Medical Loss Ratio Requirements Under the
Patient Protection and Affordable Care Act
(ACA): Issues for Congress
Suzanne M. Kirchhoff
Analyst in Industrial Organization and Management
Janemarie Mulvey
Specialist in Health Care Financing
September 18, 2012
Congressional Research Service
7-5700
www.crs.gov
R42735
CRS Report for Congress
Pr
epared for Members and Committees of Congress

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Medical Loss Ratio Requirements Under the Patient Protection and Affordable Care Act

Summary
The 2010 Patient Protection and Affordable Care Act (ACA, P.L. 111-148, as amended) requires
certain health insurers to provide rebates to their customers for each year that the insurers do not
meet a set financial target called a medical loss ratio (MLR). At its most basic, an MLR measures
the share of a health care premium dollar spent on medical benefits, as opposed to company
expenses such as overhead or profits. For example, if total premiums collected are $100,000, and
$85,000 is spent on medical care, the MLR would be 85%. The ACA sets the minimum required
MLR at 80% for the individual and small group markets and at 85% for the large group market.
In general, the higher the MLR, the more value a policyholder receives for his or her premium
payment. Congress imposed the MLR in an effort to provide “greater transparency and
accountability around the expenditures made by health insurers and to help bring down the cost of
health care.” Insurers that fail to meet these minimum standards must provide rebates to
policyholders.
The Department of Health and Human Services (HHS), with input from state insurance
commissioners who are the main regulators of health insurance, issued rules for implementing the
provisions. These rules provided greater details for calculating the MLR and issuing rebate
payments. ACA allows companies to include quality improvements along with medical benefits
when calculating the MLR. In addition, state and local taxes and some licensing fees are
subtracted (i.e., disregarded) from expenses in the MLR formula. ACA’s requirements are
different from those imposed by state laws, which generally compare only medical claims to
premiums. Though a number of states have their own MLRs, the ACA is now the minimum
standard that must be met nationwide by certain health insurers. About 12.8 million U.S.
consumers were due more than $1.1 billion in ACA MLR rebate payments in August 2012, for an
average award of $151 per qualifying household. Employers or insurers can provide the rebates,
which are based on activity in 2011, via a check, an electronic deposit in a bank account, a
reduction in future insurance premiums in the amount of the rebate, or by spending the funds for
the benefit of employees. About 66.7 million people were insured by covered companies that met
or exceeded MLR standards for 2011, and will not receive rebates.
The MLR is based on the aggregate performance of a health plan, not individual policy history.
Even if a beneficiary had no medical claims during a given year, he or she would not receive a
rebate if the broader plan met the MLR requirements. In addition, many Americans were enrolled
in health plans that were not covered by the ACA MLR provisions in 2011. The ACA MLR
provisions cover only fully funded health plans, which are plans where insurance companies
assume the full risk for medical expenses incurred. The requirements do not extend to self-funded
plans, which are health care plans offered by businesses in which the employer assumes the risk
for, and pays for, medical care. Non-profit insurers and some Medicare Advantage plans were not
covered by the ACA MLR standards in 2012, though the MLR provisions will be phased in
during 2013 and 2014, respectively. In addition, some states won special exceptions for individual
insurance policies, based on an HHS determination that meeting the MLR requirement would
harm a state’s insurance market.
Several issues have been raised about the MLR provisions since the ACA was enacted. These
include considerations regarding the treatment of insurance agent and broker bonuses and
commissions, the impact of the MLR on insurers that provide high deductible plans, and special
rules for non-profit health insurers.
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Medical Loss Ratio Requirements Under the Patient Protection and Affordable Care Act


Contents
Introduction...................................................................................................................................... 1
MLR Reporting Requirements Under ACA .................................................................................... 2
Minimum Standards Required................................................................................................... 2
Timeline for Compliance........................................................................................................... 3
Who Must Comply .................................................................................................................... 3
Components of the MLR Formula............................................................................................. 5
Medical Claims and Quality Improvement Expenditures ................................................... 5
Premiums and Taxes, Licensing and Regulatory Fees ........................................................ 9
Adjustments for Plan Size and Deductible .............................................................................. 11
State Flexibility and Waivers................................................................................................... 12
Rebates to Policyholders................................................................................................................ 13
Calculation of the Rebate ........................................................................................................ 14
Who Is Eligible for Rebate? .................................................................................................... 14
Group Policy Rebates........................................................................................................ 14
Notification Requirements ................................................................................................ 16
Amount of 2011 Rebates ......................................................................................................... 16
Issues for Congress ........................................................................................................................ 18
Brokers’ Commissions............................................................................................................. 18
High Deductible Health Plans ................................................................................................. 19
MLR for Non-profit Insurers................................................................................................... 20

Figures
Figure 1. Impact of Changes to Numerator on MLR....................................................................... 6
Figure 2. Impact of Changes to Denominator on MLR................................................................... 9
Figure 3. Average MLR Rebates Per Family, 2012 ...................................................................... 18
Figure A-1. Rebates by State ......................................................................................................... 22

Tables
Table 1. Base Credibility Factors for Calculating MLR ................................................................ 11
Table 2. Deductible Factors to Adjust MLR .................................................................................. 12
Table 3. HHS Individual Insurance Market Waivers ..................................................................... 13
Table 4. Amount of MLR Rebates Due on August 1, 2012 ........................................................... 17
Table B-1. State MLR Policies Prior to ACA ............................................................................... 24

Appendixes
Appendix A. Rebates by State ....................................................................................................... 22
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Medical Loss Ratio Requirements Under the Patient Protection and Affordable Care Act

Appendix B. State MLRs............................................................................................................... 23
Appendix C. Mini Med and Expatriate Plans ................................................................................ 25

Contacts
Author Contact Information........................................................................................................... 26

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Medical Loss Ratio Requirements Under the Patient Protection and Affordable Care Act

Introduction
Health insurance provides protection against the financial risk associated with the cost of illness
or injury that could impose a burden on consumers. Those who enroll in health insurance policies
pay a premium for a specified set of benefits. When insurers set a premium, they include not just
the cost of the health care benefits, but also other costs such as overhead. In broad terms, a
medical loss ratio (MLR) measures the share of enrollee premiums that health insurance
companies spend on medical claims, as opposed to other non-claims expenses such as
administration or profits. Historically, a number of states, as the primary regulators of health
insurance, have had their own MLR requirements, which they use to evaluate companies and
compare health plans. (See Appendix B for data on state MLRs.) Private entities, such as stock
and bond analysts and lenders, also use MLRs when assessing the financial performance of health
insurers.1
In general, the higher a plan’s MLR, the more value a consumer is receiving (i.e., the more each
dollar of premiums paid goes toward health benefits and not toward overhead). The MLR is based
on a health plan’s overall performance, however, not on individual experience. It is an aggregate
measure that in general terms compares the benefits paid to aggregate premiums.
Section 1001 of the Patient Protection and Affordable Care Act (ACA, P.L. 111-148, as
amended)2 imposes a new federal, minimum MLR requirement on fully funded health plans,
which are plans where insurance companies assume the full risk for medical expenses incurred.3
Each year that these insurance companies do not meet MLR standards established by ACA for
individual, small group, and large group policies, they must issue rebates to policyholders. The
ACA MLR requirement allows insurers to add certain quality improvements to the health benefits
calculation, while letting companies disregard certain taxes, fees, and other expenses when
calculating non-claims expenses.4 The MLR requirement is intended to provide “greater
transparency and accountability around the expenditures made by health insurers and to help
bring down the cost of health care.”5

1 Companies that use MLR data to help assess the financial strength of insurers include financial analysts employed by
firms such as the Sherlock Company and Standard & Poor’s.
2 Additionally, HHS issued the following regulations to implement the ACA MLR provisions: 45 CFR Part 158,
“Health Insurance Issuers Implementing Medical Loss Ratio (MLR) Requirements Under the Patient Protection and
Affordable Care Act; Interim Final Rule,” December 1, 2010, http://www.gpo.gov/fdsys/pkg/FR-2010-12-01/pdf/2010-
29596.pdf; 45 CFR Part 158, “Health Insurance Issuers Implementing Medical Loss Ratio (MLR) Requirements Under
the Patient Protection and Affordable Care Act; Corrections to the Medical Loss Ratio Interim Final Rule With Request
for Comments,” December 30, 2010, http://www.gpo.gov/fdsys/pkg/FR-2010-12-30/pdf/2010-32526.pdf; 45 CFR Part
158 “Medical Loss Ratio Rebate Requirements for Non-Federal Governmental Plans; Interim Final Rule,” December 7,
2011, http://www.gpo.gov/fdsys/pkg/FR-2011-12-07/pdf/2011-31291.pdf: 45 CFR Part 158, “Medical Loss Ratio
Requirements Under the Patient Protection and Affordable Care Act, Final Rule,” May 16, 2012, http://www.gpo.gov/
fdsys/pkg/FR-2012-05-16/pdf/2012-11753.pdf; and 45 CFR Part 158, “Health Insurance Issuers Implementing Medical
Loss Ratio (MLR) Under the Patient Protection and Affordable Care Act; Correcting Amendment,” May 16, 2012,
http://www.gpo.gov/fdsys/pkg/FR-2012-05-16/pdf/2012-11773.pdf.
3 In fully funded insurance plans employers purchased health coverage from insurance underwriters that assume the full
financial risk for claims made under the plan—that is, the risk that benefits paid out could exceed premiums paid in. In
self-funded health plans, most often used by large employers, companies use their own assets to cover risk and may
purchase stop-loss insurance from outside companies to limit their overall liability. Self-funded plans;’ are not subject
to the same state insurance regulations as fully funded plans.
4 See §2718(a) of the Public Health Service Act (PHS).
5 Department of Health and Human Services, 45 CFR Part 158, “Health Insurance Issuers Implementing Medical Loss
(continued...)
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The ACA MLR provisions took effect in calendar year 2011. The Department of Health and
Human Services (HHS) in July 2012 announced that, based on 2011 performance, insurers
covered by the law would be required to issue about $1.1 billion in rebates to 12.8 million
individuals by August 1, 2012.6 About 80 million people were covered by insurance plans subject
to the MLR standards in 2011. Of that total, about 66.7 million were insured by companies that
met the MLR standards, and 12.8 million, or 14%, were covered by companies that did not.7
This report provides a detailed description of the ACA requirements for MLR reporting and
rebates as specified in regulations, including
• MLR reporting requirements under ACA,
• components of the MLR formula,
• state flexibility and waivers, and
• nature of rebates to policyholders.
The report also addresses issues that have been raised about the MLR provisions since the ACA
was enacted. These include considerations regarding the treatment of insurance company bonuses
and commissions, the impact of the MLR on insurers that provide high deductible plans, and
special rules for non-profit health insurers.
MLR Reporting Requirements Under ACA
Minimum Standards Required
The ACA MLR standards require that covered insurers in the individual and small group markets
meet a minimum MLR of 80%. For insurers that sell large group plans, the minimum MLR is
85%. The higher MLR requirement for the large group market accounts for economies of scale; in
other words, it is more efficient to sell insurance to a large company that will offer coverage for
many individuals and families than it is to have to market a product to one individual at a time, or
to firms that cover a smaller group of individuals. Thus, the higher MLR standard for large
companies reflects their assumed lower administrative costs.
For purposes of calculating the MLR, the ACA defines large group policies as policies sold to
employers with more than 100 workers, and small group policies as those of up to and including

(...continued)
Ratio (MLR) Requirements Under the Patient Protection and Affordable Care Act; Interim Final Rule,” Federal
Register, December 1, 2010, p. 74864 -74934; https://www.federalregister.gov/articles/2010/12/01/2010-29596/health-
insurance-issuers-implementing-medical-loss-ratio-mlr-requirements-under-the-patient. The rule states that the ACA
MLR provisions have two purposes, “The first is the establishment of greater transparency and accountability around
the expenditures made by health insurance issuers ... The second is the establishment of MLR standards for issuers,
which are intended to help ensure policyholders receive value for their premium dollars.”
6 Department of Health and Human Services, “The 80/20 Rule: Providing Value and Rebates to Millions of
Consumers,” http://www.healthcare.gov/law/resources/reports/mlr-rebates06212012a.html#individual.
7 Ibid. In addition, seven states received special waivers from the HHS to set lower standards for individual policies,
based on evidence that the ACA requirements could have disrupted the individual health insurance market in their
states. See “State Flexibility and Waivers.”
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100 workers.8 Individual policies can be policies bought through an insurance agent or broker, or
through an association that is not part of a larger group policy. Once health insurance exchanges
are established in 2014, an individual plan could be one purchased through an exchange.9
In addition, MLR reporting requirements exclude premiums and claims experience of newly
introduced health insurance offerings, under certain circumstances.10
Timeline for Compliance
Under ACA, health insurers were required to provide their first MLR reports to the HHS by June
1, 2012, detailing financial activity for 2011.11 Each insurer covered by the law must report
aggregated activity within each state for the three market segments: large group, small group, and
individual policies. If a group policy covers workers in more than one state, the activity is
recorded in the state where the policy is issued.12 Going forward, the ACA requires annual reports
by June 1 of the year following the calendar year on which the MLR calculation is based. The
rules to implement the ACA MLR policies allow penalties to be imposed on companies that do
not comply with reporting, auditing, rebate, or other requirements, equal to $100 per entity per
affected individual each day the insurer is out of compliance.13
Who Must Comply
The ACA generally requires fully funded health insurers offering coverage (including
grandfathered health plans)14 to report their MLRs. For-profit, fully funded insurers had to
provide their first MLR reports to HHS by June 1, 2012, and were required to issue rebates by
August 1, 2012. While non-profit insurers also are required to report their MLR, their actual MLR
computation is different than for-profit insurers’.15 The MLR reporting requirement for non-

8 Prior to passage of the ACA, some states identified businesses with 51 or more workers as large group plans and those
with 50 or less as small groups. Some states also regulate very small groups (one person) as small groups. The HHS
regulations allow states, until 2016, to continue to define large groups as those with 51 or more workers. Other
provisions of the ACA use different definitions of small and large group plans.
9 CRS Report R42663, Health Insurance Exchanges Under the Patient Protection and Affordable Care Act (ACA), by
Bernadette Fernandez and Annie L. Mach
10 Under the regulation, an insurance company is allowed to defer, until the next MLR reporting year, activity from new
policies issued after the first of the year, if the new policies make up more than half a company’s overall premium
revenue for a market segment in an individual state.
11 Companies are required to report calendar year activity when calculating the MLR, rather than using plan year,
corporate fiscal year, or other alternatives.
12 Unless the policy is offered through multiple subsidiaries in various states.
13 Department of Health and Human Services, 45 CFR Part 158, “Health Insurance Issuers Implementing Medical Loss
Ratio (MLR) Requirements Under the Patient Protection and Affordable Care Act; Interim Final Rule,” Federal
Register, §158.606, December 1, 2010, p. 74890; https://www.federalregister.gov/articles/2010/12/01/2010-29596/
health-insurance-issuers-implementing-medical-loss-ratio-mlr-requirements-under-the-patient.
14 The ACA defines a grandfathered health plan as coverage provided by a group health plan, or a group or individual
health insurance issuer, in which an individual was enrolled on March 23, 2010 (for as long as it maintains that status
under the rules of the ACA). A group health plan or group health insurance coverage does not cease to be
grandfathered health plan coverage merely because one or more (or even all) individuals enrolled on March 23, 2010,
cease to be covered. A number of ACA provisions apply to all plans, which includes grandfathered plans, but some
provisions apply only to new plans.
15 §9016(a) of ACA (P.L. 111-148) amends Internal Revenue Code §833(c) adding paragraph (5).
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profits has been delayed a year (making it effective in 2013) due to a number of issues that are
being worked out regarding the actual computation of their MLR (see the “Issues for Congress”
section of this report for greater details).16
The ACA imposes separate MLR standards for Medicare Advantage Plans, which are plans that
provide private insurance options, such as managed care, to Medicare beneficiaries enrolled in
both Medicare Parts A and B.17 Effective in 2014, the ACA requires Medicare Advantage plans to
achieve a minimum MLR of 85%. Plans that do not meet this standard will have to pay HHS an
amount equal to their total revenue multiplied by the difference between the 85% goal and their
actual MLR. If a plan’s MLR is below 85% for three consecutive years, enrollment will be
restricted. A Medicare Advantage plan contract will be terminated if the plan is out of compliance
for five consecutive years.18 Further guidance for the MLR calculation for Medicare Advantage
plans will be specified in future regulations.
The HHS in its final rules provided additional adjustments to the MLR formula for two less
common types of health insurance: expatriate and mini-medical policies. Expatriate plans are
group policies that can cover employees working outside their home country or non-U.S. citizens
working for American firms in their home country. Mini-medical plans are policies that do not
cover the wide range of services of comprehensive health plans. Because of the unique
characteristics of these plans, HHS determined that insurers would have difficulty meeting
minimum MLR requirements. (See Appendix C.)
The MLR requirement does not apply to self-funded19 plans, which are health care plans offered
by businesses in which the employer assumes the financial risk for medical care. During 2010,
57.5% of private sector insurance enrollees were covered through self-funded plans.20
Medigap plans, which are supplemental policies that Medicare beneficiaries can purchase to fill
gaps in Medicare coverage, are not covered by the ACA MLR provisions. Medigap plans are
subject to their own separate MLR requirements, found in Title 18 of the Social Security Act; the
MLR requirements are 65% in the individual marketplace and 75% in the group market.
Finally, the ACA’s MLR requirements do not apply to long-term care, dental, vision, or retiree
health insurance.

16 Internal Revenue Service (IRS), Notice 2012-37, “Extension of Interim Guidance on Modification of Section 833
Treatment of Certain Health Organizations,” June 11, 2012, http://www.irs.gov/irb/2012-24_IRB/ar07.html. The IRS is
accepting comments on proposed final rules until September 10, 2012. The ACA, in what some lawmakers have called
a drafting error, based the MLR for certain non-profit plans solely on reimbursement for medical services, without
consideration for quality improvements. The IRS has issued proposed regulations to reconcile the differences and build
on the experience of other insurance plans. Certain non-profit health plans, such as some Blue Cross and Blue Shield
plans, fall under the IRS regulatory umbrella because failure to meet the set MLR will result in changes in their tax
treatment.
17 See §1103, Health Care Reconciliation Act (P.L. 111-152).
18 CRS Report R41196, Medicare Provisions in the Patient Protection and Affordable Care Act (PPACA): Summary
and Timeline, coordinated by Patricia A. Davis. See Appendix A, p. 50.
19 Employers who offer self-funded plans are assuming the “risk” for paying for medical claims, it is in their own best
interest to do so.
20 Beth Crimmel, “Self-Insured Coverage in Employer-Sponsored Health Insurance for the Private Sector, 2000 and
2010,” Medical Expenditure Panel Survey, Agency for Healthcare Research and Quality, September, 2011,
http://meps.ahrq.gov/mepsweb/data_files/publications/st339/stat339.pdf.
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Components of the MLR Formula
The federal MLR represents the percentage of premium dollars spent on medical claims and
quality improvement activities. Mathematically, the formula for calculating the MLR is displayed
in the text box below. The numerator is the sum of medical claims plus quality improvement
expenditures. (This differs from state insurance regulators’ approach, where the numerator is only
medical claims.) The federal MLR denominator is earned premiums21 minus taxes, licensing, and
regulatory fees.
Formula for Calculating the MLR
NUMERATOR: Medical Claims + Quality Improvement Expenditures
Divided by:
DENOMINATOR: Earned Premiums - Taxes, Licensing and Regulatory Fees
Specific details about how each of these components is defined and measured are important in
deriving the MLR for each insurer and, thus, the potential rebate to policyholders. The ACA
directed the National Association of Insurance Commissioners (NAIC)22 to recommend what
factors should go into each component of the MLR formula. In December 2010, HHS published
interim final regulations to implement the MLR provisions, based largely on a model regulation
drafted by the NAIC. Since then, HHS has issued corrections and amplifications to the rule,
including a final regulation on May 16, 2012.23 The following sections provide greater detail on
each of the components of the MLR formula, as described in the HHS regulations.
Medical Claims and Quality Improvement Expenditures
As illustrated in Figure 1, increases in either medical claims or quality improvement expenditures
(holding other factors constant) will increase the MLR and reduce the likelihood of premium
rebates to policyholders. Conversely, reductions in medical claims and/or quality improvement
expenditures (holding other factors constant) will decrease the MLR and increase the likelihood
that insurers will have to provide rebates to policyholders.

21 The amount of a premium that an insurer can consider earned is based on the time elapsed on a policy. In a simple
example, if a person pays a $1000 premium for a two-year policy and a year has elapsed with no claims paid, the
insurer has earned 50% of $1,000, or $500.
22 Most insurance regulation is carried out at the state level. The National Association of Insurance Commissioners is
an organization of the chief insurance regulators of the 50 states, the District of Columbia and five U.S. territories. The
NAIC, founded in 1871 to coordinate insurance regulation, sets standards and best practices for insurance products.
23 See footnote 2 for complete listing of all federal regulations relating to the MLR requirements.
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Figure 1. Impact of Changes to Numerator on MLR
(Holding Other Factors Constant)

Source: Congressional Research Service.
Notes: There are a number of other combinations of changes in the numerator and the denominator that could
affect the MLR. The chart is intended to be illustrative of some, not all, of the possibilities.
Medical Claims
The definition of medical claims (also called health care benefits or clinical services) is based on
direct claims incurred (prior to reinsurance) during the applicable MLR reporting year with
adjustments for reserves.24 In addition, MLR rebates to policyholders are excluded from the
medical claims measure. This prevents insurers from passing on the costs of any rebates to
policyholders in subsequent years. The text box below shows the specific definition of medical
claims as adopted by HHS per the NAIC recommendation.
Definition of Medical Claims
Incurred claims = direct claims incurred in MLR reporting year + unpaid claim reserves associated with claims
incurred + change in contract reserves + claims-related portion of reserves for contingent benefits and lawsuits +
experience-rated refunds (exclude rebates based on issuers MLR).
Medical claims are adjusted by three different reserve measures: (1) unpaid claims reserves, (2)
contract reserves, and (3) claims-related reserves for contingent benefits and lawsuits. Unpaid
claims reserves are premium funds that are set aside by insurers to cover claims that were
incurred during a reporting period, but had not been paid by the date on which the required report
was prepared.25 Similarly, contract reserves are established to account for the value of future
benefit payments. As a policy matures, the reserves set aside at the introduction of the policy are

24 Reinsurance is sometimes described as insurance for insurers. Since the reinsurer assumes the responsibility for
claims, they should not be included in the MLR for the insurer’s direct business.
25 Unpaid claims reserves are required to be calculated based on claims that have been processed within three months
after the end of the MLR reporting year.
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used to cover claims that are submitted in the future. For example, an issuer may establish
contract reserves to reduce the need to increase premiums for a newly introduced product as the
policy matures and more claims are incurred.
The third reserve adjustment includes the claims-related portion of reserves for contingent
benefits and lawsuits. These funds are set aside for a future event which may be beyond the
control of the insurance company, such as deferred maternity benefits or potential outcome of a
lawsuit.
There was concern from consumer groups when the regulations were initially promulgated that
reserves could be manipulated and, in particular, overstated, which would lead to a reported MLR
for a given year that was higher than the true MLR for that year. However, the NAIC and HHS
concur that, over the long run, such over-reserving for one year necessarily results in a reduction
or releasing of reserves in future years.
Prescription Drug Costs
The NAIC recommended, and HHS agreed, that prescription drug costs should be included in
incurred claims, while prescription drug rebates should be deducted from incurred claims.
Prescription drug rebates are rebates that pharmaceutical companies pay to insurers when
enrollees fill their prescriptions at participating pharmacies.
Quality Improvement Expenditures
The ACA allows insurers to include spending for quality improvements in the numerator for
calculating the MLR. In other words, companies can meet the federal MLR medical claims
requirement, in part, by increasing activities designed to enhance the quality of their insurance
products. Thus, the actual definition of what qualifies as a quality expenditure is important to the
MLR calculation. Companies must submit annual data to the Secretary of HHS detailing the
amount of premium revenue dedicated to quality improvements. To be classified as a quality
initiative, spending must meet four specific criteria developed by the NAIC. An activity must
• improve health outcomes by implementing activities such as quality reporting,
effective case management, care coordination, chronic disease management, or
medication and care compliance initiatives;
• implement activities to prevent hospital readmissions including a comprehensive
program for hospital discharge that includes patient education and counseling,
discharge planning, and post-discharge follow-up by an appropriate health care
professional;
• implement activities to improve patient safety and reduce medical errors through
the use of best clinical practices, evidence-based medicine, and health
information technology under the plan or coverage; and
• implement wellness and health promotion activities.
In addition, the HHS rules state that a non-claims expense will be counted as a quality
improvement only if it falls into one of the four categories above, and also meets all the following
requirements. An expense must be
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• designed to improve health care quality;
• designed to increase the likelihood of desired health outcomes in ways that can
be objectively measured and that can produce verifiable results and
achievements;
• directed toward individual enrollees or incurred for specific segments of
enrollees or provide health improvements to the population beyond those
enrolled in coverage, so long as no additional costs are incurred due to the non-
enrollees; and
• grounded in evidence-based medicine, widely accepted best clinical practice, or
criteria issued by recognized professional medical associations, accreditation
bodies, government agencies, or other nationally recognized health care quality
organizations.
ICD-10 Implementation As Quality Improvement
HHS will allow insurers to count a certain percentage of their ICD-10 conversion costs as a
quality improvement activity. ICD refers to the International Statistical Classification of Disease
and are alphanumeric designations given to every diagnosis, description of symptoms, and cause
of death. ICD codes are widely used in medical billing by insurers, as well as for research and
other purposes. These codes will become increasingly important as electronic medical records are
implemented.
HHS had initially proposed that health insurers would have to convert their billing systems from
ICD version 9 (ICD-9) to ICD version 10 (ICD-10) by October 1, 2013. However, they have
extended that deadline to October 1, 2014. For an insurer’s MLR calculation, HHS has stated that
ICD-10 conversion costs that account for up to 0.3% of an insurer’s premium revenue can be
counted as quality improvement activities for the 2012 and 2013 reporting years, which could
increase their MLR slightly. Any additional costs for ICD-10 maintenance and claims
adjudication systems would count as administrative costs under the MLR rule. To the extent these
additional costs exceed 0.3%, they would reduce the denominator and could reduce the MLR.
Treatment of Fraud Reduction and Prevention Activities Relative to Quality
Expenditures
One issue that has been raised in defining quality expenditures is the treatment of fraud reduction
and prevention activities and whether these activities are part of the allowable quality
improvement spending.26 HHS in its final rules agreed to let insurers count money recovered from
fraud and abuse initiatives toward the MLR requirement for medical benefits spending, but did
not allow companies to count broader fraud prevention activities.27 In making this decision, HHS
stated that:

26 America’s Health Insurance Plans, “Interim Final Rule – Medical Loss Ratio Requirements,” January 31, 2011,
http://www.ahip.org/Issues/Medical-Loss-Ratio.aspx.
27 Department of Health and Human Services, 45 CFR Part 158, “Medical Loss Ratio Rebate Requirements for Non-
Federal Governmental Plans; Interim Final Rule,” Federal Register, December 7, 2011, p. 76596-76600; and
America’s Health Insurance Plans, “Medical Loss Ratio,” http://www.ahip.org/Issues/Medical-Loss-Ratio.aspx The
amount of claim payments recovered through fraud reduction efforts, not to exceed the amount of fraud reduction
(continued...)
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The current treatment of fraud reduction efforts under the MLR rule is consistent with the
NAIC’s position and adequately addresses the concerns of issuers, while still recognizing
that many fraud prevention efforts are not directly targeted toward quality improvement....
Thus, allowing payments recovered through fraud reduction efforts as adjustments to
incurred claims gives issuers the opportunity to recoup monies invested to deter fraud.28
This means that to the extent that insurers can recover money from fraud and abuse initiatives,
this can increase their MLR. However, expenses for broader fraud prevention activities (such as
medical review or provider auditing) would be part of administrative expenses in the
denominator. In this case, all other elements equal, increases in these expenditures could lower
(and not raise) the MLR.
Premiums and Taxes, Licensing and Regulatory Fees
A key part of the MLR calculation is the definition of premiums, which is in the denominator of
the MLR formula. Holding medical claims and quality improvement constant, an increase in
premium revenues lowers the MLR, while a reduction in premium revenues raises the MLR. (See
Figure 1.) The ACA also allows insurers to subtract certain taxes, licensing, and regulatory fees
from premiums, which can further increase the MLR amount (and reduce the likelihood of paying
rebates). The following provides greater detail on how premiums, taxes, and licensing and
regulatory fees are defined in the MLR calculation.
Figure 2. Impact of Changes to Denominator on MLR
(Holding Other Factors Constant)

Source: Congressional Research Service.

(...continued)
expenses, can be included in incurred claims. Fraud reduction efforts include fraud prevention as well as fraud
recovery. In addition, the interim final rule provides that fraud prevention activities are excluded from the quality
improvement activities.
28 Department of Health and Human Services, 45 CFR Part 158, “Medical Loss Ratio Rebate Requirements for Non-
Federal Governmental Plans; Interim Final Rule,” Federal Register, December 7, 2011, p. 76596-76600.
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Premiums
Premiums are calculated based on earned premiums, and are defined as the sum of all monies
paid by a policyholder in order to receive coverage from a health insurer. Thus, an earned
premium is any fee or other contribution associated with a health plan, with some distinctions:
• Earned premiums exclude premium assessments paid to, or subsidies received
from, federal and state high risk insurance pools created by the ACA.29
• Earned premiums exclude adjustments for retroactive rate reductions.30
• Earned premiums are to be reported before insurers deduct premium discounts
for enrollees for health and wellness promotion.31
• Earned premiums should be direct (excluding reinsurance).32
Taxes, Licensing and Regulatory Fees
Taxes, licenses, and regulatory fees are subtracted from premiums under the MLR formula.33
Since they reduce premium revenue, higher taxes and fees can raise the MLR (assuming all other
components hold steady). See Figure 1.
Federal taxes are defined by HHS as all federal taxes and assessments allocated to health
insurance coverage that is subject to the MLR reporting requirements under ACA. Federal income
taxes on investment income and capital gains are excluded from this component as they are not
considered taxes on premium revenues and, thus, should not be used to adjust premium revenues.
HHS also requires insurers to report state taxes and assessments separately, including any
industry-wide (or subset) assessments (other than surcharges on specific claims) paid to a state
directly, or any premium subsidies designed to cover the cost of providing indigent care, or other
access to care, throughout a state.
Licensing and regulatory fees that must be reported as an adjustment to premium revenue include
statutory assessments and examination fees in lieu of premium taxes. However, fines and
penalties of regulatory authorities, and fees for examinations by state and federal departments
other than those referenced above, must be separately reported, but may not be used as an
adjustment to premium revenue.

29 See Appendix B of CRS Report R42663, Health Insurance Exchanges Under the Patient Protection and Affordable
Care Act (ACA), by Bernadette Fernandez and Annie L. Mach for more information about the risk programs in ACA.
30 In retrospectively rated contracts, insurers charge an initial, estimated premium. The final premium is based in part
on actual claims and other experience during the time the policy was in place.
31 Since these discounts are considered quality improvements (and are included in the numerator), if they are also used
to reduce premiums in the denominator this would lead to double counting. Therefore, they are excluded from earned
premiums in the denominator.
32 Reinsurance is sometimes described as insurance for insurers. Under a reinsurance contract one insurance company
(the reinsurer) charges a premium to compensate another insurance company for all or part of the losses that insurer
could sustain under the policies it has issued. Reinsurance contracts can be written to cover a specific risk or a broad
category of activity. Premiums for reinsurance do not represent premiums for active claims behavior under the MLR.
33 §2718(a) of PHS Act.
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Adjustments for Plan Size and Deductible
The ACA requires that the MLR calculation include methodologies to account for the special
circumstances of smaller plans, different types of plans, and newer plans. To that end, the NAIC
recommended, and HHS adopted, two “credibility adjustments” designed to address issues
associated with random variation in claims data.
The first credibility adjustment is intended to address health insurance plans with low enrollment.
The rationale for the credibility adjustments is that smaller plans may have more variability in
annual claims, making it harder for them to plan for the MLR.
Table 1 specifies the credibility adjustments based on life years34 that insurers are permitted to
use to adjust their MLR upward. For example, an insurer with an MLR of 79% would be below
the MLR standard of 80% for a small group. However, if the insurer covered 50,000 life years, it
could increase its MLR calculation by the adjustment factor shown in Table 1 of 1.2%. The
adjustment calculation would be 79% times 1.012, resulting in an adjusted MLR of 80%, which
would then meet the minimum standard required for small group plans.
Table 1. Base Credibility Factors for Calculating MLR
Life Years
Base Credibility Factor
<1,000
Not Credible
1,000 8.3%
2,500 5.2%
5,000 3.7%
10,000 2.6%
25,000 1.6%
50,000 1.2%
75,000 0.0%
Source: Department of Health and Human Services, December 1, 2010, MLR Interim Rule.
Notes: A life year is equal to the number of months of enrollee coverage divided by 12. The credibility factor is
a multiplier.
A second credibility adjustment is available for insurers who have a large share of high
deductible health plans (HDHPs).35 HDHPs tend to have a more variable (and uncertain) claims
experience than other plans. Specifically, for high deductible plans, fewer policyholders have
claims in a year, but for those with claims the claim amounts are generally higher, as compared to
lower deductible plans.

34 A life year is equal to the number of months of enrollee coverage divided by 12.
35 A high deductible health plan (HDHP) is a plan with lower premiums and higher deductibles than traditional health
insurance. Consumers may face larger out-of pocket costs under such HDHPs, depending on their health needs. An
individual with a HDHP may set up a health savings account. See CRS Report RL33257, Health Savings Accounts:
Overview of Rules for 2012, by Janemarie Mulvey.
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To address this variability, there is a deductible adjustment to the MLR calculation, which is
based on the average deductible of all policies for which experience is included in the reported
MLR (see Table 2). This potentially increases the credibility adjustments by a multiplier of 1.0 to
1.736. This deductible factor is multiplied by the base credibility adjustment factors in Table 1
above.
As an example, suppose a small group plan (with only 50,000 lives) that sold a large share of
HDHPs initially had an unadjusted MLR of 61%. This unadjusted MLR would not meet the
minimum standard of 80%. However, in this case the insurer is allowed to apply two adjustments.
Because it has only 50,000 lives, it can use the base credibility factor of 1.012 adjustment. Next,
because it has an average deductible of $5,000, it can use the deductible factor of 1.402 as shown
in Table 2. The combination would lead to a final, adjusted MLR of 1.012 times 1.402, which is
equal to 1.4188. This adjustment would raise their MLR to 86.5% and the insurer would more
than meet the minimum MLR requirement. It is important to note that the deductible factor would
not apply to insurers with more than 75,000 life years (e.g., 0.0 times 1.402= 0).
Table 2. Deductible Factors to Adjust MLR
Deductible Deductible
Factor
$0 1.000
$2,500 1.164
$5,000 1.402
$10,000 1.736
Source: Federal Register, Vol. 75, No. 230, December 1, 2010, p. 74882
Notes: If the average deductible falls within the categories, the insurer is to calculate the deductible adjustment
based on linear interpolation. The factor is a multiplier.
According to the Government Accountability Office (GAO), HHS estimates indicate that about
half of insurers that offered plans in the small and large group markets, and about a third of
insurers that offer plans in the individual market in 2011 would be eligible for a credibility
adjustment to their MLR.36
State Flexibility and Waivers
The ACA gave the HHS Secretary the authority to adjust the 80% MLR standard for the
individual health insurance market if the Secretary determined that applying the standard could
destabilize the individual market in a given state.37 In general, states were allowed to request an
MLR adjustment for up to three years. The ACA regulations allowed the HHS to consider a set of
factors, including (1) the number of insurers likely to exit a state or to cease offering coverage
absent an adjustment to the MLR; (2) the number of individual market enrollees covered by
insurers reasonably likely to exit the state; (3) the impact of the MLR standard on consumer

36 Government Accountability Office Letter to Rep. Robert Andrews, Subject: “Private Health Insurance: Early
Indicators Show That Most Insurers Would Have Met or Exceeded New Medical Loss Ratio Standards,” October 31,
2011, http://www.gao.gov/new.items/d1290r.pdf.
37 See §2718(b)(1)(A)(ii) of the PHS Act. The ACA did not provide authority to provide waivers of the MLR standard
for the small and large group markets.
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access to insurance agents and brokers; (4) alternate coverage options in a state; (5) the impact on
premiums and on benefits to remaining consumers if insurers withdrew from the market; and (6)
any other relevant information submitted by a state’s insurance commissioner.38 HHS issued
decisions on waivers based on the timing of state applications, completing the process in early
2012.39
According to HHS, 17 states and a territory requested adjustments to the federal MLR for the
individual market.40 Seven states were granted an adjustment: Georgia, Iowa, Kentucky, Maine,
Nevada, New Hampshire, and North Carolina. Ten states and a territory were denied an
adjustment: Delaware, Florida, Guam, Indiana, Kansas, Louisiana, Michigan, North Dakota,
Oklahoma, Texas, and Wisconsin.41 See Table 3 for information on the alternative MLR rates in
effect in states that have been granted a waiver.
Table 3. HHS Individual Insurance Market Waivers
Alternative MLRs for states that received waivers from 2011-2013.
State
2011
2012
2013
Georgia
70%
75%
80%
Iowa 67%
75%
80%
Kentucky 75% 80% 80%
Maine
65%
65%
65%a
Nevada
75%
NAb
NAb
New Hampshire
72%
75%
80%
North Carolina
75%
80%
80%
Source: HHS. For more detail on individual state waivers and applications go to http://cciio.cms.gov/programs/
marketreforms/mlr/state-mlr-adj-requests.html.
a. Third year depends on data submission.
b. Nevada asked for only a one-year waiver.
Rebates to Policyholders
Health insurers that fail to meet the minimum MLR requirements in the ACA must provide
rebates to policyholders. Rebates are to be issued by August 1 each year following the calendar
year used in calculating the MLR. Insurers were required to issue rebates for calendar year 2011

38 Department of Health and Human Services, 45 CFR Part 158, “Health Insurance Issuers Implementing Medical Loss
Ratio (MLR) Requirements Under the Patient Protection and Affordable Care Act; Interim Final Rule,” Federal
Register, December 1, 2010, (§158.310-158.311); https://www.federalregister.gov/articles/2010/12/01/2010-29596/
health-insurance-issuers-implementing-medical-loss-ratio-mlr-requirements-under-the-patient.
39 Centers for Medicare & Medicaid Services, “State Requests for MLR Adjustment,” http://cciio.cms.gov/programs/
marketreforms/mlr/state-mlr-adj-requests.html.
40 Ibid.
41 Department of Health and Human Services, “2011 Issuer MLR Rebate Estimates in States that Applied for an MLR
Adjustment,” Table of States Requesting Rebates, http://cciio.cms.gov/programs/marketreforms/mlr/rebate-
estimates.html.
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premiums by August 1, 2012. Policyholders include employers and individuals, and there are
slightly different procedures between employer-sponsored plans and those in the individual
market, as discussed below.
Calculation of the Rebate
Rebates are based on aggregate data from all of an insurer’s plans in the three market categories
(large market, small market, and individual market) in each state. HHS does not distinguish
between the relative efficiency of different plans offered by the same insurer in the same market.
For example, if the aggregate data from the large group plans offered by an insurer in a state
indicate that the insurer has reached an 82% MLR, rather than the required 85% MLR, all
enrollees in the large group plans are eligible for a 3% of premium rebate—even if they are in a
plan that is less, or more, efficient than the average. Rebates will eventually be based on
cumulative data for a three-year period.
Who Is Eligible for Rebate?
For the purpose of determining who is entitled to a rebate, HHS has defined the term “enrollee” to
mean the subscriber, policyholder, and/or government entity that paid the premium for the health
care coverage received by an individual during a respective calendar year.
In the case of individual insurance, the insurer pays the rebate to the enrollee. In the case of
employer-sponsored coverage, a rebate would be paid by the insurer to the employer, which
would then distribute a portion of the rebate to the enrollee (employee). The amount of the rebate
due to the employer and the employee is based on their relative shares of the original premium
payment. Thus, if the employer paid 75% of the premium and the employee paid 25%, the rebate
would be split 75%/25% accordingly. In addition, enrollees who were covered by insurance for
only part of a calendar year would have their share of any rebate adjusted to partial year coverage.
Enrollees who paid premiums to an insurance plan that did not meet its required MLR are entitled
to a rebate, even those who are no longer covered by the specific insurance plan (with certain
exceptions). For example, if an employer finds that the cost of distributing shares of a rebate to a
former plan enrollee is approximately the value of the rebate, the employer may allocate the
rebate to current enrollees based upon a reasonable, fair, and objective allocation method.42 (Also
see the “De Minimis Rebates” section.)
Group Policy Rebates
Many Americans do not pay the full insurance premium because they obtain coverage through an
employer that assumes a part of the costs. Thus, rebates under group policies must be coordinated
through the employer. Under ACA, an insurer can enter into an agreement with the group
policyholder (employer) to distribute rebates on behalf of the insurer, under the following
conditions:

42 Department of Labor, “Guidance On Rebates For Group Health Plans Paid Pursuant To The Medical Loss Ratio
Requirements Of The Public Health Service Act,” Technical Release 2011-04, December 2, 2011, http://www.dol.gov/
ebsa/pdf/tr11-04.pdf
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• The insurer remains liable for complying with the ACA requirements.
• The insurer keeps records documenting that the rebates have been distributed
accurately. Documentation must include the amount of the premium paid by the
employer, the amount paid by the worker, the amount of the rebate to each
enrollee, and the amount of any rebate either retained by the employer or that is
unclaimed and distributed.
Rebates provided to workers from employers in the form of a lump-sum payment will be treated
as regular income and therefore may be taxed. Thus, there will be an incentive for employers to
provide rebates in the form of premium credits for the upcoming enrollment period.
Form of Rebates to Current and Former Employees
The NAIC recommended, and HHS agreed, that the entity distributing the rebates may choose
whether to disburse payments to current enrollees as a lump-sum check or a deposit to a credit or
debit card.43 Current enrollees can also receive refunds in the form of a credit against future
premium payments. If an employer or insurer provides a premium credit to an enrollee, the full
amount of the rebate must be applied to the first plan premium due on, or after, August 1. If the
amount of the rebate is greater than the first premium payment, any remaining money will be
applied to future premium payments until the rebate is used up. Rebates to people who are former
enrollees can take the form of a check or a transfer to a debit or credit card.
De Minimis Rebates
There are special rules for de minimis, or minor, rebates defined as
• group policies where the insurer distributes the rebate to the policyholder
(generally an employer), and the total rebate owed to the policyholder and the
enrollees combined is less than $20 for a given year; or
• group policies where the insurer issues the rebate directly to the enrollee and the
enrollee rebate is less than $5 for a given year; or
• individual policies, where total rebate owed by the insurer to each subscriber is
less than $5 for a given MLR reporting year.44
Under these scenarios, direct rebates are not required given that the cost of administering such
small benefits may exceed their value. Insurers issuing the rebates do not get to keep these de
minimis amounts, but must aggregate the money and distribute it to other enrollees in the state
who are due a rebate.45 In addition, employers, rather than insurers, that oversee plans are not

43 Department of Health and Human Services, 45 CFR Part 158, “Health Insurance Issuers Implementing Medical Loss
Ratio (MLR) Requirements Under the Patient Protection and Affordable Care Act; Interim Final Rule,” Federal
Register, December 1, 2010, (§158.241); https://www.federalregister.gov/articles/2010/12/01/2010-29596/health-
insurance-issuers-implementing-medical-loss-ratio-mlr-requirements-under-the-patient.
44 Department of Health and Human Services, 45 CFR Part 158, “Medical Loss Ratio Rebate Requirements for Non-
Federal Governmental Plans; Interim Final Rule,” Federal Register, December 7, 2011, § 158.243, p. 76596-76600,
http://www.gpo.gov/fdsys/pkg/FR-2011-12-07/.
45 Centers for Medicare & Medicaid Services, Medical Loss Ratio (MLR) Annual Reporting Form Filing Instructions
for all Parts, http://cciio.cms.gov/resources/files/mlr-annual-form-instructions051612.pdf.
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required to issue rebates if the cost of doing so would exceed the cost of the rebates, but they
must use the de minimis amounts for allowable activities to benefit enrollees.
Notification Requirements
Under the HHS rules, all insurers subject to the MLR reporting requirement, regardless of
whether they must provide a rebate, must notify enrollees. This is a one-time requirement;
companies that do not owe refunds will not have to notify their customers in future years. Thus,
even insurers that met or exceeded the MLR for 2011 were required to provide notice to their
enrollees explaining the federal policy and their performance. The rule does not require the
companies to include information about current or prior year MLRs and other measures of insurer
performance. Company notices will direct enrollees to the HHS website for further information.46
For insurers that do provide rebates, their notice must include information about the federal MLR
and its purpose and the amount of the rebate being provided. The notice must also provide
information to policyholders about how the insurance company uses premium dollars in its
operations and how the insurance company’s MLR compares to the standard set by Congress.
Amount of 2011 Rebates
HHS announced that insurance companies would issue about $1.1 billion in rebates to 12.8
million Americans on August 1, 2012.47 Most companies covered by the law met the MLR
standard, though compliance was higher for firms offering small and large group policies than for
those offering individual policies. One reason for this difference, according to the GAO, is that
insurers in the individual market have higher average non-claims expenses, such as brokers’ fees
and commissions, than companies in the other markets.48 Thus, despite the lower MLR
requirement for the individual and small group markets, plans sold in the individual market still
were less successful in meeting their MLR requirement.

46 Department of Health and Human Services, 45 CFR Part 158, “Health Insurance Issuers Implementing Medical Loss
Ratio (MLR) Under the Patient Protection and Affordable Care Act; Correcting Amendment,” May 16, 2012, p. 82277-
82279, https://www.federalregister.gov/articles/2012/05/16/2012-11773/health-insurance-issuers-implementing-
medical-loss-ratio-mlr-under-the-patient-protection-and.
47 Department of Health and Human Services, “The 80/20 Rule: Providing Value and Rebates to Millions of
Consumers,” http://www.healthcare.gov/law/resources/reports/mlr-rebates06212012a.html#individual.
48 Government Accountability Office Letter to Rep. Robert Andrews, Subject: “Private Health Insurance: Early
Indicators Show That Most Insurers Would Have Met or Exceeded New Medical Loss Ratio Standards,” October 31,
2011, http://www.gao.gov/new.items/d1290r.pdf.
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Table 4. Amount of MLR Rebates Due on August 1, 2012
Based on Insurance Plan Activity During Calendar 2011

Individual Market
Small Group Market
Large Group Market
Total Amount of Rebate
$393,877,421
$321,116,259
$386,378,570
Total Enrollees Receiving
4,122,682
3,295,798
5,341,787
Rebates
Average Rebate Per Family $152
$174
$135
Percent of Covered
38%
17%
11%
Companies Paying Rebate
Source: Department of Health and Human Services, http://www.healthcare.gov/law/resources/reports/mlr-
rebates06212012a.html#individual. DHHS webpage includes detailed debate on rebates broken down by state.
See Appendix A for a more complete table of rebates by state.
According to HHS,49 nearly 80 million people were covered by insurance plans subject to the
MLR standards in 2011. Of that total, about 66.7 million were insured by companies that met the
MLR standards, and 12.8 million, or 14%, were covered by companies that did not. Millions
more consumers were enrolled in self-funded plans and policies offered by not-for-profit insurers
that were not subject to the MLR standards.
Average rebates per family were highest in Alaska, Arkansas, and Vermont, though a smaller
share of consumers, relative to the general population, received rebates in those states than in
some other states. Five of the most populous states—Texas, California, Florida, New York, and
Virginia—together accounted for 45% of all rebates. (See Figure 3.)
While fewer companies owed rebates in the large group market, such plans insure more people
and paid about the same overall dollar amount in rebates as companies in the small and individual
markets.

49 Ibid.
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Figure 3. Average MLR Rebates Per Family, 2012
Per Family Receiving A Rebate

Source: Department of Health and Human Services.
Note: Based on 2011 plan year MLR reports.
Issues for Congress
Some lawmakers continue to have concerns about ACA provisions of the MLR. Congress has
held hearings on possible changes to portions of the ACA dealing with the MLR, and legislative
proposals have been introduced. The following is background on some of the lingering issues.
Brokers’ Commissions
Health insurance agents and brokers act as middlemen, assisting consumers and small employers
in choosing and enrolling in health insurance products. Insurance companies pay commissions to
brokers for selling their products. Traditionally, the federal government has had no role in
regulating health insurance agents and broker activity outside of federal programs (e.g., Medicare
Advantage). Under the MLR final rule, the HHS stated that insurance company commissions and
fees paid to brokers and agents cannot be deducted from insurers’ administrative expenses.
During the regulatory process, the National Association of Health Underwriters (NAHU), a
professional association representing agents and brokers, argued that when commissions are paid
as a percentage of premiums charged for policies, insurers are merely passing the premium
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revenues along, a practice that actually reduces insurers’ operational costs by eliminating the need
to mail and account for separate payments to agents and brokers.50 In other words, they contend
that the commission portion of premiums is not retained by the insurers and, thus, should be
excluded from the calculation of MLR. Consumer organizations argue that Congress intended for
the commissions to be counted as an administrative cost in the MLR calculation, and not to be
excluded from the MLR like taxes and other fees.51
The NAIC in its recommendations to HHS ultimately concluded that the law does not provide a
clear path for waiving inclusion of commissions in the calculation of the MLR, but encouraged
“HHS to recognize the essential role served by producers (i.e., agents and brokers) and
accommodate producer compensation arrangements in any MLR regulations promulgated.”52 The
HHS, in its final regulation, noted that states who believe that their individual insurance market
could be destabilized because of the adverse effects of brokers’ and agents’ commissions on the
MLR calculation could seek waivers.53
Given that broker and agent commissions generally rank closely behind staff salaries in terms of
administrative expenses for health insurers, it is likely that insurers at risk for owing MLR rebates
will cut back on their use and/or compensation of agents and brokers. Some large insurers have
already announced such reductions. Brokers and agents are worried that their jobs could be in
jeopardy if insurance companies reduce their payments in an effort to scale back administrative
costs to meet the MLR standards. According to an industry survey, 70% of insurance agents have
seen a decline in commissions since the MLR provision took effect.54
The House Energy and Commerce Subcommittee on Health on September 9, 2012, approved by
voice vote H.R. 1206, which would exclude brokers’ commissions, fees, or rebates from the MLR
formula. The bill has been sent to the full Energy and Commerce Committee for consideration.
High Deductible Health Plans
High deductible health plans (HDHPs) have been a growing share of the health insurance
market.55 Among employer-sponsored insurance, HDHPs have increased from 4% of enrollment
in 2006 to 17% in 2011.56 In 2011, about 11% of those enrolled in individual health plans were in

50 Letter from Janet Trautwein, Executive Vice President and CEO of the National Association of Health Underwriters
to the Department of Health and Human Services, May 14, 2010, http://www.nahu.org/legislative/mlr/
NAHU%20Comments%20on%20MLR.pdf.
51 Letter from Timothy Jost, et al. to Insurance Commissioner Sandy Praeger, October 8, 2010, p. 4,
http://www.naic.org/documents/committees_models_mlr_rebate_regulation_comments_1.pdf.
52 NAIC, “Resolution Urging the U.S. Department of Health and Human Services to Take Action to Ensure Continued
Consumer Access to Professional Health Insurance Producers,” November 22, 2011, http://www.naic.org/documents/
committees_ex_phip_resolution_11_22.pdf; Also see NAIC news release on adoption of the resolution,
http://www.naic.org/Releases/2011_docs/statement_naic_president_voss_resolution.htm.
53 Department of Health and Human Services, 45 CFR Part 158, “Health Insurance Issuers Implementing Medical Loss
Ratio (MLR) Requirements Under the Patient Protection and Affordable Care Act; Interim Final Rule,” Federal
Register, December 1, 2010, (§158.241); https://www.federalregister.gov/articles/2010/12/01/2010-29596/health-
insurance-issuers-implementing-medical-loss-ratio-mlr-requirements-under-the-patient.
54 Sara Hansard, “Seventy Percent of Health Insurance Agents Say Commissions Lower Since MLR In Effect,”
Bloomberg, May 9, 2012. The poll was conducted by the National Association of Insurance and Financial Advisors.
55 CRS Report RL33257, Health Savings Accounts: Overview of Rules for 2012, by Janemarie Mulvey.
56 Kaiser Family Foundation, “Employer Health Benefits, 2011.”
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an HDHP.57 High deductible health plans tend to have a more variable (and uncertain) claims
experience than other plans. Specifically, for high deductible plans, fewer policyholders have
claims in a year, but for those with claims, the claim amounts are generally higher as compared to
the lower deductible plans. Concerns have been raised that this variability may distort the MLR
for a company with a high percentage of HDHPs.58
This concern may be unwarranted in the longer run; carriers could build up surpluses in positive
years that could be used to cover losses generated in high-claim years. Surpluses held in the form
of reserves are part of the numerator and can increase the MLR. However, the industry asserts
that the initial year of implementation does not allow for this interaction because it is based only
on premium experience in 2011. In the shorter run, there is an MLR credibility adjustment for
HDHPs. While this credibility adjustment will only be applied to smaller plans, and not to larger
plans, the larger plans have an advantage in that they can aggregate their experience across lines
of business in a given state in a given market segment. In the aggregate, one individual’s high-
claims experience would be combined with another individual’s low-claims experience, and those
should average out for the larger plans.
Many of the concerns about variability of HDHPs have come from the Health Savings Account
(HSA) industry, which is made up largely of financial institutions. To qualify for an HSA, an
individual must have an HDHP plan. The industry is concerned that if the HDHPs are no longer
viable, then consumers will no longer demand HSAs. One suggestion from the industry has been
to include the HSA distributions in a given year for deductibles and out-of-pocket costs of the
HDHP plan in the MLR calculation. Two problems arise with this proposed solution. First, many
insurers do not know the HSA contribution amounts of HDHP holders since HSAs are
administered through banks, so it would be an administrative burden on health insurers to
determine the amounts. Second, allowing HSA contributions, which are an out of-pocket cost
rather than a direct claim payment, may prompt those insurers with lower deductible plans to
request similar treatment to even the playing field.
MLR for Non-profit Insurers
The federal MLR requirements for non-profit insurers are specified in a different section of ACA
and essentially amend Section 833 of the Internal Revenue Code (IRC).59 The ACA provisions
would remove the non-profit status of insurers that have MLRs below federal minimum
requirements. The ACA defines a non-profit organization’s MLR as equal to the “percentage of
total premium revenue expended on reimbursement for clinical services provided to enrollees
under its policies during such taxable year (as reported under Section 2718 of the PHS).”
Because of the way this provision is worded, it appears that medical claims of non-profit plans
are not adjusted for quality expenditures, as they are for the MLR calculation for for-profit
insurers.
In a recent notice, the IRS extended the MLR filing requirement for non-profit insurers until
2013, giving the IRS time to publish proposed regulations, and non-profits time to assess the

57 AHIP, Center for Policy and Research, January 2012 Census Shows 13.5 Million People Covered by Health Savings
Account/High-Deductible Health Plans (HSA/HDHP), May 2012.
58 Milliman, Inc. Impact of Medical Loss Ratio Requirements Under PPACA on High Deductible Plans/HSAS in
Individual and Small Group Markets, January 6, 2012.
59 §9016 of ACA.
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potential effect of the proposed regulations, and determine whether any program adjustments may
be necessary prior to final regulations being published.
Another issue that has arisen in calculating the MLR for non-profit insurers is the question of
community health benefits. Specifically, non-profit insurers must allocate a certain amount of
revenues each year to community programs designed to improve access to health services,
enhance public health, or relieve government spending burdens.60 An example of a community
health benefit is a health fair. These community benefit expenditures are made in lieu of state
taxes that would otherwise apply, or are required by the federal government as a condition of
preserving an insurer’s federal tax-exempt status. The NAIC has recommended, and HHS has
concurred, that this required community benefit spending is essentially the equivalent of state and
federal taxes61 and should be excluded from the MLR calculation. However, the non-profit
insurance industry argues that this definition should be expanded in the MLR calculation and not
be limited to the amount required to be paid in lieu of taxes. Some states do not have premium
taxes and insurers still provide these services. Thus, some contend that the NAIC rule would
discourage non-profits from making these contributions to the community. To address these
concerns, HHS is soliciting comments on the proper treatment of community benefit expenditures
in the MLR calculation.

60 Alliance of Community Health Plans, Letter to Department of Health and Human Services, January 31, 2011,
http://www.achp.org/themes/ACPH_Main/files/ACHPResponse-OCIIO-9998-IFC%28MLR%29-013111.pdf.
61 §2718(a)(3) of PHS Act.
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Appendix A. Rebates by State
Figure A-1. Rebates by State
Based on 2011 Financial Data Submitted by Insurance Companies to HHS.

Source: Department of Health and Human Services.
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Appendix B. State MLRs
State governments are the primary regulators of health insurance. Many states have imposed their
own MLR requirements, which they use for a variety of purposes including evaluating corporate
performance and insurance company requests for an increase in premium rates.
The NAIC in 1980 developed MLR guidelines for state regulators to use in determining whether
benefits paid under individual medical policies were reasonable in relation to premiums
charged.62 A number of states also set separate MLR standards for other insurance products.
When the ACA was passed in 2010, 34 states had established some type of MLR guidelines;
required the filing or reporting of MLR information; set limits on administrative expenses for
comprehensive, major medical insurance; or enacted a combination of such policies. Of the total,
six states required insurers that did not meet MLR standards to provide premium refunds or
credits. (See Table B-1.)
States developed a range of MLR targets. For example, state MLR requirements for insurers
selling products in the individual market ranged from 55% to 80%. MLRs in the group market
ranged from 60% to 85%.63 The federal ACA provisions are now the national, minimum
requirement that insurers must meet in terms of calculating potential consumer rebates. States
were allowed to apply for limited waivers of the federal MLR for individual insurance plans,
however, if they had evidence that the ACA requirements could disrupt the state market for such
policies.
Since the ACA was passed, several states have passed additional MLR laws including some that
require insurers participating in Medicaid to meet specific MLRs or to publish their premium and
profit information.64 State policies can range widely depending on differences between rural and
urban areas and markets that have a number of insurance options, as opposed to those where
business is more concentrated in a few companies.65
One key difference between many state MLR calculations and the federal MLR standards enacted
under ACA is that the federal standards also allow for adjustments based on quality
improvements, taxes and fees, credibility adjustments, and other factors. According to a 2011
GAO analysis, the combined effect of the federal allowances has been to raise federal MLRs
above MLRs that are based only on medical claims compared to premium revenue. Analyzing
2010 data, the GAO said that average MLRs calculated under the ACA formula were 7.5
percentage points higher than traditional MLRs in the individual market, 6.5 points higher in the
small group market, and 4.8 points higher in the large group market.66

62 America’s Health Insurance Plans, “State Mandatory Medical Loss Ratio (MLR) Requirements for Comprehensive,
Major Medical Coverage: Summary of State Laws and Regulations,” April 15, 2010, http://www.naic.org/documents/
committees_e_hrsi_comdoc_ahip_chart_mlr.pdf.
63 Ibid. Pennsylvania imposed a 50% initial MLR for the individual market and a 60% renewal MLR.
64 National Conference of State Legislatures, “Medical Loss Ratios for Health Insurance,” Updated July 2, 2012,
http://www.ncsl.org/issues-research/health/health-insurance-medical-loss-ratios.aspx.
65 Health Affairs/Robert Wood Johnson Foundation, “Medical Loss Ratios. Health Insurers Will Soon Be Required To
Spend A Specific Share Of The Premiums They Collect On Health Care For Policyholders,” Health Brief, November
12, 2010.
66 Government Accountability Office, Letter to Rep. Robert Andrews, “Subject: Private Health Insurance: Early
Indicators Show That Most Insurers Would Have Met or Exceeded New Medical Loss Ratio Standards,” October 31,
(continued...)
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Table B-1. State MLR Policies Prior to ACA
State Policies as of 2010
Policy States
Filing and Reporting Requirements
AR, CA, CT, DE, FL, GA, IA, KS, KY, MA, MD, MI, MN, NH,
NJ, NY, OR, PA, TN, UT, VA, WA, WV
Group Market Requirements
AZ, CA, CO, DE, FL, KY, MD, ME, MI, MN, ND, NH, NJ,
NM, NY, OK, SD, UT, WV
Individual Market Requirements
AZ, CA, CO, DE, IA, KS, KY, MA, MD, ME, MI, MN, NC,
ND, NH, NJ, NM, NY, PA, SC, SD, TN, UT, VA, VT, WA,
WV,
Premium Refunds, Dividends, or Credits
ME, NJ, NM, NY, NC, SCa
Other Approaches
CA, NJ, OH, TNb
Source: America’s Health Insurance Plans and NAIC.
a. These states in 2010 required carriers to issue a dividend, credit or refund to policyholders for failure to
comply with state MLR requirements.
b. These four states, rather than setting a minimum MLR, required either health maintenance organizations or
certain types of insurance companies to limit administrative expenses to a specified percentage of
premiums.


(...continued)
2011, p. 3, http://www.gao.gov/new.items/d1290r.pdf.
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Appendix C. Mini Med and Expatriate Plans
The final rules issued by the HHS allow separate adjustments in the MLR formula for two less
commonly used types of health insurance: expatriate and mini-medical (mini med) policies.
Because of the unique characteristics of these plans, the HHS determined that insurers would
have difficulty meeting the minimum MLR requirements in the ACA.67
Expatriate Plans
Expatriate plans are defined by the HHS in its December 7, 2011, interim final rule as ‘‘group
policies that provide coverage to employees, substantially all of whom are: Working outside their
country of citizenship; working outside of their country of citizenship and outside the employer’s
country of domicile; or non-U.S. citizens working in their home country.”
Expatriate plans often have lower premiums than some other insurance policies, but higher
administrative costs, due to the inherent difficulty of coordinating international coverage,
according to the NAIC.68 The plans may offer unique benefits such as coverage of medical
evacuation or language translation services. Insurers may have to spend time helping
beneficiaries in foreign countries find English-speaking doctors. “These additional services would
be classified as “administrative” under the medical loss ratio, but are critical to the delivery of
care,” the NAIC noted in a letter to HHS regarding the plans. The NAIC recommended that
expatriate plans be exempt from the MLR, or, if that were not possible, that HHS allow additional
MLR adjustments for such plans.
The ACA rules allow insurers offering expatriate plans to multiply incurred claims and activities
that improve health care quality (the numerator of the formula) by a factor of 2.00 when
calculating the MLR. Without the 2.00 adjustment, the majority of expatriate insurers in the large
group market had MLRs “significantly” below the 85% standard, according to HHS. Using the
2.00 multiplier, HHS expects that companies will be able to meet the standard, “thus ensuring that
Americans working abroad will still have access to U.S.-based coverage.” The 2.00 multiplier
applied beginning in 2011 and will remain in place indefinitely.
Mini-medical
Mini-medical or limited-benefit health plans are insurance policies that do not cover the level or
range of services of comprehensive health plans. While there is substantial variability in the
marketplace due to different consumer demands, generally a limited benefit plan includes
restrictive annual limits on total benefits and/or on specific service categories (e.g., surgeries).

67 Department of Health and Human Services, 45 CFR Part 158, “Medical Loss Ratio Rebate Requirements for Non-
Federal Governmental Plans; Interim Final Rule,” Federal Register, December 7, 2011, p. 76574-76594,
http://www.gpo.gov/fdsys/pkg/FR-2011-12-07/pdf/2011-31289.pdf#page=21.
68 NAIC Letter to HHS Secretary Kathleen Sebelius, October 13, 2010, p. 3, http://www.naic.org/documents/
committees_ex_grlc_mlr_sebelius_letter_101013.pdf.

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In its December 2011 final rules, HHS noted concerns from mini-medical insurers about their
ability to meet the ACA MLR. Companies issuing the policies noted that mini-medical plans were
apt to have higher administrative costs, relative to benefits paid, than comprehensive health
insurance; higher enrollee turnover; shorter enrollment periods; and lower incurred claims (due to
high deductibles and limited coverage). Consumer, healthcare, and labor organizations opposed
efforts to relax MLR requirements for mini-medical plans. Consumer groups have said that such
policies expose beneficiaries to unacceptably high costs and that insurers should be required to
become more efficient.69
In its interim final rule, HHS included a special allowance for limited benefit plans (which it
defines as plans with total annual benefit limits of $250,000 or less). For calendar 2011, HHS
allowed insurers offering such policies to multiply incurred claims and activities (the MLR
numerator) that improve health care quality by 2.00.
After reviewing comments, the HHS in its interim final rule on December 7, 2011, extended and
modified the special treatment of mini-medical plans. HHS set a multiplier of 1.75 in 2012, 1.50
in 2013, and 1.25 in 2014. (Starting in 2014, the ACA bars the sale of health plans that impose
annual limits on essential health benefits, other than grandfathered plans in the individual market.
The ACA provisions are expected to eliminate most mini-med plans.) The HHS based its final
rule on data from insurers selling limited benefit plans. According to the data, 7 of the 12 issuers
in the individual market and 6 of the 15 firms in the large group market would not meet the
standard MLR targets. With the 2.00 multiplier in place, only 3 of the 12 companies in the
individual market would not meet the MLR requirements, while all issuers in the small and large
group market would meet the standard.

Author Contact Information

Suzanne M. Kirchhoff
Janemarie Mulvey
Analyst in Industrial Organization and Management
Specialist in Health Care Financing
skirchhoff@crs.loc.gov, 7-0658
jmulvey@crs.loc.gov, 7-6928


69 Consumers Union, “Mini-med Health Plans: Don’t Call It Insurance,” January, 2011, http://yourhealthsecurity.org/
wordpress/wp-content/uploads/2011/01/consumers_union-mini_med_health_plans-2011_01.pdf

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