Maximizing Value: Tips for Insurers to Optimize Medical Loss Ratio

The ACA requires health insurance payers to spend a certain percentage of their premium income on medical services and quality improvement activities for their enrollees. This is called the medical loss ratio (MLR).

Insurers that do not meet their MLR targets must remit rebates to consumers. This year, health plans can hit their MLR targets by implementing fresh strategies that are more sustainable over time.

In a policy setting that is highly constrained by health-related resources, cost-effectiveness analysis can help decision-makers identify opportunities to maximize health gains. However, such studies must be complemented by essential information on the context of intervention implementation.

Specifically, the extent to which a new intervention can reduce opportunity costs (the amount of health that could be gained elsewhere using the resources invested in the intervention) is critical. In addition, the incremental cost-effectiveness of interventions will vary with the level of coverage.

In the individual insurance market, a key indicator of health insurer performance is their medical loss ratio, which limits how much premiums can be used for administrative costs, fees, and profits. Insurers that fail to meet specific MLR standards are required to issue rebates to consumers.

Insureds need to be able to focus their resources on the right things, which is why the ACA’s medical loss ratio (MLR) requirement has been so essential.

The MLR requirement requires health insurance companies to spend a certain percentage of their premium on medical claims and quality improvement efforts—80% for individual and small group markets and 85% for large groups. If an insurer does not meet this requirement, they must issue rebates to their enrollees.

The MLR rules serve a dual purpose: they help keep prices stable by reducing excess overhead and profit, and they protect consumers from unjustified price increases during good times. Moreover, the medical loss ratios rule requires that insurers publicly report their spending and earnings so consumers can know how their premium dollars are spent.

Under the ACA, insurers must spend at least 80% of their premium on clinical services and healthcare quality improvement activities. This leaves 20% for administration, marketing, and profit. If an insurer fails to meet this standard, they must provide policyholders with rebates.

This balancing act helps protect consumers by capping insurer profits and overhead, but it is not without its challenges. For example, some insurers are gaming the system by misallocating expenses or inflating their spending on providers while minimizing their reported administrative costs and profits.

Before the ACA, many health insurance companies spent a significant portion of consumers’ premium dollars on overhead expenses such as executive salaries and marketing. Now, they must spend 80% to 85% of their premium dollars on medical claims and healthcare quality improvement activities.

If they spend less than 85%, they must send rebates to policyholders. This is because the ACA requires that a significant percentage of premiums pay for actual healthcare costs, not administrative costs.

To meet MLR requirements, an insurer must divide total paid medical service claims plus quality improvement activities by total premium revenue minus federal and state taxes, licensing fees, and regulatory charges. This calculation clearly shows how much an insurance company spends on healthcare costs versus overhead expenses.

As value-based care becomes the health industry's focus, insurers will need a strategy that transcends traditional cost reduction. Insurers that need to be faster to embrace this agenda will lose subscribers to competitors that do.

The ACA’s medical loss ratio rule requires health insurance companies to spend a certain percentage of premiums on paid healthcare services and quality improvement activities. If they spend more than this amount, they must provide rebates to enrollees.

The MLR database reveals essential information about the market, including a summary of an insurer’s MLR performance for each year. The database also includes details of how MLRs are calculated and reported.

In addition, under the current MLR rules, newer plans can defer reporting of their MLRs for up to five years when they have 50 percent or more of their premium income from policies effective before a given year.