What is a Medical Loss Ratio?

Medical Loss Ratio (MLR) is the amount a health insurance issuer spends from premium revenue on claims and health care quality improvement costs as compared to the total amount of premium revenue received by the insurance issuer (excluding any taxes, fees, and payments for risk adjustment, risk corridors, and reinsurance paid by the insurance issuer).

When is an MLR rebate required?

Under the ACA, a health insurance issuer must spend at least 80%-85% (depending on the market segment) of the premium dollars it receives on medical care and health care quality improvement (as opposed to overhead expenses). If an issuer fails to satisfy this obligation, it must provide a refund back to its customers/policyholders (referred to as a rebate), based upon the difference between what the insurance issuer should have spent on medical care/health care quality improvement (i.e., 80%-85% of total premium received) and what the issuer spent on those items (reflected as a percentage of total premium received). This functionally limits the insurance issuer from spending more than 15%-20% (depending on market segment) of its premium revenue on administrative expenses. See the following example of how issuers must calculate and provide the rebate.

Example:

An issuer uses 70 cents out of each premium dollar to pay customers’ medical claims and improvement of its quality of health care, leaving 30 cents out of every premium dollar to pay salaries, administrative costs, agent commissions, marketing expenses, etc. The issuer’s MLR is 70% because it is spending 70% of each premium dollar ($.70/$1.00 = 70%) it receives to pay for medical claims/improvement in the quality of health care. This also means the issuer is using the remaining 30 percent ($.30/$1.00 = 30%) of total premiums received on its administrative expenses. Since the issuer’s MLR is 70%, which is less than the required MLR percentage of 80%-85% (depending on market segment) under the ACA, the issuer must provide a refund/rebate of 10% – 15% (depending on market segment) of total premiums received in the applicable MLR reporting year to each coverage enrollee, on a pro-rata basis. The rebate amount is calculated using the average MLR of the issuer over the previous three years.

Insurance issuers must report MLR data to the Department of Health and Human Services (HHS) by July 31 following the end of the reporting year and must provide any rebate owed to policyholders no later than September 30 following the end of the MLR reporting year.

How is the rebate provided to a health plan/policyholder?

Issuers may choose to provide the rebate to a health plan/policyholder in the form of a premium credit (i.e., reduction in a premium owed), lump-sum check or if an enrollee paid the premium using a credit card or direct debit, by lump-sum reimbursement to the account used to pay the premium.¹

According to HHS guidance, if, during the MLR reporting year, the issuer determines that its MLR is lower than the minimum required percentage (depending on market segment), the issuer may institute a “premium holiday” to avoid having to pay the rebate so long as it’s permissible under applicable state law.²

Regulatory and Legislative Strategy Group