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Medical loss ratio
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A medical loss ratio (MLR) is the portion of premium revenue a healthcare insurance company spends on claims, medical care, and healthcare quality for its customers. The remaining revenue typically goes toward overhead costs, such as administration, marketing and employee salaries, and profit. The Affordable Care Act (ACA) placed new regulations on insurers' medical loss ratios by limiting the portion of revenue that goes toward overhead and profits: individual and small group insurers must maintain a medical loss ratio of 80 percent, while large group insurers must maintain an MLR of 85 percent. This means 80 or 85 percent of premium revenue must be used to pay customer claims and support improvements in health and healthcare quality, such as wellness promotion programs.[1][2][3]
Issues
Rebates
Each year, insurers must publicly report their medical loss ratio and other financial information for each state and market segment. If their MLR falls below the 80 or 85 percent standard outlined in the ACA, they must notify their customers and provide a rebate, typically received by employers. The law exempts insurers that serve fewer than 1,000 individuals in a state. The MLR provision went into effect for the 2011 plan year, which resulted in 12.8 million consumers nationwide receiving $1.1 billion in rebates, paid out in 2012. For the 2012 plan year, 8.9 million consumers received $519 million in rebates in 2013, and for 2013, 6.8 million consumers received $332 million in rebates in 2014. Fewer rebates and lower rebate totals indicate that the portion of insurers meeting the requirement is increasing.[1][3][4][5]
The average medical loss ratio could be increased in four ways:
- insurers hold down premium growth;
- the number or cost of claims increase;
- insurers reduce overhead and/or profit margins;
- insurers with low MLRs exit the market.
Proponents of the MLR regulation, such as the Urban Institute and Timothy Jost, Emeritus Professor at the Washington and Lee University School of Law, argue that it encourages insurers to keep premiums low in order to avoid having to provide rebates, providing greater value to consumers. They also say that it does not limit profitability because insurers make additional income on investments.[4][6]
Critics such as the American Action Forum and Sally Pipes, President of the Pacific Research Institute, say that the regulation does not account for natural market fluctuations that occur from year to year, which could result in fewer choices for consumers as smaller insurers unable to absorb greater losses either drop out of the market or are bought by large insurers. They also argue that the threat of losses and insolvency from very high MLRs could cause insurers to raise premiums.[7][8]
While proponents of the minimum medical loss ratio say that it encourages efficiency and greater value for consumers, critics say that MLRs that are too high can result in financial losses for insurers and threaten solvency, forcing insurers to raise premium rates. In October 2015, the Robert Wood Johnson Foundation released a report that analyzed 2014 medical loss ratios and other insurer financial data from the individual market in order to estimate possible 2016 premium rate increases. The researchers found a nationwide average MLR of 92 percent in 2014, with insurers in each state reporting an average MLR of at least 80 percent. Between 2010 and 2013, prior to implementation of the health insurance exchanges, the nationwide average MLR had been between 79 percent and 86 percent.[9]
For average MLRs to remain in an approximately similar range of 80 percent to 85 percent that was typical in those years, it was estimated by the organization that 2014 premiums would have had to be 2 percent to 15 percent higher. The report stated that MLRs in this range ensure "solvency and sustainable profits." While the study was not intended to serve as an exact prediction of 2016 increases, the researchers indicated that the results could "suggest which states may face rate increases that are higher or lower than average." The results do not include monies paid or received by insurers through three risk-related programs included in the ACA (transitional reinsurance, temporary risk corridors and permanent risk adjustment) and, therefore, MLRs may have appeared higher than they actually were.[9]
The table below includes the average net claims expenses, average premium revenues and average medical loss ratios reported by insurers, as well as the estimated premium increases calculated by the organization that would have been necessary for 2014 average MLRs to be between 80 percent to 85 percent. A higher MLR percentage means more revenue went to paying claims. An MLR above 100 percent means claims expenses exceeded premium revenue. The estimated premium increases were divided into two columns, a lower-bound estimate and an upper-bound estimate. The lower-bound estimate indicates the change in premium rates that would result in an MLR of 85 percent, while the upper-bound indicates the change that would result in an MLR of 80 percent. As explained in the report: "For example, in Indiana the estimates indicate that average 2014 premiums could fall 7 percent (the lower bound estimate) and still achieve an MLR of 85 percent, or rise 4 percent (the upper-bound estimate) and achieve an MLR of 80 percent."[9]
| Estimation of possible 2016 premium changes based on 2014 MLRs | |||||
|---|---|---|---|---|---|
| State | Net claims, PMPY* | Net premiums, PMPY* | Net MLR | Estimated percent change in 2014 premium that would have produced an MLR of 80 or 85 percent | |
| Low estimate | High estimate | ||||
| Alabama | $3,019 | $3,159 | 95% | 6% | 19% |
| Alaska | $4,613 | $4,723 | 96% | 8% | 21% |
| Arizona | $2,921 | $3,297 | 89% | -1% | 11% |
| Arkansas | $2,920 | $3,052 | 94% | 6% | 18% |
| California | $2,438 | $3,030 | 80% | -11% | 0% |
| Colorado | $2,952 | $3,344 | 87% | -3% | 9% |
| Connecticut | $3,411 | $4,013 | 87% | -3% | 8% |
| Delaware | $3,642 | $3,861 | 92% | 3% | 15% |
| District of Columbia | $3,143 | $2,872 | 109% | 22% | 36% |
| Florida | $2,921 | $3,513 | 83% | -8% | 3% |
| Georgia | $1,936 | $2,225 | 88% | -2% | 10% |
| Hawaii | $3,125 | $3,051 | 102% | 14% | 28% |
| Idaho | $2,429 | $2,605 | 92% | 3% | 15% |
| Illinois | $3,609 | $3,358 | 107% | 19% | 33% |
| Indiana | $3,049 | $3,661 | 83% | -7% | 4% |
| Iowa | $2,930 | $3,311 | 88% | -1% | 10% |
| Kansas | $3,072 | $2,978 | 103% | 15% | 29% |
| Kentucky | $3,209 | $3,402 | 91% | 2% | 14% |
| Louisiana | $3,253 | $2,638 | 89% | 0% | 11% |
| Maine | $3,873 | $4,592 | 85% | -5% | 6% |
| Maryland | $2,390 | $2,431 | 97% | 9% | 22% |
| Massachusetts | $6,467 | $5,825 | 121% | 36% | 52% |
| Michigan | $2,662 | $3,127 | 85% | -5% | 7% |
| Minnesota | $3,483 | $3,326 | 105% | 17% | 31% |
| Mississippi | $2,769 | $3,262 | 87% | -3% | 8% |
| Missouri | $2,686 | $3,003 | 89% | -1% | 11% |
| Montana | $3,793 | $3,287 | 114% | 28% | 43% |
| Nebraska | $3,028 | $3,192 | 94% | 5% | 18% |
| Nevada | $2,638 | $2,964 | 88% | -2% | 10% |
| New Hampshire | $2,886 | $3,596 | 80% | -11% | 0% |
| New Jersey | $4,102 | $4,891 | 82% | -8% | 3% |
| New Mexico | $3,417 | $3,173 | 107% | 20% | 34% |
| New York | $4,527 | $5,055 | 89% | -1% | 11% |
| North Carolina | $3,357 | $3,772 | 89% | -1% | 11% |
| North Dakota | $3,354 | $3,735 | 90% | 0% | 12% |
| Ohio | $2,893 | $3,193 | 90% | 1% | 12% |
| Oklahoma | $3,173 | $2,848 | 111% | 24% | 39% |
| Oregon | $3,452 | $3,367 | 103% | 15% | 29% |
| Pennsylvania | $3,702 | $3,690 | 100% | 12% | 25% |
| Rhode Island | $3,363 | $4,178 | 80% | -11% | 0% |
| South Carolina | $2,938 | $3,415 | 86% | -4% | 8% |
| South Dakota | $3,404 | $3,472 | 98% | 10% | 23% |
| Tennessee | $2,756 | $2,825 | 97% | 8% | 21% |
| Texas | $3,067 | $3,125 | 98% | 9% | 22% |
| Utah | $2,063 | $2,432 | 85% | -5% | 3% |
| Vermont | $4,279 | $4,621 | 93% | 4% | 16% |
| Virginia | $2,798 | $3,167 | 88% | -2% | 10% |
| Washington | $3,238 | $3,816 | 85% | -5% | 6% |
| West Virginia | $3,936 | $4,092 | 95% | 7% | 19% |
| Wisconsin | $3,690 | $3,759 | 97% | 8% | 21% |
| Wyoming | $4,203 | $4,882 | 86% | -4% | 7% |
| United States | $3,069 | $3,341 | 92% | 2% | 15% |
| * Per member per year Source: Robert Wood Johnson Foundation, "Where Might Premiums Be Heading?" | |||||
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See also
Footnotes
- ↑ 1.0 1.1 Congressional Research Service, "Medical Loss Ratio Requirements Under the Affordable Care Act," August 26, 2014
- ↑ Centers for Medicare and Medicaid Services, "Medical Loss Ratio," accessed October 13, 2015
- ↑ 3.0 3.1 The Henry J. Kaiser Family Foundation, "Explaining Health Care Reform: Medical Loss Ratio (MLR)," February 29, 2012
- ↑ 4.0 4.1 Health Affairs, "Implementing Health Reform: Medical Loss Ratios," November 23, 2010
- ↑ The Henry J. Kaiser Family Foundation, "Total Medical Loss Ratio (MLR) Rebates in All Markets for Consumers and Families," accessed October 13, 2015
- ↑ Robert Wood Johnson Foundation and Urban Institute, "Health Insurer Responses to Medical Loss Ratio Regulation: Increased Efficiency and Value to Consumers," May 2015
- ↑ American Action Forum, "How the Medical Loss Ratio Requirement Could Increase Health Insurance Premiums And Insurer Profits at Taxpayer Expense" accessed August 14, 2017
- ↑ Forbes, "HHS Can Target Obamacare's Medical Loss Ratio Rule Right Away," April 17, 2017
- ↑ 9.0 9.1 9.2 Robert Wood Johnson Foundation, "Where Might Premiums Be Heading?" October 2015
