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% 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. This policy is known as the “medical loss ratio” (MLR) provision of the Affordable Care Act.

Medical loss ratios apply 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 do.

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 Health 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.

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 the Department of Health and Human Services (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 if an adjustment is not granted and the potential impact on premiums charged, benefits provided, and enrollee cost-sharing. All State application materials are posted on the HHS website.

The North Dakota MLR Adjustment

The North Dakota Department of Insurance requested an adjustment of the 80 percent MLR to 65% MLR for 2011, 70% for 2012, and 75% for 2013.

North Dakota’s application makes it clear that:

1. No issuer is reasonably likely to withdraw from the individual market.
2. Every issuer is pricing, or will be pricing, to an 80% MLR, and
3. Consumers are not likely to lose access to agents and brokers. 

Based on the information provided, North Dakota’s market is able to meet the 80% MLR standard in the near future. 

North Dakota does not identify any particular issuer as reasonably likely to withdraw from the individual market.  The State’s dominant issuer, Blue Cross Blue Shield (BCBS) had a 2010 MLR of well above 80% and has publicly opposed an adjustment.  Medica, a new entrant that is likely to grow its business to become credible in 2011, will price to an 80% MLR and therefore does not expect to owe rebates in 2011 or beyond.  While Time expects to pay rebates in 2011, they will remain profitable in the individual market even after payment of rebates. Time also will also price to an 80% MLR in 2012 and is therefore unlikely to leave the market.  Lastly, although North Dakota recently lowered its State MLR standard from 65% to 55%, the two newest issuers into the market are too small to be subject to rebate provisions in 2011 and both of these new entrants are already pricing to an 80% MLR.

Consumers are not likely to lose access to agents and brokers.  North Dakota did not provide specific data on the likelihood of reduced commissions, on the number of agents or brokers who might leave the business, or on the number of North Dakotans who could be affected.  Consumer organizations point out that data recently provided by the National Association of Health Underwriters (NAHU) to the National Association of Insurance Commissioners do not show that commissions have been reduced in North Dakota. 

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