s application, HHS has determined that no adjustment to the MLR standard in Indiana is necessary.

The law provides that an adjustment should be granted only if there is a reasonable likelihood that the application of the 80 percent MLR standard will destabilize a State’s individual health insurance market.  Based on the information provided in Indiana’s application, it appears that all issuers would remain in the market with an 80 percent MLR standard.  Evidence shows that all issuers in the Indiana individual market either 1) already meet the 80 percent MLR standard, 2) are sufficiently profitable to absorb the impact of rebate payments under an 80 percent MLR standard, or 3) are adapting their business models in order to continue to achieve sustainable financial performance in the individual market.  In particular, the only issuer that, based on 2010 data, would be unprofitable after payment of rebates under an 80 percent MLR standard – Time – is adapting its business model to allow it to remain profitable after payment of rebates for 2011.  Therefore, the application does not demonstrate a reasonable likelihood that issuers may leave the market, requiring enrollees to find alternate coverage.

For these reasons, HHS has determined that no adjustment to the MLR standard in Indiana is necessary.

Indiana also requested an adjustment of 76.25 percent for 2014, a permanent waiver for consumer driven health plans in the individual and small group markets, and a waiver for new individual market entrants until 2014.   HHS only has the authority to grant an adjustment for up to three years at a time in the individual market and cannot consider these additional requests.  However, the MLR rule provides an adjustment in the calculation of the MLR for plans with special circumstances and smaller plans.  The regulation also allows issuers to delay MLR reporting for newer business under certain circumstances. Finally, Indiana may request an adjustment for future MLR reporting years if it so desires.