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Monday, August 26, 2013

Medical Loss Ratio Requirements Under the Patient Protection and Affordable Care Act (ACA): Issues for Congress

Suzanne M. Kirchhoff
Analyst in Health Care Financing

The 2010 Patient Protection and Affordable Care Act (ACA, P.L. 111-148, as amended) requires certain health insurers to provide rebates to their customers for each year that the insurers do not meet a set financial target called a medical loss ratio (MLR). At its most basic, an MLR measures the share of a health care premium dollar spent on medical benefits, as opposed to company expenses such as overhead or profits. For example, if total premiums collected are $100,000, and $85,000 is spent on medical care, the MLR would be 85%. The ACA sets the minimum required MLR at 80% for the individual and small group markets and at 85% for the large group market. In general, the higher the MLR, the more value a policyholder receives for his or her premium payment. Congress imposed the MLR in an effort to provide “greater transparency and accountability around the expenditures made by health insurers and to help bring down the cost of health care.” Insurers that fail to meet these minimum standards must provide rebates to policyholders.

The Department of Health and Human Services (HHS), with input from state insurance commissioners who are the main regulators of health insurance, issued rules for implementing the MLR. These rules provided greater details for calculating the MLR and issuing rebate payments. ACA allows companies to include quality improvements along with medical benefits when calculating the MLR. In addition, state and local taxes and some licensing fees are subtracted (i.e., disregarded) from expenses in the MLR formula. ACA’s requirements are different from those imposed by state laws, which generally compare only medical claims to premiums. Though a number of states have their own MLRs, the ACA is now the minimum standard that must be met nationwide by certain health insurers. About 8.6 million U.S. consumers were due more than $500 million in ACA MLR rebate payments by August 2013, for an average award of $98 per qualifying household. Employers or insurers can provide the rebates, which are based on activity in 2012, via a check, an electronic deposit in a bank account, a reduction in insurance premiums, or by spending the funds for the benefit of employees.

The MLR is based on the aggregate performance of a health plan, not on individual policy history. Even if a beneficiary had no medical claims during a given year, he or she would not receive a rebate if the broader plan met the MLR requirements. In addition, many Americans were enrolled in health plans that were not covered by the ACA MLR provisions in 2012. The ACA MLR provisions cover only fully funded health plans, which are plans where insurance companies assume the full risk for medical expenses incurred. The requirements do not extend to self-funded plans, which are health care plans offered by businesses in which the employer assumes the risk for, and pays for, medical care. Non-profit insurers and some Medicare Advantage plans were not covered by the ACA MLR standards during the first two years the law was in effect, though these insurers will be subject to MLR provisions in 2014. In addition, some states won special exceptions for individual insurance policies, based on an HHS determination that meeting the MLR requirement would harm a state’s insurance market.

Several issues have been raised about the MLR provisions since the ACA was enacted. These include considerations regarding the treatment of insurance agent and broker bonuses and commissions, and the impact of the MLR on insurers that provide high deductible plans.

Date of Report: August 9, 2013
Number of Pages: 33
Order Number: R42735
Price: $29.95

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