SuzanneM. Kirchhoff
Analyst in Industrial Organization and Management
Janemarie Mulvey
Specialist in Health Care Financing
The2010 Patient Protection and Affordable Care Act (ACA, P.L. 111-148, as amended)requires certain health insurers to provide rebates to their customers foreach year that the insurers do not meet a set financial target called amedical loss ratio (MLR). At its most basic, a MLR measures the share of ahealth care premium dollar spent on medical benefits, as opposed to company expensessuch 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%. TheACA sets the minimum required MLR at 80% for the individual and smallgroup markets and at 85% for the large group market. In general, thehigher 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 accountabilityaround the expenditures made by health insurers and to help bring down the costof health care.” Insurers that fail to meet these minimum standards mustprovide rebates to policyholders.
The Department of Health and Human Services (HHS), with input from stateinsurance commissioners who are the main regulators of health insurance,issued rules for implementing the provisions. These rules provided greaterdetails for calculating the MLR and issuing rebate payments. ACA allowscompanies to include quality improvements along with medical benefits whencalculating the MLR. In addition, state and local taxes and some licensing feesare subtracted (i.e., disregarded) from expenses in the MLR formula. ACA’srequirements are different from those imposed by state laws, whichgenerally compare only medical claims to premiums. Though a number ofstates have their own MLRs, the ACA is now the minimum standard that mustbe met nationwide by certain health insurers. About 12.8 million U.S. consumerswere due more than $1.1 billion in ACA MLR rebate payments in August 2012, foran average award of $151 per qualifying household. Employers or insurerscan provide the rebates, which are based on activity in 2011, via a check,an electronic deposit in a bank account, a reduction in future insurancepremiums in the amount of the rebate, or by spending the funds for thebenefit of employees. About 66.7 million people were insured by coveredcompanies that met or exceeded MLR standards for 2011, and will notreceive rebates.
The MLR is based on the aggregate performance of a health plan, not individualpolicy history. Even if a beneficiary had no medical claims during a givenyear, he or she would not receive a rebate if the broader plan met the MLRrequirements. In addition, many Americans were enrolled in health plansthat were not covered by the ACA MLR provisions in 2011. The ACA MLR provisionscover only fully funded health plans, which are plans where insurance companies assumethe full risk for medical expenses incurred. The requirements do not extend toself-funded plans, which are health care plans offered by businesses inwhich the employer assumes the risk for, and pays for, medical care.Non-profit insurers and some Medicare Advantage plans were not covered bythe ACA MLR standards in 2012, though the MLR provisions will be phased in during2013 and 2014, respectively. In addition, some states won special exceptionsfor individual insurance policies, based on a HHS determination thatmeeting the MLR requirement would harm a state’s insurance market.
Several issues have been raised about the MLR provisions since the ACA wasenacted. These include considerations regarding the treatment of insuranceagent and broker bonuses and commissions, the impact of the MLR oninsurers that provide high deductible plans, and special rules fornon-profit health insurers.
Date of Report: September 18, 2012
Number of Pages: 30
Order Number: R42735
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