MLR adjustments are also allowed for plans with certain special circumstances. The Henry J. Kaiser Family Foundation Headquarters: 185 Berry St., Suite 2000, San Francisco, CA 94107 | Phone 650-854-9400 Rebates also declined in the group markets but less dramatically (in proportionate terms). Hall, The Federal Medical Loss Ratio Rule: Implications for Consumers in Year 3 (Commonwealth Fund, Mar. This provision requires that all health insurers, as of January 1, 2011, spend a percentage of each premium dollar received to pay claims and related expenses and activities that improve health care quality. All else equal, an insurer with a higher MLR provides higher value to consumers. Louise Norris, “Billions in ACA Rebates Show 80/20 Rule’s Impact,” Healthinsurance.org, May 10, 2019. This means that an expatriate plan with a reported MLR of 40%, for example, would meet the 80% threshold in the small group or individual markets after the adjustment is applied (because 40% * 2 = 80%). Not-for-profit insurers, which are subject to different tax requirements by state, may either deduct state premium taxes or community benefit expenditures (up to a maximum of the highest state premium tax in their state), whichever is greater.11. Health insurers collect premiums from policyholders and use these funds to pay for enrollees’ health care claims, as well as administer coverage, market products, and earn profits for investors. All Rights Reserved. Medical Loss Ratio The Medical Loss Ratio (MLR) is one of the Affordable Care Act (ACA) provisions designed to provide better value to consumers and increase transparency. 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. The ACA’s MLR rule took effect in 2011. 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 Adjustments The health of our entire state is improved when every oneof us ha s access to quality, affordable health care. If insurers exceed that limit, they have to send rebates to their members. 19. 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. Health insurers collect premiums from policyholders and use these funds to pay for enrollees’ health care claims, as well as administer coverage, market products, and earn profits for investors. 5, 2014. Cox, Fehr, and Levitt, “Individual Insurance Market,” 2019. For example, if an insurer receives $100 million in premiums and spends $80 million paying enrollee medical claims and improving health care quality, the medical loss ratio is 80% ($80 million/$100 million). 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. As a result, rate increases averaged roughly 25 percent in 2017 and 30 percent in 2018.8. 22. Under the ACA, insurers report their MLR based on state-level data, across all of their plans, in each market segment in which they operate (i.e., individual, small group, and large group).6, If an insurer fails to meet the MLR standard and is required to issue a refund, it must notify enrollees of any rebates they will receive and how the rebate will be administered. Center for Consumer Information and Insurance Oversight, The 80/20 Rule Increases Value for Consumers for Fifth Year in a Row (CCIIO, Nov. 2016). Insurers failing to meet the applicable MLR standard must pay rebates to consumers beginning in 2012. If an insurer uses 80 cents out of every premium dollar to pay its customers' medical claims and activities that improve the quality of care, the company has a medical loss ratio of 80%. 2015).  Health insurance provided by an insurer to an association or to members of an association is subject to the MLR provision. Claims: Payments made by insurers for medical care and prescription drugs. For everyone. But under the ACA, insurers can make adjustments for quality improvement activities and expenditures on taxes, licensing and regulatory fees. https://doi.org/10.26099/hcjv-x297, © 2021 The Commonwealth Fund. Consumer rebates under the ACA’s “medical loss ratio” rule increased in 2017, as insurers raised rates and regained profitability, Because the ACA’s caps on health plans’ profits and overheads are based on a three-year rolling average, they also help insurers recoup recent losses. Medical Loss Ratio (MLR) is the percent of premiums an insurance company spends on claims and expenses that improve health care quality. Viewing the individual market as a whole, Exhibit 2 shows that in 2015 and 2016 (averaged together), insurers had poor financial results. “Mini-Med” Plans: Insurance plans with annual benefit limits of $250,000 or less – which typically have lower MLRs because medical claims are low relative to administrative costs – will receive temporary MLR adjustments for the years leading up to the opening of insurance exchanges in 2014. 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. Newer Plans: 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. 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. This effect can be seen by examining insurers that were in the individual market all three years, 2015–2017. Sign up to receive e-alerts and newsletters on the health policy topic you care about most. 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 insured’s use of medical services. Health Affairs, Nov 2010. http://www.healthaffairs.org/healthpolicybriefs/brief.php?brief_id=33Â, Cox, Cynthia, and Larry Levitt. In subsequent years, these protections became less noticeable, as insurers in the individual market struggled with substantial losses. Insurers are grouped into the following categories: Noncredible: Insurers with fewest enrollees (less than 1,000 life years) are called “noncredible” and are therefore presumed to be in compliance with ACA’s MLR requirements.12. One such provision – the Medical Loss Ratio (or MLR) requirement – limits the portion of premium dollars health insurers may spend on administration, marketing, and profits. Not counting these rebates, these insurers had a handsome overall profit margin of 12.6 percent in 2017. The system that ultimately emerges could have a big impact on the medical care that many consumers receive. Norris, “Billions in ACA Rebates,” 2019. David Blumenthal, “The Three R’s of Health Insurance,” To the Point (blog), Commonwealth Fund, Mar. The Medical Loss Ratio provision of the ACA requires most insurance companies that cover individuals and small businesses to spend at least 80% of their premium income on health care claims and quality improvement, leaving the re… 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 insurers’ uncertainty about the ACA’s evolving market conditions. The rule protects consumers by limiting how much insurers can attempt to recoup previous losses through higher profits in any one year. State Regulation of Coverage Options Outside of the Affordable Care Act: Limiting the Risk to the Individual Market. 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. By 2014, the individual market MLR standard in each state is expected to reach 80%. 2. 10 (Mar. This issue brief explains how the ACA’s MLR rule serves an important buffering function in two ways. The Benefits and Limitations of State-Run Individual Market Reinsurance, The ACA’s Innovation Waiver Program: A State-by-State Look, Countering Threats to the Small-Business Health Insurance Market. 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.9 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. To make sure that the lion’s share of your premium goes to actual medical costs, and not overhead, marketing or excessive profits, the new Medical Loss Ratio rule requires: Value: Health insurers must spend at least 80 percent of premium dollars on medical care or activities that improve the quality of care. 1. Mark A. Instead, the ACA’s three-year look-back rule required insurers that were in the market that long to pay a rebate of only $21.55 per member for the year. 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. Taxes on investment income and capital gains are not included. Available at: http://cciio.cms.gov/resources/factsheets/mlrfinalrule.html, Haberkorn, Jennifer. The rule has resumed its important role of paying rebates to consumers whose health plans enjoy substantial profits. Learn more about the Rate Review & the 80/20 Rule at HealthCare.Gov . In effect, the ACA’s loss ratio rule serendipitously serves a function similar to the ACA’s risk corridor provisions that were undermined by Republican opposition: the MLR rule partially shelters insurers in bad times and keeps them from unduly profiteering in good times. And, by holding steady their administrative costs, their profit margins improved by 11 points, from –7.4 percent to 3.3 percent. Provider credentialing is also included as a health care improvement activity under the ACA. 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. Private Health Insurance: Early Indicators Show That Most Insurers Would Have Met or Exceeded New Medical Loss Ratio Standards. 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. On November 22, 2010, The Department of Health and Human Services (HHS) released the interim final regulation (IFR) regarding medical loss ratio (MLR) implementation for health insurance issuers. 10. Charles Gaba, www.ACASignups.net (Rate Hikes menu); and Cynthia Cox, Rachel Fehr, and Larry Levitt, Individual Insurance Market Performance in 2018 (Henry J. Kaiser Family Foundation, May 2019). Medical Loss Ratios. Because of this financial improvement, rebates increased by almost 50 percent in 2017. Chris Sloan, Elizabeth Carpenter, and Chad Booker, 2019 Premium Increases Lowest on Average Since 2015 (Avalere, Sept. 13, 2018). 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. 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. Center for Consumer Information and Insurance Oversight, Summary of 2016 Medical Loss Ratio Results (CCIIO, Dec. 2017). 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. At the same time, requiring insurers to rebate excess overhead and profits protects consumers from unjustified price increases. 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. 22, 2018. 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. 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. The ACA permits insurers with low enrollment to account for this variability by making “credibility” adjustments to their MLRs. First, although insurers’ MLRs dropped quite a bit, they remained above the regulatory minimum on average. Additionally, the MLR rule affords insurers that suffer substantial losses an opportunity to recoup some of those losses by averaging a low loss ratio against two prior years of high loss ratios. Medical Loss Ratio / 80/20 Rule – Insurance companies have to spend at least 80 percent of premium dollars on claims and activities to improve health care quality. 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 insurers’ premiums. If the amount of the rebate is exceptionally small ($5 for individual rebates and $20 for group rebates), insurers are not required to process the rebate, as it may not warrant the administrative burden required to do so. State Health Facts. For the most part, these increases were caused by changes in federal rules, such as the planned phasing out of the ACA’s transitional reinsurance program, as well as the unplanned cessation of cost-sharing reduction payments to insurers.9 But these hefty increases were also driven by insurers’ aiming to substantially lower their previous loss ratios. The medical loss ratio is the percent of premium that insurers spend on medical care and quality improvement activities. Without the three-year rolling average, these more profitable insurers would have owed rebates averaging $258 per member in 2017. Instead, MLR rebates are based on an insurers’ overall compliance with applicable MLR standards in each state it operates. 13. 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. GAO, Early Effects of Medical Loss Ratio Requirements and Rebates on Insurers and Enrollees (July 2014). The Patient Protection and Affordable Care Act (ACA) requires health insurance companies to spend a certain percentage of premium on providing medical benefits and quality-improvement activities. This IFR will form part of Section 2718 of the Public Health Service (PHS) Act … (That percentage is the MLR.) It limits the portion of premium dollars health insurance companies may spend on administration, marketing, and profits. 6. The Medical Loss Ratio provision of the ACA requires most insurance companies that cover individuals and small businesses 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. Due to the medical loss ratio, the health insurance industry has likely seen an increase in claims, the study states. Premiums: All premiums earned from policyholders, including those from state and federal high risk pool programs. Affordable, quality health care. For Medicare Advantage (MA) plans, one of the most significant influences on expenditures and profit is the Medical Loss Ratio (MLR) rule. The goal of the medical loss ratio provision of the new health care law is to make sure that consumers get the full benefit of the health care premiums they pay insurers. Hall, “On the Road to Recovery: Health Insurers’ 2016 Financial Performance in the Individual Market,” To the Point (blog), Commonwealth Fund, Mar. 7. Credibility adjustments are determined by enrollment levels on a state-by-state basis in each market segment. The medical loss ratio is a key financial metric for health insurers. Also, insurers had to anticipate possible disruptions to the market caused by changes to the ACA’s market rules. 20. Partially Credible: Insurers with moderately low enrollment (1,000 to less than 75,000 life years) are called “partially credible.” These insurers receive an adjustment that increases their MLR (by adding 1.2 to 8.3 percentage points to the reported MLR). The Affordable Care Act (ACA) requires health insurers to spend 80-85% of consumers’ premiums on direct care for patients and efforts to improve care quality. U.S. Government Accountability Office, Oct 2011. http://www.gao.gov/new.items/d1290r.pdf, For more information on insurer filings, see the Supplemental Health Care Exhibit, available at: http://www.naic.org/documents/committees_e_app_blanks_10_blanks_revisions_101026_supp_hc_ex_1_health.pdf, Medical Loss Ratio: Getting Your Moneys Worth on Health Insurance. Most of the conversation around the Affordable Care Act’s Medical Loss Ratio (MLR) provision has centered on the requirement that insurers issue consumer rebates when they … Premiums are net of taxes and other assessments. This deductible factor adjusts the MLR by increasing the insurer’s credibility adjustment by a multiplier (ranging from 1.0 to 1.736). 2018). Mark A. HHS has adopted the MLR recommendations by the National Association of Insurance Commissioners (NAIC). Kaiser Family Foundation, Feb 2012. http://www.statehealthfacts.org/comparetable.jsp?ind=940. where the employer or other plan sponsor pays the cost of health benefits from its own assets) are not considered insurers and are therefore not subject to the MLR provision. As this report discusses, the insurance industry is beginning to consider the financial impact of the new minimum medical loss ratio requirements. Washington Offices and Barbara Jordan Conference Center: 1330 G Street, NW, Washington, DC 20005 | Phone 202-347-5270, www.kff.org | Email Alerts: kff.org/email | facebook.com/KaiserFamilyFoundation | twitter.com/kff. Share on Facebook. In short, these roller-coaster conditions would probably have leveled out by 2017 if ongoing changes to market rules had not intensified the uncertainty. 76 Federal Register 234 (Dec 2011) pages 76574 – 76594. 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 ACA’s drafters anticipated this uncertainty and included several risk-mitigating measures, known as the “three R’s:” 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 “bailout for insurers.”15 Risk corridors would have substantially dampened the initial cycling between substantial losses and excessive profits in the ACA’s individual market.16, Despite the absence of the ACA’s full complement of stabilizing features, participating insurers began to gain their actuarial footing in 2017. At the time of this publication, HHS has approved MLR adjustments for seven states (Georgia, Iowa, Kentucky, Maine, Nevada, New Hampshire, and North Carolina) and denied requests from eleven states and territories.13 MLR adjustments in 2011 ranged from 65% to 75%, phasing up to 65% – 80% in 2012. Self-funded plans (i.e. Loss ratios are calculated as the three-year rolling average, meaning that the regulatory standard is applied each year to the insurer’s average loss ratio during the prior three years. example, a medical loss ratio cannot provide information to consumers on quality of medical care or customer satisfaction with a health plan. 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 ACA’s loss ratio limits have renewed relevance by helping stabilize a market that has been buffeted by cyclical underpricing and overpricing. Medical Loss Ratio Many insurance companies spend a substantial portion of consumers’ premium dollars on administrative costs and profits, including … 3. At this point, however, the cause of insurers’ uncertainty shifted from typical actuarial factors to more political factors, including dramatic changes in administrative policies and market rules under the Trump administration. Here are 4 reasons behind the soaring costs that insurance companies don't want you to know. 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. Insurers with MLRs below the minimum must rebate the … Filling the need for trusted information on national health issues. Abstract For the past three years, the Affordable Care Act has required health insurers to pay out a minimum percentage of premiums in medical claims or quality improvement expenses—known as a medical loss ratio (MLR). Their collective loss of –7.4 percent was because of a high medical loss ratio — 95 percent. when risk is transferred to the insurer in exchange for premium), including plans that were grandfathered under the ACA. Fully Credible: Insurers with 75,000 life years or more are considered “fully credible” and are held to the normal MLR standard (80% for the individual and small group market and 85% for the large group market). Insurers’ financial performance improved dramatically in 2017. This reduction allowed these insurers to recoup $919 million of prior 2015–2016 losses overall. 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 97–98 percent. 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 ACA’s 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. Under health care reform, health insurers must publicly report the portion of premium dollars spent on health care and quality improvement and other activities in each state they operate. After 2014, these plans will no longer receive an adjustment as annual limits will no longer be allowed in most plans. 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