What is “Medical Loss Ratio and why is this an important piece of Obamacare?
Obamacare requires companies selling individual and small group health insurance to have at least an 80% Medical Loss Ratio (MLR). Large group insurance must have at least an 85% MLR.
When an insurance company pays a “claim”, it is paying its part of your medical bill. Paying insurance claims is an expense to the insurance company. This expense is also called a “loss” for the insurance company.
The premium you pay to the insurance company for your health insurance policy is “revenue” for the company. Paying your claims is “a loss” for the company.
The medical loss ratio (MLR) is the total claims paid out by the company (its loss) divided by total revenue for the company. So if a company pays out $800,000 in claims and has $1 million in revenue, the MLR is 800,000 / 1,000,000 = .80 . The MLR is 80%.
An 80% MLR means a company has 20% of its revenue left over for administrative costs and profits.
As a result of Obamacare, if health insurance companies in the individual or small-group market have an MLR lower than 80%, they must provide rebates to the individuals and employers who bought their policies.
Most reputable companies have had MLRs around 80 – 85%, so Obamacare is not a big change for them. But there are insurance companies that have spent only 70%, or even less, of their revenue on claims.
The MLR rules went into effect in 2011. In 2012, over $1 billion in rebates were paid by insurance companies to individuals and employers. According the Kaiser Family Foundation data, 31% of people buying individual health insurance got rebates last year. About 28% of employers got rebates. In Texas 92% of people buying individual health insurance were expected to get a rebate in 2012. What this means is that people were overcharged for their insurance, so they got money back.
Looking ahead to 2014, insurance companies will set their premiums based on general assumptions (basically educated guesses) about what kind of people and how many people will sign up for their health insurance policies. If their rates are high and their MLR ends up below 80% (for individual or small group plans), the insurance companies will give people and employers some money back – and they will adjust their premiums for the following year. In this case, premiums would go down for 2015.