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 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 expensive 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 Maine MLR Adjustment

The Maine Bureau of Insurance requested an adjustment of the 80 percent MLR to a 65 percent MLR standard. As of September 2010, nearly 37,000 Maine residents obtain health insurance coverage through Maine’s individual health insurance market. One insurer, MEGA Life & Health Insurance Company, which covers more than a third of the market or approximately 14,000 Mainers, has said it may exit the market if required to meet this higher standard in 2011 and 2012. According to the State, since MEGA offers lower cost policies in Maine’s individual market, if the insurer left the market, consumers may not be able to purchase new policies of comparable price and benefit design. For these reasons, HHS accepted the Maine Bureau of Insurance request for an adjustment to 65 percent for 2011 and 2012. HHS will allow the adjustment to continue through 2013, as Maine requested, if the State provides additional data at the end of 2012 to support a third year of the adjustment to 65 percent.

In 2014, when the Affordable Care Act is more fully implemented and Health Insurance Exchanges will provide Mainers with new, affordable options for health insurance coverage, Maine expects that an adjustment to its MLR will no longer be necessary.