A new Health Policy Brief from Health Affairs and the Robert Wood Johnson Foundation examines the requirements outlined in the Affordable Care Act concerning “medical loss ratios” (the percentage of premiums that insurance companies must spend on health care services).

Starting in 2011, insurance companies will be required to spend 80 to 85 percent of their premiums on health services and on activities aimed at improving the quality of care and individuals’ health. The goal is to ensure that consumers get more value for the dollars they spend on their health insurance premiums, and put downward pressure on insurers’ administrative and marketing expenses. Failure to meet these requirements will require insurance companies to issue rebates to their customers beginning in 2012.

This is the first time national regulations have been established for medical loss ratios. In the past, if there were medical loss ratios imposed on insurers, it was done by the states. Guidelines varied from state to state, and oversight has been uneven.

The Affordable Care Act gave the National Association of Insurance Commissioners (NAIC) major responsibility to help draft the new regulation on medical loss ratios. Specifically, the NAIC had to define what constituted spending on medical care and quality improvement, and what was an administrative activity that would not count toward the “medical loss” requirement.

In general, insurance companies want as many activities as possible to be classified as “medical” and “quality improvement” while the Department of Health and Human Services (HHS) and congressional allies want many company activities to be considered as “administrative” expenses. Other contentious issues are discussed in the policy brief.

Recently, the NAIC adopted a set of recommended rules and forwarded them to Health and Human Services Secretary Kathleen Sebelius for review. The rules, which are subject to revision by HHS, will be issued as a federal regulation by the end of this year. The final rule is likely to have a significant impact on medical care costs, consumers’ premiums, and the kinds of health care services that insurance companies will cover in the future.

The insurance industry and many state insurance commissioners are concerned that overly restrictive medical loss ratios may force some insurance companies to stop writing new policies or go out of business, resulting in destabilized markets. Already, HHS has granted temporary waivers to two states, and more are expected. 

About Health Policy Briefs

Health Policy Briefs are aimed at policy makers, congressional staffers, and others who need short, jargon-free explanations of health policy basics. The briefs include competing arguments on policy proposals from various sides and the relevant research supporting each perspective. The information is objective and reviewed by Health Affairs authors and other specialists with years of expertise in health policy.

Previous policy briefs have addressed:

Grandfathered Insurance Plans: If an insurance plan is exempt from the law, how consumers and businesses are impacted.

Comparative Effectiveness Research: Some of the key issues, including those that are controversial.

Standards and Certification of Electronic Medical Records: Steps providers will take to make records compliant.


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You can sign up for e-mail alerts about upcoming briefs. The briefs are also available from the RWJF’s Web site. Please feel free to forward the briefs to any of your colleagues who are tracking health issues. And after you’ve taken a look, we would welcome your feedback at hpbrief@healthaffairs.org.