Medical Loss Ratio (MLR)

What is the Medical Loss Ratio?

The Medical Loss Ratio (MLR)  is a rule established by the Patient Protection and Affordable Care Act requiring health insurance companies to report the amount of premium revenue spent on quality improvement and medical care. This amount must meet certain proportional standards, hence the nickname the “80/20 rule,” urging individual and small group insurers to spend 80 percent and large group insurers to spend 85 percent of their premium-based income on clinical services. The other 20 percent is designated for administrative costs, such as overhead or paying their employees.

If the minimum expenditure of 80 or 85 percent is not reached, the insurance company must issue a rebate check to the policy holder for a portion of the premiums they paid throughout the calendar year. Beginning in July, rebate checks had already begun to arrive in the mailboxes of policy holders, the rest sent out by August 1 of 2012. These rebates were calculated by each insurance company’s performance in 2011, and how well they met up to the 80/20 rule. Evaluations are based differently for each health insurance carrier and type of market, such as individual, small group, and large group, though in certain cases, individual and small group were merged.

Pros: Consumer Benefits

As of January 1, 2011, the regulations of the MLR took effect in all health insurance markets with the exception of self-insured commercial plans. Totaling approximately $426 million dollars, millions of Americans have just received checks for their health plans not being up to MLR par. Also, this suggests that more funds were directed towards improving quality of service by the insurance company and their provider networks and technologies. Because individuals purchase a health plan in hopes that they are receiving the best care possible for their money, the MLR encourages that the level of service increases in all areas of the health care system.

After the rebate checks had all been sent, insurers and government officials say the implementation of the 80/20 rule may result in maintaining lower premiums. Even those who did not end up with a check are benefiting, as insurance companies are keeping their premiums down. Claims have also been made that insurers are working to alleviate the cost of health care services, which would be a true feat. However, reducing costs will take the form of follow-up care to eliminate hospital readmission when not entirely necessary, and creating medical teams to make care more efficient.


Cons: Risk of Unemployment and Pay Cuts

While these rules clearly result in a reward for health care consumers, there is a large group of individuals taking a hit on their behalf: health insurance brokers. While some of them may have received refund checks, it will not compensate for the incredible loss experience over the past year among the nation’s brokers. Commissions have been significantly reduced, a portion of agents have fled the market entirely, and many companies have downsized or considered doing so. Several of the most influential insurance trade groups are currently working hard to have broker and agent commissions to be considered an administrative cost, and be exempt from MLR rules.

Causing significant damage to the health insurance market and who is behind it, the MLR may give agents a break if all goes to plan in Congress. Until then, the commission rates, which are taken as a percentage of profit generated from premiums, are now much lower than they once were. This leaves many individuals with insufficient paychecks or out of work. Hopefully, the government will see the negative impact and allow for these individuals to get their deserved compensation, as the policy holder gets their rebate.