Medical Loss Ratios

The Medical Loss Ratio (MLR) is the proportion of premiums collected by a health insurance issuer that is spent on clinical services and quality improvement. The Medical Loss Ratio was created via the Affordable Care Act (ACA) to ensure carriers are spending a certain percentage of the premiums that they collect on health care.

By setting minimum MLR standards, the ACA incentivizes health insurance issuers to spend most of the premiums collected on health care and quality improvement rather than on the issuer’s administrative costs, including executive salaries and marketing. If a carrier’s health care spending for that year does not meet the minimum MLR requirement, the carrier must issue the difference in the form of a rebate. The ACA requires health insurance issuers to report their MLR for each year they provide group or individual coverage.

Minimum Medical Loss Ratio Standards

• For large group market issuers, the minimum MLR standard is 85%.
• For individual and small group market issuers, the minimum MLR standard is 80%.

Medical Loss Ratio Rebate

For each MLR reporting year, if a health insurance issuer fails to meet the minimum MLR standard, then the health insurance issuer must provide a rebate to each subscriber or policyholder. The difference between the minimum MLR standard and the issuer’s actual MLR will be rebated to policyholders and subscribers no later than September 30 following the end of the MLR reporting year.

Example: A small group health insurance issuer has a minimum MLR of 80%. This means that this issuer must spend at least 80% of collected premiums on health care services. If a small group health insurance issuer only spends 75% of collected premiums during a MLR reporting year on health care services, then this issuer must refund 5% of the total premium amount collected to the policy holder.

Policyholders who receive a rebate are required to distribute the rebate in one of the following ways:

• Reduce a portion of the premium for the next policy year for persons covered under any option under the group health plan.
• Reduce a portion of the premium for the next policy year for persons covered under the group health plan option for which the issuer is providing a rebate.
• Provide a cash refund to persons covered under the group health plan option for which the issuer is providing a rebate.

The above rebate distributions must be made within 3 months after a policyholder receives a rebate. All rebate distributions made after 3 months of receipt must include late payment interest (at the Federal Reserve Board lending rate or 10%, whichever is higher).

Medical Loss Ratio Notice

A health insurance issuer must provide a notice any time a rebate of premium is provided. The notice must be sent to each policyholder who receives a rebate. The notice will explain the applicable minimum MLR standard and information relevant to the issuer’s total premium revenue and the rebate percentage owed to enrollees. If required to provide a rebate, issuers must send the notice by September 30 of the year following the MLR reporting year for which the rebate is being issued.

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