The Commonwealth Fund Blog

Medical Loss Ratio Regulations Good for Consumers

November 23, 2010

Tags: health insurance health insurance premiums Affordable Care Act

Sara R. CollinsBy Sara R. Collins, Ph.D.

The Affordable Care Act's medical loss ratio (MLR) requirements for health insurance plans are an important way that the law improves the value consumers receive for their health insurance payments and will place downward pressure on premiums over time. Commonwealth Fund analysis has found that, for some small employers, as much as 30 percent of premium payments go to administration, and some individuals see 40 percent of their payments spent on administration. High marketing expenses, underwriting, churning on and off coverage, benefit complexity, and brokers’ fees explain the bulk of the problem. Our country now leads all other industrialized nations in the share of health care expenditures devoted to administration.

This week the Department of Health and Human Services (HHS) issued new interim final regulations governing the MLR, or the percentage of enrollees' premiums that health plans spend on medical care versus administration and profits. Under the Affordable Care Act, beginning in 2011, health plans are required to report their total spending on medical care and activities to improve the quality of care relative to their nonmedical costs, such as those for marketing, advertising, underwriting, broker commissions, profits, and compensation. Insurance companies must provide separate reports for each market in each state in which they do business: individual, small group, and large group. HHS will publicly post the reports, with the first reports for 2011 due by June 2012.

Beginning in August 2012, health plans in the large-employer group market that spend less than 85 percent of their premiums on medical care and quality improvement activities, and plans in the small-employer group and individual markets that spend less than 80 percent on the same, will be required to offer rebates to enrollees based on their 2011 MLR reports. Carriers will pay rebates to enrollees in the form of a reduction in their premiums or a rebate check. People with employer-based plans will receive rebates that are proportional to their premium contribution.

HHS estimates that 74.8 million people are in health plans that will be protected by the new requirements. In 2012, up to 9 million people might be eligible for rebates worth $1.4 billion.

When health plans calculate their MLRs, they are allowed to deduct federal and state taxes on health insurance from their premium revenues but not taxes on investment income and capital gains.

The new regulations allow quality improvement activities to count as medical costs but health plans must be able to demonstrate over time that such activities are improving health outcomes.

The MLR regulations make some exceptions and adjustments for certain types of health plans. Very small health plans (less than 75,000 enrollees) are either excluded from the regulations or receive an adjustment to their MLR. New plans, where 50 percent of more of premium revenues are for policies that have been in effect for less than one year, may delay MLR reporting until the following year. In addition, plans with very low annual limits, so-called mini-med plans, and those for people working in other countries (expatriate plans) will receive a special adjustment for their MLRs in 2011 but must report their data in 2011 to receive the adjustment.

States concerned that the new requirements would destabilize their individual markets may apply to HHS for an adjustment to the MLR for the market in their state.

The new requirements are reasonable and achievable. Several significant coverage and system reform provisions in the new law will help insurers reduce wasteful spending and meet the targets. The creation of state health insurance exchanges and essential standard benefits packages will more efficiently pool risk, reduce benefit complexity, and lower advertising expenses. Requiring individuals to carry coverage and restricting carriers from varying premiums on the basis of health, age, and gender will significantly reduce insurers’ underwriting costs. And improving the portability of coverage will reduce churning and increase efficiency across individual and small-group markets.

Too many Americans have struggled under the weight of administrative expenses and double-digit premium increases for too long. The new reform law and these new interim final regulations encourage insurers to do their part to increase efficiency and lower costs in a way that should increase value and return real savings to families, businesses, and the economy.

Post Comment Read or Post Comments

Sylvia Donnell of The Kempton Group says:
November 30, 2010

A very significant aspect of insurance pricing, reserves, appears to have been completely overlooked in the calculations of MLRs. A basic tenet of insurance -- specifically, that not all participants will be sick at the same time thereby allowing the healthy ones' "un-needed" premium to offset the addtional cost of sick participants -- is being gutted by these regulations. If an insurer must refund any excess premium above the MLR, where will the funds come to "carry" participants that have a bad year? While much of the MLR approach is, as this author states, good for consumers, one of the unmentioned and very unfavorable effects of the MLR legislation will be dramatic premium increases for participants experiencing heavy claims as they will no longer be able to be subsidized by their fellow healthy participants. The net effect will most likely be extremely detrimental to many consumers.

Jeoffry Gordon, MD, MPH of Ocean Beach Medical Group says:
November 24, 2010

I am a practicing family doctor. Each week for the past couple of years I have received about 5 computer-generated mailings from health insurance companies telling me that this patient has not refilled his prescription, or this patient has been on an antidepressant too long, or this BRAND NAME DRUG is a preferred medication, or this person takes more than seven prescribed medications, etc. These are obviously computer generated and over 90% of them are clinically useless. My staff could easily spend 2 hours per week tracking down these charts and responding. Some refer to patients who have changed insurance companies or medications or physicians; some have no clinical relevance; some suggestions are overridden by obvious clinical circumstances. Some are obviously commercial marketing material. I bet most physicians pay far less attention to these mailings than I do. Now under MLR I am sure that the insurance companies can claim that these are "quality improvement activities." They are on the whole inane and ridiculously ineffective. The insurance companies should not be allowed to have activities like this counted as medical expenses. Allowed MLR expenses should pertain to direct medical care by professionals only.

james mcniff of montefiore medical center says:
November 23, 2010

I would hope that the insurers will now take advantage of e-commerce between them and the providers to reduce administrative costs. In 1996, Hipaa business transactions were developed with the purpose of reducing costs. As of today, there isn't one insurer that can communicate with the provider using all these transactions. They have implemented the 837 transaction (the bill) and 835 transaction(the remittance) but have not adopted the 275 transaction (attachment) which would greatly reduce their costs in handling medical records. The change in the MLR should incentive the insurers to see e-commerce as a priority.