Insurance companies spend a large portion of consumers’ premium dollars to cover administrative costs, marketing, overhead, salaries, and similar expenses. The Affordable Care Act (ACA) requires insurance issuers to report the amount spent on quality improvement and clinical services to determine the Medical Loss Ratio (MLR).
Learn how MLR affects health coverage and how to get assistance for an effective MLR strategy.
Components of the Medical Loss Ratio
The medical loss ratio compares how much of a premium goes toward paying medical claims compared to the amount that an insurer pays for administrative costs and what is retained as profit. Understanding MLR is an important tool for determining whether premiums are reasonable and whether they should be adjusted.
The two main components of the MLR include:
Medical Costs
- The ACA requires individual and small-group insurance carriers to spend at least 80% of premiums on medical expenses.
- Large-group plans must spend at least 85%.
Administrative Costs
- Administrative costs, such as profits, should make up no more than 20% of premiums collected for individual and small-group insurance carriers.
- For large groups, the maximum is 15%.
Impact on Health Coverage
Regulatory bodies establish minimum MLR requirements to ensure that insurance companies prioritize the bulk of their spending on healthcare services. Although MLR requirements can vary by jurisdiction, a higher MLR is a good sign that a large portion of premium dollars is being used to directly benefit policyholders’ health coverage.
Some ways that the medical loss ratio impacts health coverage include:
Cost of Care
When the MLR is high, it typically suggests that a large portion of premium dollars is being allocated toward medical care, resulting in a positive impact on health coverage.
However, if the MLR is low, it could signify that a larger percentage of premium dollars is being spent on administrative costs and profits instead of further benefiting policyholders’ health coverage. This could result in higher out-of-pocket costs, reduced access to healthcare services, and limited coverage options.
Quality of Care
While the MLR itself does not directly impact the quality of care, it can influence it indirectly. A higher MLR signifies that a larger portion of premium dollars is being spent on healthcare services and quality improvement, which can lead to improved quality
of care.
In addition, MLR requirements may encourage insurance companies to prioritize spending on healthcare services rather than profits or administrative costs.
Consumer Protections and Benefits
The Medical Loss Ratio provision, also known as the 80/20 rule, provides policyholders with effective consumer protections. This rule requires health insurance companies to report certain financial information, including how much they spend on health care.
Some consumer protections and benefits that result from the MLR include:
Rebates
If an insurer does not meet the MLR standard, a refund must be issued to impacted enrollees. Enrollees must also be notified of any rebates they will receive, including information on how the rebate will be administered, such as by check or mail.
If a consumer purchased insurance through an employer, the refund is generally paid to the employer, who is then responsible for allocating the funds in one of three ways:
- By providing a direct refund to employees.
- By providing a reimbursement to the account used to pay the premium.
- By providing a direct reduction in future premiums.
Improved Transparency
Implementing MLR standards often results in improved transparency. The MLR provides consumers with a clearer understanding of how their premium payments are being utilized. It also enables consumers to effectively compare different insurance plans based on how premiums are spent on healthcare services.
Factors Affecting MLR
Several factors can impact the medical loss ratio in the health insurance industry, from rising healthcare costs to higher profit margins, as well as changes to regulations.
Other factors that impact MLR include:
Market Dynamics
Competitive market dynamics directly impact the medical loss ratio. Insurance companies may adjust their pricing and benefit structures to remain competitive, which can affect the allocation of premium dollars and the MLR.
Regulatory Changes
Different jurisdictions may establish MLR requirements that insurance companies are obligated to meet. The ACA introduced MLR requirements for health insurers in the United States. Regulatory changes can influence how insurance companies allocate their premium dollars, directly influencing the medical loss ratio. These regulations are paramount to protecting consumers and ensuring fair and affordable health coverage.
How Does Medical Loss Ratio Impact Insurance Moving Forward?
Heading into 2024, increased premiums in the individual market are likely due to higher loss ratios. Insurers are aiming to improve margins by lowering these ratios. However, the ongoing uncertainties stemming from the pandemic make premium setting a tricky task.
Factors including the unwinding of Medicaid continuous coverage, expected to result in millions transitioning to other insurance sources, only add to the uncertainty. Rising provider wages and inflation-driven costs are additional factors that could contribute to potential premium hikes.
Get Assistance with Your Medical Loss Ratio Strategy with eBen
The impact of the MLR on health coverage can vary depending on many factors, such as the insurance company the business is enrolled with, specific policy terms, and regulations in the particular jurisdiction. The professionals at eBen provide expert consulting and guidance on MLR strategies to provide policyholders with greater value, enhanced affordability, and increased transparency. Check out other helpful insights here.
