Five-minute guide to medical loss ratios (MLRs)

Have you ever wondered how your insurance company uses your premium payments? In addition to spending those dollars on medical claims, insurers use a portion of health insurance premiums toward administration, executive salaries, overhead expenses, and marketing.

Those non-clinical costs add up. In fact, the U.S. spends more than $1,000 per person on healthcare administrative costs¹. This amount is nearly five times more than the average in similar countries and more than the U.S. spends on long-term medical care.

One provision the federal government created to counteract this problem is the medical loss ratio (MLR) rule. The MLR rule requires insurers to spend a specific portion of their revenue on medical care and improving the quality of care for consumers.

In this blog post, you’ll learn:

• How the medical loss ratio rule impacts insurance companies, consumers, and healthcare spending.
• How to calculate a medical loss ratio.
• The importance of MLR regulations in promoting transparency and improving accountability in the health insurance industry.

What is the medical loss ratio rule under the Affordable Care Act?

The MLR rule is a financial regulation created by the Affordable Care Act (ACA). It requires health insurance companies to spend a larger percentage of consumers’ premiums on medical claims and quality of care improvements than they keep for profit, marketing, and administration costs. This ensures that health insurance companies provide enough value to their customers.

Expenses that qualify as improving the quality of care might include the following:

• Advancing health information technology to improve the following:
  • Quality of patient care
  • Transparency
  • Health outcomes
• Creating programs to support patient safety, such as reducing medical errors and mortality rates.
• Revising hospital discharge policies to reduce frequent hospital readmissions.
• Increasing the promotion of wellness programs.

Quality improvement activities must also meet the following standards:

• They must stand up to audit.
• They must be consistent each year.
• Improvements and services must aim to improve health quality and increase the likelihood of favorable patient outcomes.
• The services must be for health plan members and non-members (with no additional costs for non-members).
• The services must use evidence-based medicine, require clinical expertise, and follow best practices.

What are the medical loss ratio requirements for individual, small group, and large group insurers?

The ACA and some state laws set minimum MLR standards that differ for insurers that cover different markets.

Insurers that serve individual and small group markets must spend at least 80% of their premium income on medical-related expenses. This leaves 20% for administration costs. The ACA defines small groups as organizations with 50 or fewer full-time equivalent employees (FTEs). However, some states may define small groups as companies with fewer than 100 employees.

Insurers that serve the large group market segment, which includes organizations with more than 50 FTEs under the ACA, must spend at least 85% on medical-related expenses, leaving 15% for administrative costs. This is known as the “85% MLR rule.”

Insurers offering Medicare Part C and D plans must also meet 85% MLR standards.

States can also set higher MLR requirements than the federal government. For example, New York sets an MLR of 86% for managed care organizations (MCOs)².

In any case, if administrative expenses exceed those amounts, the insurer must pay a rebate to their policyholders.

How do you calculate a medical loss ratio?

To calculate a medical loss ratio, an insurer divides the cost of medical services by the total premiums collected over a specific period. Insurers subtract any state or federal taxes, licensing, and regulatory fees from premium revenue.

Let’s use the 85% MLR rule as an example. Suppose an insurer uses $850 of a customer’s $1,050 monthly premium to pay for medical claims and quality of care improvements. The insurer must also pay $50 in taxes and fees, so they subtract $50 from the premium. They then calculate their MLR by taking $850 divided by $1,000 ($1,050 minus $50 in taxes), which is 0.85, or 85%.

To make it easier, here is the equation and calculation of the example:

In this example, an MLR of 85% means the insurer spent 85 cents of every premium dollar on the patient’s medical services and quality improvements. They won’t be subject to any rebate payments.

Why are medical loss ratio rules important?

Regulation of MLRs is one of the most notable consumer protections in the ACA. While it’s an insurance company’s responsibility to track MLR, knowing how your insurer spends your premium should also matter to you as a policyholder.

In the sections below, we’ll review why MLR benefits you as a customer.

1. It improves transparency and accountability

The MLR standard doesn’t just require insurance companies to track their spending internally—they must also report it publicly. That means insurers must show how they spent every dollar of your health insurance premium annually.

You can check out your insurance company’s MLR and review their past expense reports using the medical loss ratio search tool on the Center for Medicare & Medicaid Services website³.

Each year's report is due by July 31 of the following year. For instance, an insurer must submit its yearly report for 2024 by July 31, 2025.

This public disclosure of how insurance companies spend their premium income is a great way to hold companies accountable. It also helps keep customers informed about which companies are compliant and provides a credible experience.

2. You can be sure your insurer spends your premium dollars wisely

While the MLR rule helps cushion an insurer’s losses over time, it also protects consumers against overpriced qualified health plans.

Medical costs have risen over the last several decades. So it’s comforting to know whether your insurance company is spending your hard-earned money on the medical expenses and healthcare quality improvements you rely on.

Additionally, the MLR rules are federal, meaning they apply to every state and health insurance issuer in the U.S. So, you’ll have peace of mind knowing that wherever you live, you can expect the same minimum standard for how your insurer will spend your premium dollars.

3. You may be eligible for a rebate payment

Health insurance carriers that fail to meet the MLR threshold must pay back excess profits through rebates to their policyholders. However, insurers don’t base annual rebates on a single year’s MLR. The ACA requires insurers to asses their MLR based on a three-year rolling average. For example, an insurer’s 2025 MLR would be calculated based on data from 2022, 2023, and 2024.

Let’s say you enrolled in health coverage from the individual market, and your insurer only reports a 78% MLR over the previous three years. Individual markets are subject to the 80% MLR rule, so your insurer must pay a 2% rebate to all its policyholders to make up the difference.

You would receive the cash rebate via check, direct deposit, or a reduction in your health insurance premium. For group plans, the rebate may go to the employer who paid the premium on behalf of their employees.

So, what would a 2% rebate payment look like for you in dollars? Insurance companies calculate the rebate based on your premium minus any taxes or fees they must pay.

The below chart is an example of an average rebate calculation using the 80% MLR rule:

An individual rebate of $19 might not sound like a lot. But they add up over time. Between 2012 and 2023, health insurers returned $11.8 billion in rebates to health plan members⁴.

The average rebate payment an individual receives will vary. But according to KFF, insurers estimate they will issue $1.1 billion in MLR rebate checks across all commercial markets in 2024, similar to the amounts in 2022 and 2023⁵. Experts anticipate the total amount of rebates between 2012 and 2024 will rise to about $13 billion.

Keep in mind that if an insurer owes a rebate of less than $5 to an individual or less than $20 to a group, they're not required to issue it.

Conclusion

It can be challenging to keep up with rising premium rates. However, MLR rules can help you guarantee your insurance company will use most of 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 to ensure that no American’s premium is gone to waste.

This article was originally published on July 18, 2021. It was last updated on November 15, 2024.

1. U.S. Healthcare System Comparison

2. MLR Calculation for New York

3. CMS - MLR Search Tool

4. ACA Rebates

5. KFF - MLR Rebates