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 percent of premium dollars on medical care and health care quality improvement, rather than on overhead costs. If they don’t, the insurance companies will be required to provide a rebate to their customers starting in 2012 for the 2011 reporting year. This policy is known as the “medical loss ratio” (MLR) provision of the Affordable Care Act.

Medical loss ratio applies to all health insurance plans, including job-based coverage and coverage sold in the individual market. However, insurance plans in the individual market often spend a larger percent of premiums on administrative expenses and non-health related costs, than job-based health plans.

Recognizing the variation in local insurance markets, the Affordable Care Act allows States to request a temporary adjustment in the MLR ratio for up to three years, to avoid disruptions to coverage in the individual market. This flexibility allows consumers to maintain the choices currently available to them in their State while transitioning to a new marketplace where they will have more options for coverage and more affordable health insurance through State-based Affordable Insurance Exchanges. This is one of many ways the Affordable Care Act is building a bridge from today’s often disjointed and dysfunctional markets to a better health care system.

The Department of Health and Human Services (HHS) has set up a transparent process for how States can apply for an MLR adjustment and what criteria will be used to determine whether to grant those requests.  States must provide information to HHS showing that requiring insurers in their individual market to spend at least 80 percent of their premiums on medical care and quality improvement may cause one or more insurers to leave the market, reducing access to coverage for consumers.  States must also show the number of consumers likely to be affected and the potential impact on premiums charged, benefits provided, and cost-sharing.  All application materials are posted on the HHS website.

The Florida MLR Adjustment Application

The Florida Office of Insurance Regulation requested an adjustment of the medical loss ratio standard to 68 percent, 72 percent, and 76 percent for reporting years 2011, 2012, and 2013, respectively.

In general, Florida’s application shows that the State has a competitive individual health insurance market, which should ensure that consumers continue to receive adequate coverage.

Evidence in Florida’s application shows that most issuers in the Florida individual market either:
1.    Already meet the 80 percent MLR standard,
2.    Are sufficiently profitable to provide rebate payments if they fail to meet the 80 percent MLR standard, or
3.    Are adapting their business models in order to provide consumers better value for their premium dollar.  

Insured Floridians will continue to have access to coverage. Florida law requires insurance companies to offer coverage to any individual whose insurance plan leaves the market, and makes it illegal to discriminate against these individuals because of a pre-existing condition.

For these reasons, HHS has determined that no adjustment to the medical loss ratio standard in Florida is necessary.  This determination will ensure consumers receive a better value for their premium dollar.