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 percent 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 Affordable 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.

The Department of Health and Human Services (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 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 Georgia MLR Adjustment Application

The Georgia Department of Insurance requested an adjustment of the MLR standard to 65 percent, 70 percent, and 75 percent for the reporting years 2011, 2012, and 2013, respectively.

After reviewing Georgia’s application, we found an adjustment of the MLR standard was warranted. However, we determined that an adjustment to 65 percent in 2011, 70 percent in 2012, and 75 percent in 2013, as requested by the Department, is not necessary.

Georgia’s application indicates that issuers can meet a higher MLR than it requested for 2011, 2012 and 2013.   Most issuers already do so; 12 of the 18 largest issuers in the Georgia individual market had 2010 MLRs above 65 percent, and another issuer is pricing its products to an 80 percent MLR.  However, there is some indication that the application of an 80 percent standard would negatively affect several issuers in Georgia.  Because Georgia has no guaranteed issue requirement, limits on health status rating, an issuer of last resort, nor does the State operate a high risk pool, any potential withdrawal by these issuers could make it difficult for their policyholders, particularly those with pre-existing conditions, to obtain replacement coverage immediately.

For these reasons, we have determined to adjust the MLR standard in the Georgia individual health insurance market to 70 percent for 2011 and to 75 percent for 2012.  The 80 percent statutory standard will apply in MLR reporting year 2013 and thereafter.  This approach creates a glide path for compliance with the 80 percent standard and balances the interests of consumers, the State, and the issuers in accordance with the principles underlying the MLR provision.