What is the Minimum Medical Loss Ratio?

Posted on: Wednesday, October 30, 2013

Since 2011, insurance providers have been required to spend a minimum percentage of their adjusted premium revenues on patient care claims and quality improvement expenses. For large group insurers, this amount is 85%, and lowers to 80% for individual providers. Failure to meet these requirements will result in these providers issuing rebates to their enrollees. This is known as the Minimum Medical Loss Ratio, or MLR, provision of the Affordable Care Act.

Essentially, this provision is designed to reduce waste and unnecessary paperwork and expenditures by providers. Many insurance companies have, in the past, been accused of spending a disproportionate amount of consumers’ dollars on administrative costs and profits; including executive salaries, overhead, and marketing. Now, health plans have no alternative but to spend on medical costs and activities that improve health care quality, such as wellness and preventative programs.

How is the Minimum Medical Loss Ratio calculated?

It will probably come as no surprise to learn that this system involves some complicated formulas. Providers take the total amount spent on claims and allowable quality improvements. Divide that by the amount taken in (premiums minus allowed deductions, such as taxes). That amount should be equal to, or greater than, 80% for small groups and individuals, and 85% for larger groups.

If an individual spends $1000.00 annually on insurance, and spends $850 on pharmaceuticals and medical care under that plan, then the medical loss ratio is 85 cents on the dollar, or 85%, which exceeds the minimum.

Rebates and notifications

Insurers that fail to make the minimum must pay a rebate to their enrollees. Recipients of the rebates are individuals on nongroup plans, and employers in group plans. While it is believed that insurers are reducing premium rates in order to avoid paying rebates, resulting in savings for health insurance consumers, we cannot know with certainty what premiums would have been if the MLR rules were not in place. We can only know if MLR targets are being met.

Initially, it was argued that insurance providers should reveal to all of their clients the history of their MLR in order to evaluate the provider’s performance over time.  Insurers had argued that these requirements would impose an unnecessary burden on them. It was decided that insurers must notify enrollees that all MLR information for current and prior years is available at healthcare.gov. Significantly, insurers who meet the MLR target don’t have to disclose their current year MLR, except through the government website.

Like all aspects of the ACA, the full merits, or weaknesses, of the Minimum Medical Loss Ratio may need years of review. It is, however, part of the new normal in health insurance.

Want to learn more? Core benefits Group has answers. Please contact us or give us a at 1-877-214-2969.  

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