In the simplest terms, the medical loss ratio represents the portion of premiums an insurer spends on medical care and things that improve quality, such as care coordination and patient education. A loss ratio of 84% means an insurer spent 84 cents of every dollar in premiums it collected from customers on medical claims. The rest goes toward administrative costs or is kept as profit.
Since 2011, the ACA has required insurers in the individual and small group markets to spend at least 80 cents of every premium dollar on medical care and quality improvement; insurers in the fully insured large group market must spend 85 cents per dollar. Companies that don’t meet those minimums pay the difference to plan members.
The goal of the MLR rule was simple: ensure people were getting a fair value for their premiums, according to Gary Cohen, Blue Shield of California’s vice president of government affairs and former CMS official who was charged with drafting the medical loss ratio regulations. That value—the minimum loss ratio thresholds—was set at levels that politicians could get behind and the industry could comfortably meet.
Cohen said the rule succeeded in delivering on that promise. “Whether the program has been successful depends on whether you believe it was a good policy to make sure that everybody who is buying health coverage is getting at least that much value from the health plan that they’re buying. If you agree that was a good thing to do, then I think the MLR program has succeeded in doing that,” he said.
Prior to the ACA, 64% of insurers had loss ratios high enough to meet the minimum requirement even before the rule went into effect, but just 43% of insurers in the individual market would have, according to a 2011 report from the U.S. Government Accountability Office. The average individual market MLR was close at 78.8%, while average loss ratios for small and large group insurers were 85% and 89.5%, respectively. Dozens of states had their own minimum loss ratio requirements, but they varied widely. For example, North Dakota imposed an MLR of 55% on individual insurers, while New Jersey required an MLR of 80%.
The initial yardstick for the MLR rule’s success was the volume of rebates noncompliant insurers would have to pay. The federal government expected rebates would subside as health insurers got used to the law and set their premiums to more accurately reflect healthcare costs, Cohen said, and that’s generally how things played out.
In the first year of the program, insurers across the individual, small group and large group markets paid nearly $1.1 billion in rebates for failing to meet minimum loss ratio requirements for plans sold in 2011. They quickly made changes to increase their MLRs, causing rebates to fall to $504 million in 2012 and $332 million in 2013.
“There’s been billions of dollars issued over the years. But even if you’re not getting a rebate, that’s because your insurer is trying not to exceed those MLR thresholds, and so you might be benefiting without even getting a rebate,” said Cynthia Cox, vice president at the Kaiser Family Foundation.
The volume of rebates has since surged again, reaching nearly $1.4 billion for 2018. Mark Hall, a law professor at Wake Forest University who tracks the outcomes of the MLR rule, said the rule served as a stabilizing force in the ACA marketplace beginning in 2017 when insurers began to claw their way back into the black after losing money in the first few years selling plans on the exchanges. Insurers raised premiums too high to make up for initially setting them too low and to protect themselves from the Trump administration’s decision to stop paying certain ACA subsidies for low-income people.
Because the formula for calculating rebates uses three years of financial data, the rule allowed insurers to hold on to some of that extra premium revenue to recoup early losses, Hall explained. “It’s a buffering or balancing effect of that three-year rolling average that both protects the consumer against excessive prices but gives the insurer some comfort that they’re not going to have to eat a large loss in a single year just because they miscalculated,” he said.
Though $1.4 billion in rebates sounds like a big number, it’s not much compared to the premium revenue the companies bring in. According to the Kaiser Family Foundation, Centene Corp. issued the largest rebates at $216.9 million for its individual market performance in 2018. That’s less than 2% of its commercial revenue that year.
That might be why health insurers that once feared the mandate to spend a certain percentage on benefits now downplay its importance and characterize it as an insignificant provision. They once fought tooth and nail to classify as many expenses as possible as medical care and quality improvement so they could more easily meet the minimum requirements.
They lost the battle to include broker commissions and anti-fraud programs as quality improvement expenses, but the final rule did include an adjustment to protect small insurers with low loss ratios from having to pay rebates.
Kris Haltmeyer, a vice president at the Blue Cross and Blue Shield Association, said the requirements never had a big effect on how Blues plans operated. “Our plans have consistently run above the MLR threshold and it really hasn’t been a significant provision,” he said, though he did credit the rule for improving transparency.