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Medical Loss Ratio (MLR) Questions and Answers

What is a Medical Loss Ratio (MLR)?

In general, a Medical Loss Ratio (or MLR) is the amount of health insurance premiums that an insurer spends on health care and activities to improve health care quality. It is expressed as a percentage: for example, an MLR of 90% means 9 out of 10 of all premium dollars the insurer receives are spent on health care and quality improvement, with the other dollar spent on overhead, profits, and administrative costs.

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Why is the federal MLR important?

The health care reform law, called the Affordable Care Act, features a number of tools to help make health insurance more affordable. The MLR is one way the law makes sure consumers get better value for their health care dollars.

Starting in 2012, an insurer that does not spend enough of its premium dollars on health care must provide a rebate to the insured individual or to the policyholder, which may be the employer that purchased the insurance.

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What MLR do plans have to meet?

Under the Affordable Care Act, an insurer that offers health care coverage to individuals or small groups (usually less than 50 employees) generally must meet an 80% MLR. This means that these insurers must spend at least 80% of annual premiums they take in on health care costs (or activities that improve health care quality) as opposed to profits and administrative costs, including executive salaries, overhead, and marketing.

An insurer that offers coverage in the large group market (usually over 50 employees) must meet at least an 85% MLR. It must spend at least 85% of premiums on health care costs or quality improvement.

Individual states can require a higher MLR for insurers operating within their state.

In certain states, where meeting an 80% MLR may have a negative effect on that state's individual insurance market, insurers must meet a slightly lower MLR standard for that market. To find out whether insurers in your state must meet a lower MLR, please visit http://cciio.cms.gov/programs/marketreforms/mlr/index.html.

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What is a credibility adjustment?

The more people who have insurance through a particular insurer, the easier it is to predict the amount of claims the insurer will receive and the easier it is to accurately price premiums. Although there may still be variations in claims that the insurer can't predict, in a larger insurer these variations have less effect. In order to account for the fact that a smaller insurance company's claims experience may be harder to predict—and the variation may have a bigger effect on its MLR—smaller insurers are given an adjustment to their MLR. This is called a "credibility adjustment."

A health insurer with 75,000 or more enrollees is large enough that it does not need a credibility adjustment. A health insurer with between 1,000 and 75,000 enrollees is given a credibility adjustment on a sliding scale. A health insurer with fewer than 1,000 enrollees is considered to have such an unpredictable claims experience that the MLR standard is not an accurate measurement. It is therefore deemed to meet or exceed the MLR standard does not have a rebate requirement.

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How can I tell what my insurer spent on health care for this year?

Beginning in 2011, each insurer must submit a report each year to the Department of Health and Human Services (HHS) showing how much the insurer spent on health care and activities that improve care in the past year. Each year's report is due by June 1 of the following year. For example, an insurer must submit its yearly report for 2011 by June 1, 2012. Starting in the summer of 2012, HHS will post these reports and insurers' medical loss ratios in this section of HealthCare.gov.

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Will I receive any money back from my health insurer?

You or your employer will get back some of the premium that was paid if your insurer does not meet its MLR for the year. This is called a rebate. A rebate may be a credit towards your next premium payment if you still have the same health insurer, or it may be money refunded to you. If you have health insurance through your employer, your employer may use the portion of the rebate attributable to the portion of premium paid by employees in a way that benefits you, such as reducing future premiums. This applies to your health care coverage beginning January 1, 2011. Each year's rebates must be provided to policyholders by August 1 of the following year. For example, any rebates based upon the insurer's MLR in 2011 must be provided by August 1, 2012.

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How will I know if my insurer owes me a rebate?

If either you or your employer is going to receive a rebate, your insurer must provide you with a notice telling you about the rebate by August 1. For example, an insurer that owes rebates for 2011 must provide rebate notices by August 1, 2012.

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