What Is a Medical Loss Ratio?

Medical Loss Ratios Explained

A medical professional wearing scrubs uses a touch screen tablet
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A medical loss ratio (MLR) is a calculation that indicates how much of an insurer’s net premiums go towards paying claims. Healthcare insurers earned $816 billion in premiums last year, but they can’t spend all that money on just anything. The Affordable Care Act (ACA) requires that a minimum percentage of those premiums go toward covering medical insurance claims and providing value to health plan participants. Insurers are required to report their MLRs in order to determine if they’ve met the minimum requirement.

Your insurer’s medical loss ratio can have important implications for you since the insurer must issue you a rebate each year that it fails to meet the minimum requirement. Here’s what you should know about how the ratio is calculated, the related rules for insurance providers, and what it all means for you.

Definition of a Medical Loss Ratio

An insurer’s medical loss ratio is generally the amount it spends on claims and other expenses that improve the quality of its healthcare divided by the net premiums received from the participants enrolled in its health plans:

MLR = Claims costs + quality improvement expenditures ÷ premiums received

For an insurer’s expenses to qualify as improving the quality of its healthcare, they must lead to measurably better patient outcomes, safety, or wellness. For example, that might include:

  • Enhancement of health information technology to improve quality, transparency, or patient outcomes
  • Provider credentialing to establish its ability to give proper care
  • Programs to help individuals manage serious health conditions such as cancer
  • Hospital discharge planning to reduce the frequency of hospital readmissions

The medical loss ratio is sometimes referred to as the 80/20 rule. This is because insurers must spend at least 80% of their net premiums on health care claims and quality improvements. The other 20% can be spent on overhead, administrative and marketing costs. The minimum required medical loss ratio is 80% for individual and family health plans and small group plans (less than 50 employees). For large group plans (generally 51 or more employees), the minimum required MLR is 85%.

  • Acronym: MLR
  • Alternate name: 80/20 Rule

How the Medical Loss Ratio Works

The minimum medical loss ratio requirements are designed to hold insurance providers accountable for how they spend health insurance premiums, and to keep health insurance costs down. More specifically, these requirements attempt to put a cap on insurance companies’ profits and administrative costs. 

Prior to the ACA, many states had individual medical loss ratio requirements, but they were defined more simplistically: claims paid divided by premiums received. Today, the ACA allows insurers to make adjustments for spending on healthcare quality improvement, taxes, and licensing and regulatory fees.

You may want to look up your insurance provider’s medical loss ratio to see if you’ll receive a rebate or make sure it meets the minimum requirements. You can do so at the Centers for Medicare & Medicaid Services (CMS) website using their MLR Search Tool. The tool provides a spreadsheet detailing the calculation of the ratio.

Input your desired reporting year (the year in which the insurance company issued the medical loss ratio report), the name of your insurance company, and your state or territory. You can then search by plan type (such as individual, small group, or large group). 

For example, here are the 2019 calculations for Kaiser Permanente Insurance Company’s large group plan in California:

  • Adjusted Incurred Claims (claims paid during the year): $85,082,104 
  • Improving Health Care Quality Expenses: $777,275 
  • Premiums Earned After Adjusting for Taxes and Fees: $95,692,655
  • Medical Loss Ratio: ($85,082,104 + $777,275) ÷ $95,692,655 = 89.7%

In this case, Kaiser Permanente meets the minimum medical loss ratio requirements.

As mentioned above, if insurers don’t meet the minimum MLR requirement, they’re required to provide rebates to their policyholders. For example, imagine that your insurance provider had an average medical loss ratio of 75% for its small group plans (remember, the required minimum MLR for these plans is 80%). This means that it would be required to issue rebates to policyholders. 

In general, rebates are calculated by multiplying the percentage difference between the required MLR and the one reported (in this case, 80% minus 75%) by the total annual premiums received (excluding taxes and fees). So, if your insurer received net premiums of $10 million in 2020, this means it would be required to issue a net rebate of $500,000 that would be divided up between policyholders:

5% x $10,000,000 = $500,000

What the Medical Loss Ratio Means for You

If your healthcare insurance provider fails to meet their minimum required medical loss ratio, you or your employer may receive a rebate. Rebates may be issued in one of the following ways:

  • Checks in the mail
  • Direct deposits to the accounts used to pay the premiums
  • Direct reductions in future premiums

If you or your employer are eligible for a rebate, the insurer must notify you by August 1st. If you have an individual insurance policy, you’ll receive your rebate directly, but if your plan is sponsored by your employer, they’ll likely receive the rebate instead. Your employer will either pay you a portion of the rebate using one of the methods listed above, or use the money to make health plan improvements that benefit all employees.

Rebates aren’t based only on claims related to your policy. If the claims for all policies similar to yours in your state fell below the required MLR percentage, you’ll likely receive a rebate. If the claims were higher than the required MLR percentage, you won’t.

In addition, rebates aren’t based only on an insurer’s MLR percentage for a single year. Since 2014, the law has required insurers to issue rebates based on their rolling average medical loss ratio from the previous three years.

Key Takeaways

  • A medical loss ratio (MLR) is calculated by dividing a health insurance provider’s claim and healthcare quality improvement costs by net premiums received.
  • Insurance companies must reach an MLR of 80% for individual, family, and small group plans, and an MLR of 85% for large group plans.
  • The Affordable Care Act (ACA) requires a minimum medical loss ratio to prevent health insurance companies from spending too much on administrative costs or keeping too much in profits.
  • If an insurance provider doesn’t meet its minimum MLR, it must pay a rebate to policyholders approximately equal to the shortfall. Rebates can be paid by direct reimbursements or premium reductions.