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. This policy is known as the “medical loss ratio” (MLR) provision of the Affordable Care Act.

Medical loss ratios apply 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 do.

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 if an adjustment is not granted and the potential impact on premiums charged, benefits provided, and enrollee cost-sharing. All State application materials are posted on the HHS website.

The Kentucky MLR Adjustment

Kentucky’s Department of Insurance requested an adjustment of the 80 percent MLR standard to 65%, 70%, and 75% for 2011, 2012, and 2013, respectively. 

Kentucky’s dominant issuer in the individual market, Anthem, has a market share of 83.5 percent, and intends to adjust its business model to meet the 80 percent standard.  Therefore, Anthem is unlikely to leave the market due to implementation of an 80 percent MLR standard. Of the three smaller issuers that are expected to owe rebates in 2011, two (Humana and Golden Rule) are significantly below an 80 percent MLR, based on 2010 data.  The third one (Time) operates at a loss and has indicated that it may consider leaving the market absent an adjustment to the MLR standard.  Golden Rule and Time also reported relatively high commissions, supporting Kentucky’s concern that it may be difficult for them to adjust their business models to meet an 80% standard, as a result of being locked into binding multi-year agent commission contracts.  Some or all of these three issuers could be impacted by having to meet an 80% standard and could withdraw from the market, potentially leaving more than 22,000 enrollees without coverage.  The impact of an 80% MLR standard on these issuers is of concern.

All four of Kentucky’s individual market issuers expected to owe rebates in 2011 have MLRs above Kentucky’s requested 65 percent for 2011 and 70 percent for 2012. Time, the issuer that appears to be most at risk of withdrawal, had a 2010 MLR of almost 75 percent.

For these reasons we believe it reasonable to establish an MLR standard at 75% for the year 2011, with the 80 percent standard to apply in 2012 and each year 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.