The Henry J. Kaiser Family Foundation Headquarters: 185 Berry St., Suite 2000, San Francisco, CA 94107 | Phone 650-854-9400 This political and regulatory uncertainty continues. The ACAâs MLR rule took effect in 2011. Taxes on investment income and capital gains are not included. After 2014, these plans will no longer receive an adjustment as annual limits will no longer be allowed in most plans. By 2014, the individual market MLR standard in each state is expected to reach 80%. 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. HHS is considering amending the MLR rule in such a way that would require all insurers — regardless of whether a rebate is issued — to notify enrollees of the insurerâs MLR each year and also include information on the prior yearâs MLR.7. 19. 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. As shown in Exhibit 1, rebates in the individual health insurance market declined from almost $400 million in 2011 to slightly more than $100 million annually in 2015 and 2016,5 accounting in those later years for only about 0.14 percent of insurersâ premiums. Center for Consumer Information and Insurance Oversight, Summary of 2016 Medical Loss Ratio Results (CCIIO, Dec. 2017). The medical loss ratio (MLR), which considers âlossâ from an insurerâs perspective, is the amount an insurer pays out for the covered health care expenses of its enrollees, expressed as a share of the premium revenue it collects from (or on behalf of) enrollees. The Medical Loss Ratio ("MLR") was introduced as a provision in The Patient Protection and Affordable Care Act ("ACA") of March 23, 2010. For Medicare Advantage (MA) plans, one of the most significant influences on expenditures and profit is the Medical Loss Ratio (MLR) rule. insurance reform: mandated medical loss ratio (MLRs) or, as the White House commonly refers to it âthe 80-20 rule.â It has not received as much attention by the public, but has far more impact on how health care reform moves forward. In most states, large groups are those with more than 50 full-time workers, except in the few states (California, Colorado, and New York) that have opted to extend small-group rules to groups of 100 or less. In the case of employer-sponsored insurance plans, the cost of coverage is often split between the employer and employees. Instead, MLR rebates are based on an insurersâ overall compliance with applicable MLR standards in each state it operates. However, insurance broker and agent compensation is not considered an expense relating to health improvement under current law, and is therefore counted as an administrative expense in the ACA MLR.9Â The same is true for fraud prevention activities.10, Taxes, Licensing and Regulatory Fees: Includes federal taxes and assessments, state and local taxes, and regulatory licenses and fees. 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%). Consumer rebates under the ACAâs âmedical loss ratioâ rule increased in 2017, as insurers raised rates and regained profitability, Because the ACAâs caps on health plansâ profits and overheads are based on a three-year rolling average, they also help insurers recoup recent losses. The Medical Loss Ratio provision of the ACA requires most insurance companies that cover individualsÂ and small businessesÂ 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. Sign up to receive e-alerts and newsletters on the health policy topic you care about most. 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. 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. 45, No. Because of this financial improvement, rebates increased by almost 50 percent in 2017. Loss ratios are calculated as the three-year rolling average, meaning that the regulatory standard is applied each year to the insurerâs average loss ratio during the prior three years. At this point, however, the cause of insurersâ uncertainty shifted from typical actuarial factors to more political factors, including dramatic changes in administrative policies and market rules under the Trump administration. Share on Facebook. Insurers must provide a rebate to consumers if the percentage of premium expended for medical care and health care quality is less than 85% in the large group market and 80% in the small group and individual markets. 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 97â98 percent. Insurersâ financial performance improved dramatically in 2017. 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. Against this backdrop, we now consider the role that the ACAâs 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. 10 (Mar. Rebates remained low for two reasons. Provider credentialing is also included as a health care improvement activity under the ACA. 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 ACAâs 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. At the same time, the rule allows insurers to replenish some of their reserves that deplete during lean times by calculating MLR limits based on a three-year rolling average. MLR adjustments are also allowed for plans with certain special circumstances. 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 insurersâ uncertainty about the ACAâs evolving market conditions. Medical Loss Ratio / 80/20 Rule â Insurance companies have to spend at least 80 percent of premium dollars on claims and activities to improve health care quality. 85% in large group markets. 2018). Hall, âOn the Road to Recovery: Health Insurersâ 2016 Financial Performance in the Individual Market,â To the Point (blog), Commonwealth Fund, Mar. https://doi.org/10.26099/hcjv-x297, Â© 2021 The Commonwealth Fund. Under the ACA, insurers that do not incur a loss ratio of at least 80 percent (based on a three-year rolling average) in the individual or small-group market must rebate the difference to consumers.1 Put another way, insurers with average overhead and profits during the past three years that exceed 20 percent must rebate the excess to members. 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.14Â As medical loss ratios are calculated using aggregate data, rebates are not based on the experience of an individual enrollee or group. Credibility adjustments raise an insurerâs MLR, making it easier to meet the threshold. Beginning in 2011, all health insurers are required to publically report aggregated state-level financial data, including income from premiums and expenditures on health care claims, quality improvement, taxes, licensing, and regulatory fees. In short, these roller-coaster conditions would probably have leveled out by 2017 if ongoing changes to market rules had not intensified the uncertainty. Health insurers collect premiums from policyholders and use these funds to pay for enrolleesâ health care claims, as well as administer coverage, market products, and earn profits for investors. 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. Due to the Affordable Care Act enacted in May 2010, insurance companies are required to spend a specified At the same time, requiring insurers to rebate excess overhead and profits protects consumers from unjustified price increases. Not counting these rebates, these insurers had a handsome overall profit margin of 12.6 percent in 2017. Quality Improvement: To be included in this category, health improvement activities must lead to measurable improvements in patient outcomes or patient safety, prevent hospital readmissions, promote wellness, or enhance health information technology in a way that improves quality, transparency, or outcomes. Self-insured plans are not subject to the MLR requirement.Â, âCredibleâ plans are those that are subject to the MLR requirement. 1. Cox, Fehr, and Levitt, âIndividual Insurance Market,â 2019. As this report discusses, the insurance industry is beginning to consider the financial impact of the new minimum medical loss ratio requirements. Michelle Andrews talks about medical loss ratio, the amount of money an insurer must spend on health care as opposed to administrative costs and â¦ One such provision â the Medical Loss Ratio (or MLR) requirement â limits the portion of premium dollars health insurers may spend on administration, marketing, and profits. An analysis by the Government Accountability Office (GAO) found that the majority of insurers with credible claims experienceÂ would have met or exceeded the ACAâs MLR rebate standard in 2010 if it had been in effect.3, 4Â 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. Kaiser Family Foundation, Dec 2011. http://healthreform.kff.org/notes-on-health-insurance-and-reform/2011/december/insurance-brokers-and-the-medical-loss-ratio.aspx, Medical Loss Ratio Requirements Under the Patient Protection and Affordable Care Act. Claims: Payments made by insurers for medical care and prescription drugs. 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. Newer Plans:Â As new insurance plans tend to have fewer claims in their first year, applying the MLR standard to these plans could create a barrier to entry into the insurance market. 3. Large-group insurers must do the same for loss ratios less than 85 percent, or when overhead and profits average more than 15 percent of premium dollars based on a three-year average.2. This actuarial uncertainty carried over into 2016 because insurers must file their rates roughly 18 months prior to the end of the following rating year.12 Also, in 2015 and 2016, there was substantial turnover among insurers in the individual market, as some initial players learned that they were not able to compete effectively under the new market rules.13, The ACAâs drafters anticipated this uncertainty and included several risk-mitigating measures, known as the âthree Râs:â reinsurance, risk-adjustment, and risk corridors.14 The first two measures were implemented, but risk corridors were not because of Republican opposition that characterized this market-stabilizing measure as a âbailout for insurers.â15 Risk corridors would have substantially dampened the initial cycling between substantial losses and excessive profits in the ACAâs individual market.16, Despite the absence of the ACAâs full complement of stabilizing features, participating insurers began to gain their actuarial footing in 2017. 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. 8. 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 ACAâs loss ratio limits have renewed relevance by helping stabilize a market that has been buffeted by cyclical underpricing and overpricing. New consumer protections in the Affordable Care Act (ACA) will make it easier to purchase health care plans that provide better value for our money. The medical loss ratio is the percent of premium that insurers spend on medical care and quality improvement activities. 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.8Â Traditionally, MLR is defined as the portion of premium income insurers pay out in the form of health care claims (claims divided by premiums). All Rights Reserved. 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 Insurersâ 2016 Financial Performance in the Individual Market, Billions in ACA Rebates Show 80/20 Ruleâs 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, 2014â2018, Success and Failure in the Insurance Exchanges, Feds Owe Health Insurers $12.3 Billion in Unpaid Risk-Corridor Payments. 7. Michael J. McCue and Mark A. Updated: Medical Loss Ratios. Health Policy Briefs. U.S. Center for Consumer Information and Insurance Oversight, Dec 2011. Hall and Michael J. McCue, âHow Do Noncompliant Health Plans Affect the Market?,â To the Point (blog), Commonwealth Fund, Nov. 15, 2017; and Kevin Lucia et al., State Regulation of Coverage Options Outside of the Affordable Care Act: Limiting the Risk to the Individual Market (Commonwealth Fund, Mar. 1 (January 2015). Hall, Stabilizing and Strengthening the Individual Health Insurance Market: A View from Ten States (Brookings Institution, July 2018). 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.Â The provisions apply to all of an insurerâs underwritten business (i.e. One recent analysis projects that loss ratios in the individual market will drop to 70 percent for 2018, resulting in close to $1 billion in rebates.21. Hall and Michael J. McCue, How the ACAâs Medical Loss Ratio Rule Protects Consumers and Insurers Against Ongoing Uncertainty (Commonwealth Fund, July 2019). example, a medical loss ratio cannot provide information to consumers on quality of medical care or customer satisfaction with a health plan. Medical Loss Ratio (MLR) A basic financial measurement used in the Affordable Care Act to encourage health plans to provide value to enrollees. Plans that fall below this 85% threshold are dinged financially. This effect can be seen by examining insurers that were in the individual market all three years, 2015â2017. 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. This uncertainty has two causes: actuarial and political.11, When the newly reformed individual market first opened in 2014, insurers lacked the actuarial experience needed to accurately estimate the newly insuredâs use of medical services. 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. By increasing premiums by 11 percent more than the increase in claims (14% vs. 3%),19 insurers reduced their medical loss ratios by nine percentage points overall, from 95 percent to 86 percent. As shown in Exhibit 3, these rebates reduced their profit margins by slightly more than 25 percent. Important Information Regarding the Medical Loss Ratio (MLR) Rebate Please note this is a unique situation that only affects a small group of taxpayers. However, the fate and timing of that litigation is highly uncertain. This reduction allowed these insurers to recoup $919 million of prior 2015â2016 losses overall. Mark A. 5, 2014. Center for Consumer Information and Insurance Oversight, The 80/20 Rule Increases Value for Consumers for Fifth Year in a Row (CCIIO, Nov. 2016). As the 2011 MLR reporting year will not have sufficient data to use the three-year reporting period, the MLR will be calculated using only 2011 data. Although most insurers in 2017 owed no rebates, 29 insurers paid a rebate of $140 per member, amounting to $132 million, or 3.3 percent of their premiums. (That percentage is the MLR.) Available at: http://cciio.cms.gov/resources/factsheets/mlrfinalrule.html, Haberkorn, Jennifer. This deductible factor adjusts the MLR by increasing the insurerâs credibility adjustment by a multiplier (ranging from 1.0 to 1.736). 13. 18. Viewing the individual market as a whole, Exhibit 2 shows that in 2015 and 2016 (averaged together), insurers had poor financial results. This rule requires that MA plans spend at least 85% of their revenue on health care services, covered benefits and quality improvement efforts. 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%). 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. Filling the need for trusted information on national health issues. 16. Medical Loss Ratio (MLR) is the percent of premiums an insurance company spends on claims and expenses that improve health care quality. American Academy of Actuaries, Drivers of 2018 Health Insurance Premium Changes (AAA, July 2017). Because 2010 was the first year of reporting under the new MLR guidelines, the data from 2011 is expected to provide more reliable figures. Regulation of insurersâ medical loss ratios (MLRs, or loss ratios) is one of the most notable consumer protections in the Affordable Care Act (ACA). Second, for insurers with 2017 loss ratios below 80 percent, their earlier losses in 2015â2016 decreased the rebate amount they owed because the rebate is calculated using a three-year rolling average. To fully understand this pattern, it helps to have a clearer picture of insurance pricing during this period. The MLR standard does not apply even when an insurer administers the self-funded plan on behalf of an employer or other sponsor. 1 ï»¿ 6. Kaiser Family Foundation, Feb 2012. http://www.statehealthfacts.org/comparetable.jsp?ind=940. But the ACA imposed a medical loss ratio (MLR) requirement, which specifies the maximum percentage of premiums that insurers can spend on administrative costs. The average loss ratio of the five health insurers that bring in the most premiums from short-term insurance policies was 39.2% in 2018. Due to the medical loss ratio, the health insurance industry has likely seen an increase in claims, the study states. Regulation of insurersâ medical loss ratios (MLRs, or loss ratios) is one of the most notable consumer protections in the Affordable Care Act (ACA). Private Health Insurance: Early Indicators Show That Most Insurers Would Have Met or Exceeded New Medical Loss Ratio Standards. Learn more about the Rate Review & the 80/20 Rule at HealthCare.Gov . HHS has adopted the MLR recommendations by the National Association of Insurance Commissioners (NAIC). And, by holding steady their administrative costs, their profit margins improved by 11 points, from â7.4 percent to 3.3 percent. Medical Loss Ratio Adjustments The health of our entire state is improved when every oneof us ha s access to quality, affordable health care. Opens in a new window. Also, insurers had to anticipate possible disruptions to the market caused by changes to the ACAâs market rules. 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