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 North Carolina MLR Adjustment Application

The North Carolina Department of Insurance requested an adjustment of the medical loss ratio standard to 72 percent, 74 percent, and 76 percent for reporting years 2011, 2012, and 2013, respectively.

Evidence in North Carolina’s application shows most issuers in the North Carolina individual market are adapting their business models in order to provide consumers better value for their premium dollar.

However, according to the data provided by the State, the individual health insurance market in North Carolina is highly concentrated.  There are only nine issuers in the market. One dominant carrier, Blue Cross Blue Shield (BCBS), has a market share of more than 80 percent. North Carolina presented evidence that the 80 percent MLR standard would make it difficult for smaller issuers to compete with BCBS due to, for example, having to reduce marketing expenses to meet the MLR standard.

Therefore, HHS determined to grant an alternative adjustment of 75 percent for 2011 only, with the 80 percent standard to apply in 2012 and 2013 in order to ensure market choice is preserved. This approach, which creates a glide path for compliance with the 80 percent standard, balances the interests of consumers, the State and the issuers in accordance with the principles underlying the MLR provision.