Assessing the Implications of the Medical Loss Ratio (MLR) Requirement

September 2012

Individuals and businesses across the country received checks from their health insurance companies this summer under a provision in the Patient Protection and Affordable Care Act (ACA) that targets insurers’ use of premium dollars.  Minimum medical loss ratios (MLRs) require insurers to spend a certain percentage of premium revenue on health care claims and quality improvement activities.  Under the ACA, insurers that do not meet new MLR standards must rebate the portion of premium dollars that exceeds the target.  An article by Ken Alltucker in The Arizona Republic looks at the effect of the new MLRs in Arizona, where consumers and businesses were expected to collect more than $36 million in refunds. 

The MLR requirement in the ACA requires insurers to put a significant portion of premium revenue toward customer health care and limits the amount available for salaries, marketing, and other administrative expenses.  The minimum MLR for insurers in the individual and small group markets is 80 percent; in the large group market, the minimum MLR is 85 percent.  Regulations issued by the Secretary of the U.S. Department of Health and Human Services operationalized the requirement by providing greater detail about exactly what expenses count toward meeting the MLR.  Insurers were required to report their 2011 spending to federal officials by June 1, 2012, with rebate checks sent to customers by Aug. 1.

According to the Alltucker article, which cites reports by Consumers Union and Kaiser Family Foundation, Arizona consumers who purchased individual plans were expected to get $24.4 million in refund checks or credits to future premiums.  Insurers were expected to refund $9.3 million to Arizona employers with small-group plans and $2.9 million to companies with larger plans.

Employers have up to three months to decide how to spend the rebate, which may be paid directly to employees, used to reduce next year’s premium, or put toward benefits like wellness programs.  Writing in The New York Times, Nina Bernstein finds many employers are still deciding what to do with the rebate, leaving some workers wondering what happened to the money.  Adding to the uncertainty for employees is the fact that employers must only return the amount of money that workers contributed to their premiums, which varies across businesses. 

HCFO-funded research by Jean Abraham, Ph.D. and Pinar Karaca-Mandic, Ph.D. at the University of Minnesota examines the likelihood of individual market insurers meeting the new MLR standard and the implications for coverage.  Using data from the National Association of Insurance Commissioners, the researchers established state-level estimates of the size and structure of the U.S. individual market, then estimated the number of insurers expected to have MLRs below the legislated minimum.  They found that in nine states, at least 50 percent of health insurers would likely fail to meet the new MLR standard.  Another key finding: In 12 states, at least half of total member-years of enrollment were associated with insurers failing to meet the minimum MLR.

In their study, Abraham and Karaca-Mandic noted that insurers with MLRs below the minimum requirement may respond in a variety of ways, including exiting the market.  This could mean major coverage disruption for consumers, particularly people with poor health status and/or high claims experience, known as “medically uninsurable” enrollees.  The researchers estimated the number of individual market enrollees in each state that may be vulnerable to coverage disruption due to health status, finding the highest numbers of medically uninsurable individuals in Arizona, Florida, South Carolina, Texas, and Virginia.  Additional information about the study can be found on HCFO’s website.

The potential for coverage disruption also came to the attention of the market analysts, industry representatives and actuaries, and regulators who participated in a June 2010 HCFO-sponsored meeting about the MLR requirement and potential instability in the individual market.  A resulting issue brief identifies warning signs of market destabilization that could inform policymakers’ determinations about market stability.  Under the ACA, the Secretary may adjust the MLR standard for a state if she determines market destabilization is likely.  Seven states have been granted exemptions from the MLR requirement under this provision.   

In recently-funded related work, Richard Scheffler and colleagues at the University of California, Berkeley, are examining the impact of state-level rate review regulations on health insurance premiums.