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Health Care Reform Section

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Medical Loss Ratio (MLR) source: healthcare.gov

A basic financial measurement used in the Affordable Care Act to encourage health plans to provide value to enrollees. 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%. A medical loss ratio of 80% indicates that the insurer is using the remaining 20 cents of each premium dollar to pay overhead expenses, such as marketing, profits, salaries, administrative costs, and agent commissions. The Affordable Care Act sets minimum medical loss ratios for different markets, as do some state laws.


In an article, Insurance commissioners back changes to healthcare law’s MLR standard, by Sam Baker - 11/22/11,  posted by Health Watch:

“After more than a year of debate, state regulators Wednesday approved a resolution calling for changes to the healthcare reform law’s medical loss ratio provision.

The National Association of Insurance Commissioners (NAIC) passed the measure 26-20...”

A response, quoted by Lee Cohen states:

“Insurance agent commissions are neither an administrative expense of the insurance company or a frivolous charge added in to the consumers cost of buying insurance. No item in our society can be purchased without a cost being added to it for the acquisition. It takes time, effort, research and work to obtain a health insurance policy for someone. I see agent commissions as a shared cost between consumer ( for the guidance and hand holding ) and the insurance company for the business being placed with them as opposed to another carrier. MLR should have always been about rewarding insurance companies for operating efficiently and not about penalizing the person in the field writing business and helping people.”

Tools from the Carriers

Oxford Health Plans - UHC

Medical Loss Ratio

Empire - Anthem Blue Cross/Shield

Medical Loss Ratio

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Department of Health & Human Services

Medical Loss Ratio

Department of Labor

Technical Release No. 2011-04

Medical Loss Ratio: Getting Your Money's Worth on Health Insurance

source:  healthcare.gov

Today, many insurance companies spend a substantial portion of consumers’ premium dollars on administrative costs and profits, including executive salaries, overhead, and marketing. Thanks to the Affordable Care Act, consumers will receive more value for their premium dollar because insurance companies will be required to spend 80 to 85 percent of premium dollars on medical care and health care quality improvement, rather than on administrative costs, starting in 2011. If they don’t, the insurance companies will be required to provide a rebate to their customers starting in 2012.

On November 22, 2010, the Obama Administration issued a regulation implementing this policy, known as the “medical loss ratio” provision of the Affordable Care Act. This regulation will make the insurance marketplace more transparent and make it easier for consumers to purchase plans that provide better value for their money.


Over 20 percent of consumers who purchase coverage in the individual market today are in plans that spend more than 30 cents of every premium dollar on administrative costs. An additional 25 percent of consumers in this market are in plans that spend between 25 and 30 cents of every premium dollar on administrative costs. And in some extreme cases, insurance plans spend more than 50 percent of every premium dollar on administrative costs. This regulation will help consumers get good value for their health insurance premium dollar.

In 2011, the new rules will protect up to 74.8 million insured Americans, and estimates indicate that up to 9 million Americans could be eligible for rebates starting in 2012 worth up to $1.4 billion. Average rebates per person could total $164 in the individual market. Important details regarding the new regulation are included below.

How These New Rules Will Help You – Ensuring Value for Consumers

The new medical loss ratio rules will hold insurance companies accountable and increase value for consumers by:

Working with State Experts: Developing the Medical Loss Ratio Regulation

The Affordable Care Act required the National Association of Insurance Commissioners (NAIC) to develop uniform definitions and methodologies for calculating insurance companies’ medical loss ratios. Insurance commissioners in every State have a responsibility to protect the interests of the general public, policyholders, and enrollees within their respective States. Today’s regulation certifies and adopts the recommendations submitted to the Secretary of Health and Human Services (HHS) on October 27, 2010, by the NAIC. It also incorporates recommendations from a letter sent to the Secretary by the NAIC on October 13, 2010. The NAIC report was approved unanimously by representatives from every State and the District of Columbia and is the product of months of public hearings and consultation with consumers, employers, insurers, and other stakeholders. The NAIC has a long history of developing these types of rules through a transparent process with stakeholder input, and this process was no exception.

The medical loss ratio regulation outlines disclosure and reporting requirements, how insurance companies will calculate their medical loss ratio and provide rebates, and how adjustments could be made to the medical loss ratio standard to guard against market destabilization.

Insurer Reporting Requirements

Beginning in 2011, insurance companies that issue policies to individuals, small employers, and large employers will have to report the following information in each State it does business:

These reports will be posted publicly by HHS so residents of every State will have information on the value of health plans offered by different insurance companies in their State.

An insurer will report aggregate premium and expenditure data for each market, except for so-called “expatriate” and “mini-med” plans. For these plans, insurers will be allowed to report their experience separately. Although the NAIC did not make a formal recommendation on this subject, in their letter sent to Secretary Sebelius on October 13, 2010, the NAIC recommended that the Secretary exclude expatriate plans—health insurance provided to U.S. citizens who are living or working abroad – from the new requirements. The regulation accelerates data collection and creates a special methodology that follows this recommendation to the extent permitted by the Affordable Care Act. HHS is allowing the same treatment for mini-med plans — insurance products with very low annual dollar limits and low premiums – to allow this type of coverage to continue until 2014 when better, more affordable options will be available to consumers.

Activities That Improve Health Care Quality

Following NAIC recommendations, this regulation specifies a comprehensive set of “quality improving activities” that allows for future innovations and may be counted toward the 80 or 85 percent standard. Quality improving activities must be grounded in evidence-based practices, take into account the specific needs of patients and be designed to increase the likelihood of desired health outcomes in ways that can be objectively measured.

In order to maintain incentives for innovation, insurers will not be required to present initial evidence in order to designate an activity as “quality improving” when they first begin implementing it. However, to ensure value, the insurer will have to show measurable results stemming from the quality improvement activity in order to continue claiming that it does in fact improve quality.

Timing of Reporting and Rebates

The regulation generally requires health insurance companies to report to the Secretary by June 1 of each year. The first report, containing calendar year 2011 data, will be due in 2012, which gives insurers adequate time to make necessary reporting adjustments. Insurers will be required to make the first round of rebates to consumers by August 2012 based on their 2011 medical loss ratio. Under the regulation, expatriate and mini-med plans that report separately will be required to report data to the Secretary on an accelerated basis.

Treatment of Taxes in the Rebate Calculation

Consistent with NAIC recommendations, the regulation will allow insurers to deduct federal and State taxes that apply to health insurance coverage from an insurer’s premium revenue when calculating its medical loss ratio. As NAIC recommended, taxes assessed on investment income and capital gains will not be deducted from premium revenue. In the case of non-profit plans, assessments they are required to pay in lieu of taxes may be deducted.

Accommodations to Ensure Continued Access to Coverage by Consumers

In order to guard against market destabilization, the Affordable Care Act stipulates that the reporting requirements and methodologies for calculating the medical loss ratio “be designed to take into account the special circumstances of small plans, different types of plans, and new plans.”

The NAIC commissioned an extensive analysis by a well-known national actuarial consulting firm, and relied on these findings to develop its credibility adjustment calculation. In developing its recommendations, the NAIC noted that the credibility adjustment methods and factors should be monitored and re-evaluated in light of developing experience. The Administration intends to carefully monitor the effects and suitability of the regulation’s initial approach to credibility adjustment over the next three years.

Accommodations to Avoid Market Destabilization

In the individual market, the Affordable Care Act allows the Secretary to adjust the medical loss ratio standard for a State if it is determined that meeting the 80 percent medical loss ratio standard may destabilize the individual market. Consistent with NAIC recommendations, the regulation establishes a process for States to request such an adjustment for up to three years – an effective State-based transition. In order to qualify for this adjustment, a State must demonstrate that requiring insurers in its individual market to meet the 80 percent MLR has a likelihood of destabilizing the individual market and could result in fewer choices for consumers.

The approach taken in the regulation is designed to give States and other interested parties full opportunity to present relevant information that the Secretary needs to make a timely determination about whether an adjustment to the statutory medical loss ratio standard is justified for insurers in that particular individual market. It is consistent with the recommendations in the NAIC letter dated October 13, 2010.


The Affordable Care Act gives the Secretary direct enforcement authority for the medical loss ratio requirements. However, HHS recognizes States’ capacity to assist in enforcement and will accept the findings of a State audit of MLR compliance if they are based on the medical loss ratio requirements set forth in federal law and regulations.

The regulation also requires insurers to retain documentation that relates to the data they reported and to provide access to those data and their facilities to HHS, so compliance with reporting and rebate requirements can be verified.

Finally, the regulation imposes civil monetary penalties if an insurer fails to comply with the reporting and rebate requirements set forth in the regulation, and it details the criteria and process for determining whether and in what amount such penalties should be imposed. Although the law allows HHS to develop separate monetary penalties for medical loss ratio non-compliance, HHS has adopted the HIPAA penalties in this regulation. The regulation’s penalty for each violation is $100 per entity, per day, per individual affected by the violation.

Posted: November 22, 2010

11/21/2011 NAIC Recommendation on Commissions in the MLR

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