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Health Policy Brief: Medical Loss Ratios

November 15th, 2010

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

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3 Responses to “Health Policy Brief: Medical Loss Ratios”

  1. Bob Mason Says:

    1. Fundamental to genuine Health Care Reform is defining the acceptable rules of insurance provider behavior in way that makes successful regulation realistic and possible.

    2. Above all, this means NOT allowing loopholes or exceptions by which insurers can do creative bookkeeping. In this example, the insurers wish to create ‘wellness’ or ‘public health’ campaigns of their own devise, or ones they can control or manipulate, and call this medicine.

    3. Anyone who has seen the glossy wellness magazines sent by insurers to the insured should recognize self-serving advertising for what it is. It is impossible for the department of Health and Human Services to read, analyze and police each of these publications and programs to determine if genuinely useful medical advice prevails, or if this should, charitably, be called administrative expenses.

    4. Hence all this fancy footwork should be denied: only solid medical care, delivered by providers who actually see their patients, should count as medical loss. All the rest is the noise of Administration and profit, and must be seen as such.

    Bob Mason
    EQUAL Health Network

  2. Roger Collier Says:

    This otherwise competent brief omits a critical factor from the MLR discussion. Coverage with lower benefits (and therefore lower costs) will have a lower MLR, potentially discouraging insurers from offering such policies. As an example, consider the ACA “metallic tiers” for exchange coverage: a health insurer that just meets the MLR 80 percent threshold for individuals with its Silver plan will have only a 77 percent MLR for a comparable Bronze plan and even less for a catastrophic plan. The result is likely to be that many insurers will forgo offering the more affordable coverage in order to avoid the rebate requirements associated with failing the MLR threshold.

    In the short run (pre-exchange), unless HHS can modify the MLR calculation proposed by NAIC, we are likely to see insurers abandoning their lower-cost policies, thereby either further increasing the numbers of uninsured or increasing the average cost of coverage—or both.

    In fact, it appears that the federal government is beginning to be aware of the problem. A recent announcement indicates that HHS is seeking a formula that would allow mini-med policies, like those offered to McDonalds employees, to pass or avoid the MLR test. The trouble is that by making an exception for the extreme case with the lowest benefits, HHS will open itself up to demands for exceptions to be made for plans with more generous coverage but which still fail the MLR test.

  3. Ellen R. Shaffer Says:

    The NAIC draft regulations on the medical loss ratio (MLR) open a gaping “greenwashing” loophole that will let insurance companies count marketing expenses and ill-defined wellness programs as medical care. Congress has documented that “MLR shifting” has already begun.

    The “wellness” activities permitted to count as medical expenses could include “Activities that increase the likelihood of desired health outcomes.” While buying a lottery ticket might not count, the entire section invites abuse.

    The standard goes well beyond both the new Affordable Care Act (ACA) and existing state laws and opens an entirely new category of expenses that insurance companies can rely on to justify reduced spending on care for subscribers, and thus denials of care. It will frustrate the aims of the law and instead give undue weight to the views and interests of the insurance industry. This standard must be fixed by HHS.

    The Affordable Care Act (ACA) requires health insurance companies to spend at least a minimum percent of premium dollars on the medical claims of subscribers. Companies that fail this test must provide rebates to those same subscribers. The intent of imposing the MLR is to “bring down the cost of health care coverage” and “ensure that consumers receive value for their premium payments.” It should provide incentives to the health insurance industry to actually pay claims instead of denying them, to operate efficiently, and to negotiate assertively with health care providers, rather than simply passing on cost increases to consumers. But companies can frustrate the intent of the law by inflating medical claims to include other expenses, including marketing expenses typically considered part of administration.

    The insurance industry has already begun to manipulate the MLR rules for its own gain, and has stated its intention to game the system by raising premiums to make up for any constraints imposed by the new law, The Senate Commerce Committee has documented that, “At least one company, WellPoint, has already ‘reclassified’ more than half a billion dollars of administrative expenses as medical expenses, and a leading industry analyst recently released a report explaining how the new law gives for-profit insurers a powerful new incentive to ‘MLR shift’ their previously identified administrative expenses.”

    It is vital that the “medical” and “quality improvement” portion of insurance expenditures be defined strictly, and that standardized reporting requirements be detailed to prevent miscategorization of administrative expenses. HHS should address this problem when ir certifies the NAIC’s proposal.

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