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medical loss ratio

What is the medical loss ratio?

Medical loss ratio (MLR) is a measure of the percentage of premium dollars that a health plan spends on medical claims and quality improvements, versus administrative costs.

Obamacare requires health insurance carriers to spend the bulk of the premiums they collect on medical expenses for their insureds.  Individual and small-group carriers must spend at least 80 percent of premiums on medical expenses, and for large-group plans, the requirement is 85 percent.

Profits and other administrative expenses can make up no more than 20 percent (15 percent for large groups) of premiums collected.  If administrative expenses exceed those amounts, the insurer must remit rebates to their insureds.

The MLR rules took effect in 2011, and the amount of the rebates is calculated on a three-year rolling average. From 2012 through 2016, insurers had returned $2.8 billion to insureds in the form of rebates for premiums that ultimately ended up being too high (ie, the insurers didn’t spend 80/85 percent of the collected premiums on medical costs and quality improvements).