Medical Loss Ratio: Getting Your Money's Worth on Health Insurance

Thanks to the Affordable Care Act, consumers will receive more value for their premium dollars because insurance companies are required to spend 80-to-85% of premium dollars on medical care and health care quality improvement, rather than on overhead costs. If they don’t, the insurance companies will be required to provide a rebate to their customers starting in 2012 for the 2011 reporting year. This policy is known as the “medical loss ratio” (MLR) provision of the Affordable Care Act.

Medical loss ratio applies to all health insurance plans, including job-based coverage and coverage sold in the individual market. However, insurance plans in the individual market often spend a larger percent of premiums on administrative expenses and non-health related costs, than job-based health plans.

Recognizing the variation in local insurance markets, the Affordable Care Act allows States to request a temporary adjustment in the MLR ratio for up to three years, to avoid disruptions to coverage in the individual market. This flexibility allows consumers to maintain the choices currently available to them in their State while transitioning to a new marketplace where they will have more options for coverage and more affordable health insurance through State-based Health Insurance Exchanges. This is one of many ways the Affordable Care Act is building a bridge from today’s often disjointed and dysfunctional markets to a better health care system.

HHS has set up a transparent process for how States can apply for an MLR adjustment and what criteria will be used to determine whether to grant those requests.  States must provide information to the Department of Health and Human Services (HHS) showing that requiring insurers in their individual market to spend at least 80 percent of their premiums on medical care and quality improvement may cause one or more insurers to leave the market, reducing access to coverage for consumers.  States must also show the number of consumers likely to be affected and the potential impact on premiums charged, benefits provided, and cost-sharing.  All application materials are posted on the HHS website.

The Delaware MLR Adjustment Application

The Delaware Department of Insurance (DDI) requested an adjustment of the 80 percent MLR standard for its individual market to 65 percent for 2011, 70 percent for 2012 and 75 percent for 2013.

After a careful examination of the information provided and consideration of the criteria set forth in the statute and regulation, it was determined that Delaware’s individual market is not reasonably likely to become destabilized based upon the application of the 80 percent MLR standard.  Consequently, we have determined not to adjust the MLR standard in the Delaware individual market and ensure that consumers receive the full benefit of the MLR provision of the Affordable Care Act. 

None of the three partially credible issuers subject to the MLR provisions has provided notice of withdrawal from the Delaware individual market.  The largest of these three, Delaware Blue Cross Blue Shield, would not owe rebates because it had an MLR of 88 percent, and has not expressed an interest in the DDI’s request for an adjustment to the MLR standard.  The other two issuers, Golden Rule and Aetna, would be expected to owe rebates assuming they do not adjust their business models but both of these issuers generated profits in the Delaware individual market and would be unlikely to exit the market or be substantially affected if they were required to pay rebates.

For these reasons, HHS has determined that no adjustment to the MLR standard in Delaware is necessary.