Have you ever wondered how your insurance company actually uses the money you pay them for your premium?
As it turns out, a lot of insurance companies spend a significant portion of consumers’ premium dollars on things other than healthcare (think administrative costs and profits, like executive salaries, overhead, and marketing).
One study estimates that administrative costs like these make up about 34% of total healthcare expenditures in the United States—to put that in perspective, that’s twice what Canada pays.
The solution the federal government created to help counteract this problem is the medical loss ratio (MLR)—a rule put in place to make sure insurance companies spend more money on actual medical costs than they do on anything else, and give them consequences if they don’t.
In this article, we’ll cover what medical loss ratios are, how they’re calculated, and what they mean for you as a policyholder.
What is a medical loss ratio (MLR)?
The MLR standard was created by the federal Affordable Care Act of 2010 and put into effect in January 2011.
It mandates that health insurance companies must use a larger percentage of their premium income on medical care and quality improvement than they use for administration, marketing, and profit. That percentage depends on the size of the group market.
Individual and small group markets (or plans that are geared toward organizations with 50 or fewer full-time employees), are expected to spend at least 80% of their premium income on medical-related expenses with 20% leftover for the administrative costs.
For large group markets (plans for organizations with more than 50 full-time employees), they need to spend at least 85% on medical-related expenses, leaving 15% for administrative costs.
How are medical loss ratios calculated?
To calculate an MLR, an insurer would divide the cost of medical services (things like claims paid and any expenses for healthcare quality improvement) by the total premiums collected over a period of time, minus any federal or state taxes, licensing, and regulatory fees paid in that same period.
That’s a little confusing, so let’s break that down with an example.
Say an insurer uses $850 out of a customer’s $1,050 monthly premium to pay for that customer’s medical claims. The insurer also pays $50 in taxes and fees, so we’d subtract $50 off the premium price. Their MLR would be calculated by taking 850 divided by 1000, which is 0.85, or 85%.
That means this insurer is spending their premium dollars appropriately, and won’t suffer any consequences for underspending on actual medical costs (more on those consequences later).
Why should I care about medical loss ratios?
While MLR is something that insurance companies have to keep track of, they should matter to you as a policyholder, too. The rules put in place by the MLR standard offer several benefits to you as a customer and peace of mind when it comes to how your premium dollars are being spent.
Increased transparency and accountability
The MLR standard doesn’t just mandate that insurance companies keep track of their spending internally—they’re also required to report everything publicly. That means every dollar of your premium is charted and categorized for the world to see.
You can check out your insurance company’s MLR and look through their past reports using this medical loss ratio search tool provided by the Center for Medicare and Medicaid Services.
Each year's report is due by July 31 of the following year. So for example, an insurer must submit its yearly report for 2021 by July 31, 2022.
This kind of public availability to how insurance companies are spending their premium income is a great way to keep companies accountable while also helping you keep informed on which companies are staying compliant.
You can be sure your premium is being spent wisely
Given that healthcare costs have been on the rise for the last several decades, it’s comforting to know whether or not your hard-earned money is being spent on the actual medical expenses and healthcare quality improvements that you personally benefit from.
Additionally, considering the standard was set in place by the federal government, the rules apply to every state and insurance company in the U.S.
This way you can be sure that wherever you go, you can expect the same standard for how your premium dollars are spent.
If your premium isn’t used responsibly, you’ll get a rebate
Let’s say you’re a customer of an insurance company with a plan from the large group market, and your insurer only reports an 83% MLR. Remember, for large group markets, the requirement is 85%, so there’s a 2% gap here.
In this case, a 2% rebate would be paid back to all of its policyholders to make up the difference. This rebate would be paid directly to you in the form of a rebate check, a direct deposit, or simply as a reduction in your premium.
In other cases, the rebate may go to the employer that paid the premium on the enrollees' behalf, and they’ll see to it that it’s used for their employees’ benefit.
So what would a 2% rebate look like for you in dollars? The rebate dollar amount is calculated based on the amount of premium paid by the policyholder, minus any taxes or fees associated with the premium.
For example, if a policyholder paid $1,000 for their premium and the insurer paid $50 in taxes related to that premium, the 2% rebate would be applied to the $950 difference, getting you a total rebate of $19.
That might not sound like a lot, but all of these rebates add up. From the time rebates were created back in 2012 through the end of 2020, insurers had returned a whopping $7.8 billion worth of rebates to their policyholders. In 2020 alone, that number was nearly $2.46 billion—which was by far the highest rebate amount seen since the rule went into effect.
How else can I save on my premium?
Through a health reimbursement arrangement (HRA), you can get more than 200 eligible medical expenses covered through your employer, including individual insurance premiums.
With the creation of MLRs, you can be sure that your insurance company will use your premium dollars toward medical expenses and improvements that will benefit you and your family. No matter where you live or what insurance company you choose, there are standards in place to ensure that no American’s premium is gone to waste.
This article was originally published on July 18, 2021. It was last updated April 12, 2021.