Across 50 states and the District of Columbia, insurers in 26 jurisdictions had no rebates for 2017 in the individual market, and rebates were less than $5 a person in 11 states. Regulators are greatly loosening rules that previously had limited the sale of non-ACA-compliant policies, and the full impact of these changes is still unknown.18 Moreover, the Justice Department has taken the position in court that the ACA should be struck down as unconstitutional, which could have a catastrophic impact on the individual market. 13. If an insurer uses 80 cents out of every premium dollar to pay its customers' medical claims and activities that improve the quality of care, the company has a medical loss ratio of 80%. If the same insurer had an average deductible of $2,500, its credibility adjustment would be increased by a factor of 1.164, bringing its MLR up to 81.36% (because 71.7% + 8.3% * 1.164 = 81.36%). If the amount of the rebate is exceptionally small ($5 for individual rebates and $20 for group rebates), insurers are not required to process the rebate, as it may not warrant the administrative burden required to do so. Using a three-year rolling average to calculate excess overhead and profits protects insurers by allowing them to recoup at least a portion of their recent losses through somewhat larger rate increases in a current year. Privacy Policy. Fully Credible: Insurers with 75,000 life years or more are considered “fully credible” and are held to the normal MLR standard (80% for the individual and small group market and 85% for the large group market). Hall, Stabilizing and Strengthening the Individual Health Insurance Market: A View from Ten States (Brookings Institution, July 2018). Following the ACA medical loss ratio rules, we include in medical claims the amounts insurers spend on quality improvement, which averaged less than 1 percent of premiums. Now that the individual market appears to have regained profitability, however, the ACA’s MLR rule has renewed relevance, both for consumers and insurers. For everyone. where the employer or other plan sponsor pays the cost of health benefits from its own assets) are not considered insurers and are therefore not subject to the MLR provision. Sarah Goodell, Risk Corridors (Health Affairs, updated Feb. 2015). 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 … An analysis by the Government Accountability Office (GAO) found that the majority of insurers with credible claims experience would have met or exceeded the ACA’s MLR rebate standard in 2010 if it had been in effect.3, 4 However, MLR compliance varied substantially by market, with less than half of insurers in the individual market meeting the standard, compared to 70% in the small group market and 77% in the large group market.5. This means that an expatriate plan with a reported MLR of 40%, for example, would meet the 80% threshold in the small group or individual markets after the adjustment is applied (because 40% * 2 = 80%). This political and regulatory uncertainty continues. Medical Loss Ratio Adjustments The health of our entire state is improved when every oneof us ha s access to quality, affordable health care. Center for Consumer Information and Insurance Oversight, Summary of 2016 Medical Loss Ratio Results (CCIIO, Dec. 2017). Beginning in 2012, insurers failing to meet the applicable MLR standard for the prior year must issue rebates to consumers proportionate to the amount in premiums paid by each consumer.14 As medical loss ratios are calculated using aggregate data, rebates are not based on the experience of an individual enrollee or group. Under health reform, small businesses are defined as groups of 100 or fewer employees, but until 2016, states have the option to define small businesses as 50 or fewer employees and large employers as those having 51 or more employees. U.S. Coronavirus Cases (12/29): 19.41 million, Explaining Health Care Reform: Medical Loss Ratio (MLR), Millions of Uninsured Americans are Eligible for Free ACA Health Insurance, 10 Reasons to Pay Attention to ACA Open Enrollment This Year, KFF Health Tracking Poll – October 2020: The Future of the ACA and Biden’s Advantage On Health Care. However, in seven states (Arizona, Massachusetts, Minnesota, Mississippi, Missouri, New Hampshire, and New Mexico), rebates exceeded $50 per person in the 2017 individual market.22 Notably, in four of these seven states (Minnesota, Missouri, New Hampshire, and New Mexico), a single insurer with profit margins of 15 percent or greater was solely responsible for the rebate (Exhibit 4). The Medical Loss Ratio provision of the ACA requires most insurance companies that cover individuals and small businesses to spend at least 80% of their premium income on health care claims and quality improvement, leaving the remaining 20% for administration, marketing, and profit.1, 2 The MLR threshold is higher for large group plans, which must spend at least 85 percent of premium dollars on health care and quality improvement. Loss ratios are calculated as the three-year rolling average, meaning that the regulatory standard is applied each year to the insurer’s average loss ratio during the prior three years. Norris, “Billions in ACA Rebates,” 2019. 19. The following sections examine two key stabilizing features in the ACA’s loss ratio rule. 16. 20. Hall and Michael J. McCue, How the ACA’s Medical Loss Ratio Rule Protects Consumers and Insurers Against Ongoing Uncertainty (Commonwealth Fund, July 2019). Insurers with partially credible experience that have higher average deductibles receive further upward adjustments. Some insurers were more successful and were required to pay a rebate; however, across the entire market, these rebates averaged only $6 per person per year (50 cents a month), equal to just 0.01 percent of the premium. Over time, rebates will be based on cumulative data over three-year periods. The rule protects consumers by limiting how much insurers can attempt to recoup previous losses through higher profits in any one year. If insurers exceed that limit, they have to send rebates to their members. Vice President, Health Care Coverage and Access, The Commonwealth Fund, Senior Scientist, Tracking Health System Performance, The Commonwealth Fund, Fred D. & Elizabeth L. Turnage Professor of Law, Wake Forest University School of Law, R. Timothy Stack Professor, Department of Health Administration, School of Allied Health Professions at Virginia Commonwealth University, , Fred D. & Elizabeth L. Turnage Professor of Law, Harkness Fellowships in Health Care Policy and Practice, Association of Health Care Journalists Fellowships, Commonwealth Fund Fellowships in Minority Health, The Federal Medical Loss Ratio Rule: Implications for Consumers in Year 3, The 80/20 Rule Increases Value for Consumers for Fifth Year in a Row, Summary of 2016 Medical Loss Ratio Results, On the Road to Recovery: Health Insurers’ 2016 Financial Performance in the Individual Market, Billions in ACA Rebates Show 80/20 Rule’s Impact, Individual Insurance Market Performance in 2018, Drivers of 2018 Health Insurance Premium Changes, 2019 Premium Increases Lowest on Average Since 2015, Stabilizing and Strengthening the Individual Health Insurance Market: A View from Ten States, Insurer Participation on ACA Marketplaces, 2014–2018, Success and Failure in the Insurance Exchanges, Feds Owe Health Insurers $12.3 Billion in Unpaid Risk-Corridor Payments. In effect, the ACA’s loss ratio rule serendipitously serves a function similar to the ACA’s risk corridor provisions that were undermined by Republican opposition: the MLR rule partially shelters insurers in bad times and keeps them from unduly profiteering in good times. Mark A. Because of this financial improvement, rebates increased by almost 50 percent in 2017. Insurers with MLRs below the minimum must rebate the … Medical Loss Ratio The Medical Loss Ratio (MLR) is one of the Affordable Care Act (ACA) provisions designed to provide better value to consumers and increase transparency. Health insurers collect premiums from policyholders and use these funds to pay for enrollees’ health care claims, as well as administer coverage, market products, and earn profits for investors. 6. The ACA permits insurers with low enrollment to account for this variability by making “credibility” adjustments to their MLRs. 1. Expatriate Plans: Insurance policies sold to Americans working abroad may have higher administrative expenses than other policies and therefore receive an adjustment (by multiplying the numerator of the MLR by 2.0). Hall, The Federal Medical Loss Ratio Rule: Implications for Consumers in Year 3 (Commonwealth Fund, Mar. Rebates also declined in the group markets but less dramatically (in proportionate terms). 45, No. Rebates remained low for two reasons. Charles Gaba, www.ACASignups.net (Rate Hikes menu); and Cynthia Cox, Rachel Fehr, and Larry Levitt, Individual Insurance Market Performance in 2018 (Henry J. Kaiser Family Foundation, May 2019). Out of 303 such insurers with at least 1,000 members, there were 74 insurers with loss ratios below the required 80 percent in 2017. Mark A. Abstract For the past three years, the Affordable Care Act has required health insurers to pay out a minimum percentage of premiums in medical claims or quality improvement expenses—known as a medical loss ratio (MLR). insurance reform: mandated medical loss ratio (MLRs) or, as the White House commonly refers to it “the 80-20 rule.” It has not received as much attention by the public, but has far more impact on how health care reform moves forward. This rule requires that MA plans spend at least 85% of their revenue on health care services, covered benefits and quality improvement efforts. Private Health Insurance: Early Indicators Show That Most Insurers Would Have Met or Exceeded New Medical Loss Ratio Standards. Medical Loss Ratio (MLR) A basic financial measurement used in the Affordable Care Act to encourage health plans to provide value to enrollees. Physician leaders will want to understand the MLR and the arguments made by its proponents and opponents. The MLR provision of the ACA applies to all types of licensed health insurers, including commercial health insurers, Blue Cross and Blue Shield plans and health maintenance organizations.  The provisions apply to all of an insurer’s underwritten business (i.e. This provision requires that all health insurers, as of January 1, 2011, spend a percentage of each premium dollar received to pay claims and related expenses and activities that improve health care quality. David Blumenthal, “The Three R’s of Health Insurance,” To the Point (blog), Commonwealth Fund, Mar. 11. 7. Before the health reform law passed, many states had medical loss ratio and other reporting requirements in place, but these varied quite a bit from state to state.8 Traditionally, MLR is defined as the portion of premium income insurers pay out in the form of health care claims (claims divided by premiums). (That percentage is the MLR.) These consumer protections could have substantially more impact in some states than in others, depending on how much insurers were permitted to increase rates in each state. Day, Benjamin, et al., “The Affordable Care Act and Medical Loss Ratios: No Impact in First Three Years,” International Journal of Health Services, Vol. By building in more cushion than they needed, insurers are expecting substantially lower loss ratios in 2018, which will generate much higher rebates. In its first few years, this rule provided important consumer protection by requiring substantial consumer rebates and inducing insurers to reduce their administrative costs, which likely helped to keep premiums somewhat lower.3 These protections became less visible once insurers adjusted their rates to reflect their lower overhead.4 Following substantial rate increases for individual health insurance in 2017 and 2018, however, the ACA’s loss ratio limits have renewed relevance by helping stabilize a market that has been buffeted by cyclical underpricing and overpricing. All Rights Reserved. Hall, “On the Road to Recovery: Health Insurers’ 2016 Financial Performance in the Individual Market,” To the Point (blog), Commonwealth Fund, Mar. The loss ratio is the percentage of premium dollars that insurers spend on medical claims and quality improvement, rather than dollars retained for administrative overhead and profit. Filling the need for trusted information on national health issues. These changes are described in more detail elsewhere, but in brief they include abruptly ceasing cost-sharing reduction payments, repealing the individual mandate penalty, and drastically reducing funding for marketing and consumer navigation during open enrollment.17. Insurers are grouped into the following categories: Noncredible: Insurers with fewest enrollees (less than 1,000 life years) are called “noncredible” and are therefore presumed to be in compliance with ACA’s MLR requirements.12. Center for Consumer Information and Insurance Oversight, The 80/20 Rule Increases Value for Consumers for Fifth Year in a Row (CCIIO, Nov. 2016). 3. Premiums are net of taxes and other assessments. Health insurers with relatively few policies in a market segment may have less predictable claims expenses. For example, an insurer with a reported enrollment of 1,000 life years and an MLR of 71.7% would receive a base credibility adjustment of 8.3 percentage points, bringing its MLR up to 80% (because 71.7% + 8.3% = 80%). By smoothing out oscillations in profits and losses, the ACA’s MLR rebate rule holds the prospect of not only continuing to protect consumers, but also of helping to counter some of the destabilizing effects of ongoing changes in regulatory policy in the individual market. 10. In calculating the 2012 MLR, credible plans will use only 2012 data, but partially credible plans will use MLR data from 2012 and 2011. 9, 2017): 907–10. Note that under the ACA, states have the flexibility to set higher MLR standards than the federal threshold of 80% in the small group and individual markets or 85% in the large group market.Â. As this report discusses, the insurance industry is beginning to consider the financial impact of the new minimum medical loss ratio requirements. Ashley Semanskee et al., Insurer Participation on ACA Marketplaces, 2014–2018 (Henry J. Kaiser Family Foundation, Nov. 2017); and Craig Garthwaite and John A. Graves, “Success and Failure in the Insurance Exchanges,” New England Journal of Medicine 376, no. 9. But the ACA imposed a medical loss ratio (MLR) requirement, which specifies the maximum percentage of premiums that insurers can spend on administrative costs. Medicare, the government program that provides health care services to people aged 65 and older and to the nonelderly disabled, maintains a medical loss ratio of 97–98 percent. Mini-Med plans may use a multiplier of 1.75 in 2012, decreasing to 1.5 in the year 2013, and 1.25 in 2014. For the most part, these increases were caused by changes in federal rules, such as the planned phasing out of the ACA’s transitional reinsurance program, as well as the unplanned cessation of cost-sharing reduction payments to insurers.9 But these hefty increases were also driven by insurers’ aiming to substantially lower their previous loss ratios. The goal of the medical loss ratio provision of the new health care law is to make sure that consumers get the full benefit of the health care premiums they pay insurers. Affordable, quality health care. Shelby Livingston, “Feds Owe Health Insurers $12.3 Billion in Unpaid Risk-Corridor Payments,” Modern Healthcare, Nov. 14, 2017. In fact, many insurers overshot their targeted loss ratios in 2017 and 2018, resulting in greater profitability than they may have anticipated. But rebates still remained much lower than in the ACA’s early years, averaging only $9 a person for 2017 ($0.73 a month) marketwide. Additionally, the MLR rule affords insurers that suffer substantial losses an opportunity to recoup some of those losses by averaging a low loss ratio against two prior years of high loss ratios. https://doi.org/10.26099/hcjv-x297, © 2021 The Commonwealth Fund. 76 Federal Register 234 (Dec 2011) pages 76574 – 76594. Medical Loss Ratio Many insurance companies spend a substantial portion of consumers’ premium dollars on administrative costs and profits, including … Self-funded plans (i.e. Under health care reform, health insurers must publicly report the portion of premium dollars spent on health care and quality improvement and other activities in each state they operate. The rule has resumed its important role of paying rebates to consumers whose health plans enjoy substantial profits. 10 (Mar. Insurers underpriced those years because of the highly competitive conditions in the newly reformed individual market, coupled with actuarial uncertainty over the full extent of health care needs for the newly insured.6, But since 2017, the ACA’s MLR limits have once again become more relevant for consumers in the individual market.7 To help insurers regain profitability, state regulators allowed them to target the minimum allowable loss ratios, which meant that rates increased more than the anticipated increases in medical claims. Insurers will be responsible for ensuring that rebates benefit consumers proportionally to the amount they contributed toward premiums. Medical Loss Ratios. Updated: Medical Loss Ratios. Michelle Andrews talks about medical loss ratio, the amount of money an insurer must spend on health care as opposed to administrative costs and … First, although insurers’ MLRs dropped quite a bit, they remained above the regulatory minimum on average. Due to the Affordable Care Act enacted in May 2010, insurance companies are required to spend a specified Against this backdrop, we now consider the role that the ACA’s loss ratio rule might play in stabilizing the market by protecting both consumers and insurers through continuing cycles of losses and excessive profits that result from ongoing market uncertainty. The Henry J. Kaiser Family Foundation Headquarters: 185 Berry St., Suite 2000, San Francisco, CA 94107 | Phone 650-854-9400 At this point, however, the cause of insurers’ uncertainty shifted from typical actuarial factors to more political factors, including dramatic changes in administrative policies and market rules under the Trump administration. Medical Loss Ratio: Getting Your Money's Worth on Health Insurance Thanks to the Affordable Care Act, consumers will receive more value for their premium dollars because insurance companies are required to spend 80-to-85% of premium dollars on medical care and health care quality improvement, rather than on overhead costs. This backstop against excessive profits is expected to have even more importance once full financial reporting is complete for 2018, which included a second round of substantial rate increases.20 Despite owing rebates for 2017, insurers continued to increase rates for 2018 in part because they had to file their 2018 rates in mid-2017 without their complete 2017 financial performance data in hand. When the ACA’s medical loss ratio rule first took effect in 2011, its protections were more visible to consumers, who received significant rebates while insurers substantially reduced overhead costs. Under the ACA, insurers report their MLR based on state-level data, across all of their plans, in each market segment in which they operate (i.e., individual, small group, and large group).6, If an insurer fails to meet the MLR standard and is required to issue a refund, it must notify enrollees of any rebates they will receive and how the rebate will be administered. when risk is transferred to the insurer in exchange for premium), including plans that were grandfathered under the ACA. The Affordable Care Act (ACA) requires health insurers to spend 80-85% of consumers’ premiums on direct care for patients and efforts to improve care quality. Share on Facebook. This deductible factor adjusts the MLR by increasing the insurer’s credibility adjustment by a multiplier (ranging from 1.0 to 1.736). If insurers fail to meet this “medical loss ratio (MLR)” provision, they must provide a rebate to their customers. The medical loss ratio – also known as the 80/20 rule – means that insurers have to disclose where they’re spending plan holder premium dollars. The ACA therefore allows a one-year deferral for insurers with a high proportion of new plans (representing at least half of their business in a given state). The Medical Loss Ratio provision of the ACA requires most insurance companies that cover individuals and small businesses to spend at least 80% of their premium income on health care claims and quality improvement, leaving the re… At the time of this publication, HHS has approved MLR adjustments for seven states (Georgia, Iowa, Kentucky, Maine, Nevada, New Hampshire, and North Carolina) and denied requests from eleven states and territories.13 MLR adjustments in 2011 ranged from 65% to 75%, phasing up to 65% – 80% in 2012. Kaiser Family Foundation, Feb 2012. http://www.statehealthfacts.org/comparetable.jsp?ind=940. 7. Accordingly, their rate increases were much more subdued in 2019, averaging only about 3 percent.10, This cyclical pattern of underpricing followed by overpricing (relative to actual medical claims) is driven in large part by insurers’ uncertainty about the ACA’s evolving market conditions. Opens in a new window. The Affordable Care Act (ACA) includes several provisions that change the way private health insurance is regulated in an effort to provide better value to consumers and increase transparency. Here are 4 reasons behind the soaring costs that insurance companies don't want you to know. On November 22, 2010, The Department of Health and Human Services (HHS) released the interim final regulation (IFR) regarding medical loss ratio (MLR) implementation for health insurance issuers. The percent of premium that insurers spend on administration, marketing, and 1.25 2014! 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