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 Nevada Department of Insurance requested an adjustment of the 80 percent MLR to a 72 percent MLR standard for 2011. 

As of 2010, more than 86,000 Nevada residents obtain health insurance coverage through Nevada’s individual health insurance market.  Two of Nevada’s biggest issuers, Golden Rule and Aetna, insure a combined total of 21,652 enrollees, which constitutes 24 percent of the individual market.  The large impact that an 80 percent MLR standard would have on Golden Rule’s and Aetna’s profits in Nevada suggests a sufficiently high risk that these two issuers would withdraw if the 80 percent MLR standard is implemented immediately.  A withdrawal by these two issuers could make it difficult for their 21,652 enrollees, particularly those with pre-existing conditions, to obtain alternate coverage.  Due to these issuers’ relatively large market share, their withdrawal could also lead the remaining issuers to reduce benefits and raise premiums, which would adversely affect all Nevada residents who obtain coverage through the individual market.

However, seven of Nevada’s top ten issuers are expected to have 2011 MLRs above the 72 percent requested by the DOI, and at 68 and 70 percent, Golden Rule and Aetna are fairly close to the DOI’s proposed standard.  Furthermore, an adjustment to a 72 percent standard would deprive consumers of a substantial amount in rebates.  Increasing the adjustment from 72 percent to 75 percent would reduce the loss of rebates to consumers by $1.1 million, while still providing issuers with low MLRs an opportunity to improve the efficiency of their operations.

For these reasons, HHS has determined to adjust the MLR standard in Nevada to 75 percent for 2011.