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 (the ACA) 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, with the first rebate checks issued in the fall of 2012. The amount of the rebates is calculated on a three-year rolling average. From 2012 through 2020, insurers had returned nearly $7.8 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). The rebates that were issued in 2020 totaled nearly $2.46 billion, which was by far the highest since the rule went into effect.

The ACA also imposes a medical loss ratio requirement of 85 percent on Medicare Advantage plans, but rebates are sent to the Centers for Medicare and Medicaid services instead of to consumers.

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