What’s a Medical Loss Ratio (MLR)?

And what does it have to do with your company?

A major goal of the Affordable Care Act (ACA) was to make health care more transparent and ensure that consumers get the most value from their health insurance. The law included a number of provisions designed to help, including the Medical Loss Ratio (MLR) requirement.

The Medical Loss Ratio requirement says that health insurance companies have to spend at least 80% of their premium income (excluding taxes and fees) from individual and small group policies and 85% of premiums from large groups on medical claims and health care quality improvements. No more than 20% of premium income (15% for large group) can be used for administration costs (salaries, marketing, etc.) or profit. The goal of the “80/20 rule” is to  help ensure that insurers’ first priority is the health and wellbeing of their members.

80/20 rule graphic

Massachusetts, however, sets higher standards. For small and individual health plans: 88% of premiums must be spent on medical services and activities to improve health care quality, and no more than 12% of premiums can be spent on administrative cost. For large group plans, the state ratio aligns with the federal requirement and is 85%/15%.

If, after the end of the year, a health insurer calculates that they've spent less than the required percentage on medical claims and health care quality improvement measures, then they have to pay a rebate for a portion of the premium cost back to employers or individual policy holders. Employers are required to pass this rebate along to their employees by covering a larger portion of their health care premiums going forward, issuing cash payments, or other means of distributing the rebates back to employees’ health benefits.

In 2019, nearly 9 million people got MLR rebates, either directly from their insurance companies or passed through from their employers, totaling more than $1.37 billion.1

How are MLR rebates calculated?

Health insurance companies work hard to accurately predict how much they’ll need to spend on medical claims and improvement measures and set premium rates accordingly. But sometimes medical costs end up being lower than predicted.

Insurance spreads risk across a large group of people, and that’s how MLR rebates are calculated, too. MLR rebates are based on the amount an insurer spends on medical claims and quality improvements across their entire block of business in each segment of their market (large group, small group or individual) in a given state. This means that the amount your health plan paid out for your employees’ specific medical claims in a given year doesn’t affect whether or not you get a rebate. In fact, your employees could even have higher than usual medical claims in a given year, but if claims are lower than expected on average across the board in your market segment, you would still get a rebate.

What are expenses for improving health care quality and delivery?

As mentioned before, premium payments that health insurers use to fund measures for improving health care quality and delivery count toward the medical cost portion of the loss ratio calculation. These measures include certain activities health plans do to improve health care quality and increase the likelihood of desired health outcomes, as long as they’re grounded in evidence-based medicine and meet the other requirements of MLR regulations.

This includes actions health plans take that are designed to achieve the goals of improving patient safety and reducing medical errors, reducing health disparities among specified populations, lowering infection and mortality rates, promoting health and wellness activities, helping patients comply with their medication and care, and more. In order to count towards the medical cost portion of the calculation, as opposed to administrative costs, improvement activities need to be able to be objectively measured, for verifiable proof of results.

More detailed information about MLR is available here.

Tufts Health Plan is committed to supporting great health outcomes for our members while keeping premium costs affordable. The MLR requirement is one more reason you can feel confident that your employees’ wellbeing is our first priority. Learn more.

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  1. Data Note: 2019 Medical Loss Ratio Rebates - KFF