Medical Loss Ratio Requirements Under the
Patient Protection and Affordable Care Act
(ACA): Issues for Congress
Suzanne M. Kirchhoff
Analyst in Health Care Financing
August 9, 2013
Congressional Research Service
7-5700
www.crs.gov
R42735
CRS Report for Congress
Pr
epared for Members and Committees of Congress
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
MLR. 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 8.6 million U.S. consumers were due more than
$500 million in ACA MLR rebate payments by August 2013, for an average award of $98 per
qualifying household. Employers or insurers can provide the rebates, which are based on activity
in 2012, via a check, an electronic deposit in a bank account, a reduction in insurance premiums,
or by spending the funds for the benefit of employees.
The MLR is based on the aggregate performance of a health plan, not on 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 2012. 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 during the first two years the law
was in effect, though these insurers will be subject to MLR provisions in 2014. 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, and the impact of the MLR on insurers that provide high deductible plans.
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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 ................................................................................................... 13
Medicare Advantage and Part D Drug Plans ................................................................................. 14
Contract Level Calculation ................................................................................................ 15
Enrollment Ban and Contract Termination ........................................................................ 15
Rebates to Policyholders ................................................................................................................ 16
Calculation of the Rebate ........................................................................................................ 16
Who Is Eligible for a Rebate?.................................................................................................. 16
Group Policy Rebates ........................................................................................................ 17
Notification Requirements ................................................................................................ 18
Amount of Rebates ........................................................................................................................ 18
Issues for Congress ........................................................................................................................ 19
Brokers’ Commissions ............................................................................................................. 19
High Deductible Health Plans ................................................................................................. 21
Figures
Figure 1. Impact of Changes to Numerator on MLR ....................................................................... 6
Figure 2. Impact of Changes to Denominator on MLR ................................................................. 10
Figure 3. Average MLR Rebates Per Family, 2013 ....................................................................... 20
Figure A-1. 2013 MLR Rebates by State ....................................................................................... 23
Tables
Table 1. Base Credibility Factors for Calculating MLR ................................................................ 12
Table 2. Deductible Factors to Adjust MLR .................................................................................. 13
Table 3. HHS Individual Insurance Market Waivers ..................................................................... 14
Table 4. Amount of MLR Rebates Due on August 1, 2013 ........................................................... 19
Table B-1. State MLR Policies Prior to ACA ................................................................................ 25
Table D-1. Credibility Factors for Calculating the MLR for MA-PD* Contracts ......................... 28
Table D-2. Credibility Factors for Part D Stand-alone Contracts .................................................. 28
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Medical Loss Ratio Requirements Under the Patient Protection and Affordable Care Act
Appendixes
Appendix A. Rebates by State ....................................................................................................... 23
Appendix B. State MLRs ............................................................................................................... 24
Appendix C. Mini Med and Expatriate Plans ................................................................................ 26
Appendix D. Medicare Credibility Adjustments ........................................................................... 28
Contacts
Author Contact Information........................................................................................................... 29
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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 plans
pay a premium for a specified set of benefits. When insurers set premiums, 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 various MLR data when assessing the financial
performance of health insurers.
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 benefits paid to aggregate premiums.
Section 1001 of the Patient Protection and Affordable Care Act (ACA, P.L. 111-148, as
amended)1 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.2
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.3 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.”4
1 HHS issued the following regulations to implement the ACA MLR provisions: “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; “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; “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; “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 “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; and “Medicare
Program; Medical Loss Ratio Requirements for the Medicare Advantage and the Medicare Prescription Drug Benefit
Programs; Final Rule,” Federal Register, May 23, 2013, http://www.gpo.gov/fdsys/pkg/FR-2013-05-23/pdf/2013-
12156.pdf.
2 In fully funded insurance plans employers purchase 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 insurance regulations as fully funded plans.
3 See §2718(a) of the Public Health Service Act (PHS).
4 Department of Health and Human Services, “Health Insurance Issuers Implementing Medical Loss Ratio (MLR)
(continued...)
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The ACA MLR provisions took effect in calendar year 2011. The Department of Health and
Human Services (HHS) in June 2013 announced that, based on 2012 performance, insurers
covered by the law would be required to issue about $504 million in rebates to 8.5 million
individuals by August 1, 2013.5 That compares to the HHS July 2012 announcement that insurers
were required to issue about $1.1 billion in rebates to 12.8 million individuals.6
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 commissions paid
to brokers and agents, and the impact of the MLR on insurers that provide high deductible plans.
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
100 workers.7 Individual policies can be policies bought through an insurance agent or broker, or
(...continued)
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.”
5 Department of Health and Human Services,“80/20 Rule Delivers More Value to Consumers in 2012,”
http://www.cms.gov/CCIIO/Resources/Forms-Reports-and-Other-Resources/Downloads/2012-medical-loss-ratio-
report.pdf.
6 Department of Health and Human Services, “The 80/20 Rule: Providing Value and Rebates to Millions of
Consumers,” http://www.cms.gov/CCIIO/Resources/Forms-Reports-and-Other-Resources/mlr-rebates06212012a.html.
7 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
(continued...)
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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 a plan purchased through an exchange.8
In addition, MLR reporting requirements exclude premiums and claims experience of newly
introduced health insurance offerings, under certain circumstances.9
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 2011.10 Going forward, the ACA requires annual reports
by June 1 of the year following the calendar year on which the MLR calculation is based. 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.11 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.12
Who Must Comply
The ACA generally requires fully funded health insurers offering coverage (including
grandfathered health plans)13 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. Non-profit insurers must also report their MLR, beginning in 2014.14
(...continued)
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.
8 CRS Report R42663, Health Insurance Exchanges Under the Patient Protection and Affordable Care Act (ACA), by
Bernadette Fernandez and Annie L. Mach
9 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.
10 Companies are required to report calendar year activity when calculating the MLR, rather than using plan year,
corporate fiscal year, or other alternatives.
11 The rules apply unless the policy is offered through multiple subsidiaries in various states.
12 Department of Health and Human Services, “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.
13 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, including grandfathered plans, but some
provisions apply only to new plans.
14 §9016(a) of ACA (P.L. 111-148) amends Internal Revenue Code §833(c) adding paragraph (5).
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The federal MLR requirements for not-for-profit insurers are specified in a different section of
ACA and essentially amend Section 833 of the Internal Revenue Code (IRC).15 The ACA requires
that non-profit insurers meet minimum MLR standards in order to keep their non-profit status.
Under proposed IRS regulations, a non-profit insurer would lose its non-profit status only for the
taxable year or years in which the insurer did not meet the MLR standard.16 The proposed IRS
regulations do not allow non-profit insurers to adjust medical claims for quality expenditures, as
is the case with for-profit insurers.17 However, the IRS will not require non-profits to count ACA-
related fees or assessments as part of total premium revenue.
The ACA imposes separate MLR standards for Medicare Part D prescription drug plans and
Medicare Advantage Plans (MA), which are plans that provide private insurance options, such as
managed care, to Medicare beneficiaries who are enrolled in both Medicare Parts A and B.18
Effective in 2014, the ACA requires coverage sold through these programs, with some exceptions,
to achieve a minimum 85% MLR. MA and Part D contracts 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 MA and Part D contracts have an MLR below 85% for three
consecutive years, enrollment will be restricted. If a contract is out of compliance for five
consecutive years, the contract will be terminated. (See section “Medicare Advantage and Part D
Drug Plans.”)
The HHS provides 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 subject to the additional adjustments
have total annual benefit limits of $250,000 or less. 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-funded plans,19 which are health care plans offered
by businesses in which the employer assumes the financial risk for medical care. During 2011,
57.5% of private sector insurance enrollees obtained health coverage through self-funded plans.20
The share of employees in self-funded plans rose to 58.6% in 2012.21
15 §9016 of ACA.
16 Internal Revenue Service (IRS), “Computation of, and Rules Relating to Medical Loss Ratio,” Federal Register, May
13, 2013; http://www.gpo.gov/fdsys/pkg/FR-2013-05-13/pdf/2013-11297.pdf; and 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.
17 Internal Revenue Service (IRS), “Computation of, and Rules Relating to Medical Loss Ratio,” Federal Register, May
13, 2013; http://www.gpo.gov/fdsys/pkg/FR-2013-05-13/pdf/2013-11297.pdf.
18 See §1103, Health Care Reconciliation Act (P.L. 111-152) and Centers for Medicare & Medicaid Services,
“Medicare Program; Medical Loss Ratio Requirements for the Medicare Advantage and the Medicare Prescription
Drug Benefit Programs: Final Rule,” Federal Register, May 23, 2013, http://www.gpo.gov/fdsys/pkg/FR-2013-05-23/
pdf/2013-12156.pdf.
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 Levin 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.
21 Beth Levin Crimmel, “Changes in Self-Insured Coverage for Employer-Sponsored Health Insurance: Private Sector,
(continued...)
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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.22
Finally, the ACA’s MLR requirements do not apply to long-term care, dental, vision, or retiree
health insurance.
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 premiums23 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)24 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, 2012.25 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
(...continued)
by Firm Size, 2001-2011,” Medical Expenditure Panel Survey, Agency for Healthcare Research and Quality, Statistical
Brief #412, June 2013, http://meps.ahrq.gov/mepsweb/data_files/publications/st412/stat412.pdf.
22 CRS Report R42745, Medigap: A Primer, by Carol Rapaport.
23 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 $1,000 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.
24 Most insurance regulation is carried out at the state level. The National Association of Insurance Commissioners
(NAIC) 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.
25 See footnote 1 for a listing of federal regulations relating to the MLR requirements.
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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.
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. 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.26 Similarly, contract reserves are established to account for the value of future
26 Unpaid claims reserves are required to be calculated based on claims that have been processed within three months
(continued...)
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benefit payments. As a policy matures, the reserves set aside at the introduction of the policy are
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 (with some exceptions) 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
(...continued)
after the end of the MLR reporting year.
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• 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
• 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.27 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
27 America’s Health Insurance Plans, “Interim Final Rule – Medical Loss Ratio Requirements,” January 31, 2011,
http://www.ahip.org/Issues/Medical-Loss-Ratio.aspx.
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not allow companies to count broader fraud prevention activities.28 In making this decision, HHS
stated that:
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.29
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.
28 Department of Health and Human Services, “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 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.
29 Department of Health and Human Services, “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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Figure 2. Impact of Changes to Denominator on MLR
(Holding Other Factors Constant)
Source: Congressional Research Service.
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.30
• Earned premiums exclude adjustments for retroactive rate reductions.31
• Earned premiums are to be reported before insurers deduct premium discounts
for enrollees for health and wellness promotion.32
• Earned premiums should be direct (excluding reinsurance).33
30 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.
31 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.
32 Since these discounts are considered quality improvements (and are included in the numerator), if they were also
used to reduce premiums in the denominator, this would lead to double counting. Therefore, they are excluded from
earned premiums in the denominator.
33 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.
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Taxes, Licensing, and Regulatory Fees
Taxes, licenses, and regulatory fees are subtracted from premiums under the MLR formula.34
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.
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 years35 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.
34 §2718(a) of PHS Act.
35 A life year is equal to the number of months of enrollee coverage divided by 12.
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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).36 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.
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).
36 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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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 indicated that about
half of insurers that offered plans in the small and large group markets, and about a third of
insurers that offered plans in the individual market in 2011 would be eligible for a credibility
adjustment to their MLR.37
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.38 States were allowed to request a temporary
adjustment in the MLR ratio for up to three years, to avoid coverage disruptions in the individual
markets. ACA regulations allowed the HHS to consider a set of factors regarding such waivers,
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 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.39 HHS issued
decisions on waivers based on the timing of state applications, completing the process in early
2012.40
According to HHS, 17 states and a territory requested adjustments to the federal MLR for the
individual market.41 Seven states were granted an adjustment: Georgia, Iowa, Kentucky, Maine,
Nevada, New Hampshire, and North Carolina. Ten states and a territory were denied an
37 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.
38 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.
39 Department of Health and Human Services, “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.
40 Centers for Medicare & Medicaid Services, “State Requests for MLR Adjustment,” http://www.cms.gov/CCIIO/
Programs-and-Initiatives/Health-Insurance-Market-Reforms/state_mlr_adj_requests.html.
41 Ibid.
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adjustment: Delaware, Florida, Guam, Indiana, Kansas, Louisiana, Michigan, North Dakota,
Oklahoma, Texas, and Wisconsin.42 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, see 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.
Medicare Advantage and Part D Drug Plans
Effective in 2014, most MA plans, stand-alone Medicare Part D prescription drug plans, and MA
plans that include a Part D drug benefit (MA-PD) must meet an 85% MLR standard.43 In May
2013, CMS issued final rules for calculating the MLR for these plans.44
In general, the MLR will be based on the percentage of Medicare contract revenue that plan
sponsors spend on clinical services, prescription drugs, quality improvement activities, and direct
benefits to beneficiaries in the form of reduced Medicare Part B premiums.45 Insurers that cannot
meet the 85% threshold must pay HHS an amount equal to the total revenue for the MA or Part D
42 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.
43 See §1103, Health Care Reconciliation Act (P.L. 111-152). CMS has determined that the MLR rules will apply only
to the Part D portions of Medicare Cost-Based Health Maintenance Organization and Competitive Medical Plans
(HMO/CMPs) and employers/unions offering Health Care Prepayment Plans (HCPP). In addition, CMS waived the
MLR requirements for the Part D offerings of PACE plans, (Program of All-inclusive Care for the Elderly), which are
offered under a Medicare and Medicaid program that helps people meet their health care needs in the community
instead of going to a nursing home or other care facility.
44 Centers for Medicare & Medicaid Services, “Medicare Program; Medical Loss Ratio Requirements for the Medicare
Advantage and the Medicare Prescription Drug Benefit Programs: Final Rule,” Federal Register, May 23, 2013,
http://www.gpo.gov/fdsys/pkg/FR-2013-05-23/pdf/2013-12156.pdf.
45 Medicare Part B covers physician services, skilled nursing care and other select services. In general, the MLR is
based on actual costs and revenues for MA and Part D plans, including both federal payments and enrollee premiums.
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contract in question, multiplied by the difference between the target MLR and their actual MLR.46
For example, if total contract revenue was $1,000, and the MLR was 82%, the plan would remit
$30 to HHS (0.85-0.82 X $1,000 = $30).
Contract Level Calculation
CMS rules require insurers to calculate the MLR for Part D and MA plans at the contract level.
HHS enters into contracts with MA and Part D insurers to provide coverage to beneficiaries.
Insurers offering standalone Part D drug plans enter into one-year, renewable contracts to provide
services, region-wide, in one of the 34 designated U.S. regions. Many single states are designated
as Part D regions, but a number of regions encompass two or more states. Insurers may sponsor
Part D plans in more than one region or nationwide, but must submit separate contracts for each
region.
Most MA beneficiaries are enrolled in local HMOs or PPOs offered in a county or group of
counties. Since 2006, the MA program has also allowed MA sponsors to offer regional plans
serving the 26 U.S. regions designated by the Secretary of HHS. Some regions are single states;
others are groups of states. A single MA contract may cover more than one MA plan.47 Under
CMS rules, sponsors that offer MA plans will report a single MLR for each contract that includes
MA–PD plans, rather than one MLR for non-drug benefits and another MLR for prescription
drug benefits.
Enrollment Ban and Contract Termination
If an MA or Part D contract fails to meet the 85% MLR for three or more consecutive years, plans
offered under that contract will be closed to new enrollees. CMS will bar new enrollment starting
in the second contract year after the three-year threshold is reached. For example, MLR data for
Part D plans for contract years 2014 through 2016 will be reported during calendar years 2015
through 2017. If the 2017 data show that a contract has been out of compliance for three
consecutive years, a ban on new enrollment would take effect in 2018.
If a MA or Part D contract is out of compliance for five consecutive years, the contract would be
terminated. Termination, like the ban on new enrollment, would take place in the second,
succeeding contract year after the threshold has been met. For example, an MA or Part D insurer
that failed to meet the MLR requirement from 2014 through 2018 would have the contract
terminated in 2020.
CMS will require the Medicare plans to report their MLR data in December following a contract
year. However, in the case of contracts that fail to meet the MLR threshold for two consecutive
years, MLR reporting will be required prior to December, in a month to be specified by CMS.
46 Department of Health and Human Services, “Medicare Program; Medical Loss Ratio Requirements for the Medicare
Advantage and the Medicare Prescription Drug Benefit Programs: Final Rule,” Federal Register, May 23, 2013,
http://www.gpo.gov/fdsys/pkg/FR-2013-05-23/pdf/2013-12156.pdf.
47 Centers for Medicare & Medicaid Services, Medicare Managed Care Manual, Chapter 11, http://www.cms.gov/
Regulations-and-Guidance/Guidance/Manuals/downloads/mc86c11.pdf.
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Earlier reporting will give CMS time to implement enrollment sanctions or contract terminations
before annual Medicare open enrollment,48 when beneficiaries are allowed to change plans.
The CMS rules also include credibility adjustments for MA-PD and Part D standalone plans.
(See Table D-1 and Table D-2.)
Rebates to Policyholders
Health insurers that fail to meet the minimum MLR requirements 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 2012 premiums by
August 1, 2013, for example. 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 a 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
48 For more information about Medicare enrollment periods, see Centers for Medicare & Medicaid Services,
“Understanding Medicare Part C & D Enrollment Periods,” October 2012, http://www.medicare.gov/Pubs/pdf/
11219.pdf.
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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.49 (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:
• 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.50 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
49 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
50 Department of Health and Human Services, “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.
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• 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.51
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.52 In addition, employers, rather than insurers, that oversee plans are not
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 were required to provide a rebate, where required in 2012 to notify enrollees of their
MLR results. This was a one-time requirement; companies that do not owe refunds will not have
to notify their customers in 2013 and future years. Federal rules do 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.53
Insurers that are required to provide annual rebates must notify enrollees about the federal MLR,
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 Rebates
HHS announced that insurance companies would issue about $504 million in rebates to 8.5
million Americans on August 1, 2013. That compares to the 2012 figures of $1.1 billion in rebates
to 12.8 million Americans.54 Most companies covered by the law met the MLR standard in 2012.
51 Department of Health and Human Services “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/.
52 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.
53 Centers for Medicare & Medicaid Services, “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.
54 Centers for Medicare & Medicaid Services,“2012 Total Rebates,” http://www.cms.gov/CCIIO/Resources/Data-
Resources/Downloads/2012-mlr-rebates-by-state-and-market.pdf.
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Table 4. Amount of MLR Rebates Due on August 1, 2013
Based on Insurance Plan Activity During Calendar 2012
Individual Market
Small Group Market
Large Group Market
Total Amount of Rebates
$192,177,266
$203,310,640
$108,669,805
Enrol ees Receiving Rebates
2,730,735
3,067,459
2,699,675
Average Rebate Per Family
$94
$122
$74
Source: Department of Health and Human Services, http://www.cms.gov/CCIIO/Resources/Data-Resources/
Downloads/2012-mlr-rebates-by-state-and-market.pdf.
In general, health insurers were more efficient in 2012 compared to 2011, with the share of
premium revenues dedicated to administrative expenses declining to 9.1% in 2012 from 9.4% in
2011. Individual and small group plans showed the greatest efficiency gains. For individual plans,
administrative costs declined to 15.1% of premiums in 2012 from 15.7% in 2011. In the small
group market, administrative costs fell to 11.6% of premiums in 2012 from 12.2% in 2011. The
large group market realized a decline in administrative expenses to 7.3% from 7.4%.55
Average rebates per family were highest in Delaware, Massachusetts, and Washington. Five of
the most populous states—Texas, California, Florida, New York, and Massachusetts—together
accounted for about 46% of all rebates. (See Figure 3.)
See Appendix A for a more complete table of rebates by state.
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 not regulated health
insurance agent 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.
55 Department of Health and Human Services, “80/20 Rule Delivers More Value to Consumers in 2012,”
http://www.healthcare.gov/law/resources/reports/mlr-rebates06212012a.html - individual, http://www.cms.gov/CCIIO/
Resources/Forms-Reports-and-Other-Resources/Downloads/2012-medical-loss-ratio-report.pdf.
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Figure 3. Average MLR Rebates Per Family, 2013
Per Family Receiving a Rebate
Source: Figure created by CRS based on Department of Health and Human Services state-by-state data,
http://www.cms.gov/CCIIO/Resources/Data-Resources/Downloads/2012-mlr-rebates-by-state-and-market.pdf.
Note: The 2013 rebates are based on 2012 plan year MLR reports.
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
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.56 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.57
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
56 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.
57 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.
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“HHS to recognize the essential role served by producers (i.e., agents and brokers) and
accommodate producer compensation arrangements in any MLR regulations promulgated.”58 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.59
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.60
During the 112th Congress, the House Energy and Commerce Subcommittee on Health approved
by voice vote H.R. 1206, which would exclude brokers’ commissions, fees, or rebates from the
MLR formula. Similar legislation has been introduced during the 113th Congress.
High Deductible Health Plans
High deductible health plans (HDHPs) have been a growing share of the health insurance
market.61 Among employer-sponsored insurance, HDHPs have increased from 4% of enrollment
in 2006 to 17% in 2011.62 In 2011, about 11% of those enrolled in individual health plans were in
an HDHP.63 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.64
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. In the shorter run, there is an
MLR credibility adjustment for HDHPs. While this credibility adjustment will only be applied to
58 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.
59 Department of Health and Human Services, “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.
60 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.
61 CRS Report RL33257, Health Savings Accounts: Overview of Rules for 2012, by Janemarie Mulvey.
62 Kaiser Family Foundation, “Employer Health Benefits, 2011.”
63 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.
64 Milliman, Inc. Impact of Medical Loss Ratio Requirements Under PPACA on High Deductible Plans/HSAS in
Individual and Small Group Markets, January 6, 2012.
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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.
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Appendix A. Rebates by State
Figure A-1. 2013 MLR Rebates by State
Source: Department of Health and Human Services, 2013 data, http://www.cms.gov/CCIIO/Resources/Data-
Resources/Downloads/2012-mlr-rebates-by-state-and-market.pdf.
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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.65 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%.66 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.67 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.68
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.69
65 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.
66 Ibid. Pennsylvania imposed a 50% initial MLR for the individual market and a 60% renewal MLR.
67 National Conference of State Legislatures, “Medical Loss Ratios for Health Insurance,” Updated June 20, 2013,
http://www.ncsl.org/issues-research/health/health-insurance-medical-loss-ratios.aspx.
68 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.
69 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.70
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.71 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 subject to different MLR standards are defined by
CMS as policies with annual benefit limits of $250,000 or less. While there is substantial
variability in the marketplace, mini-med plans generally have higher copayments and deductibles
and provide a lower dollar-value level of benefits than comprehensive plans. In some cases, the
plans impose limits on specific types of services such as hospitalization and physician care.
70 Department of Health and Human Services, “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.
71 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
higher 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.72
In its interim final rule, HHS included a special allowance for mini-med 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.
72 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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Appendix D. Medicare Credibility Adjustments
CMS set separate credibility adjustments for MA and Part D plans.
Table D-1. Credibility Factors for Calculating the MLR for MA-PD* Contracts
Member Months
Credibility Adjustment
<2,400 Not
Credible
2,400
8.4%
6,000
5.3%
12,000
3.7%
24,000
2.6%
60,000
1.7%
120,000 1.2%
180,000 1.0%
>180,000 Fully
credible
Source: Centers for Medicare & Medicaid Services, “Medicare Program; Medical Loss Ratio Requirements for
the Medicare Advantage and the Medicare Prescription Drug Benefit Programs; Final Rule,” Federal Register, May
23, 2013, http://www.gpo.gov/fdsys/pkg/FR-2013-05-23/pdf/2013-12156.pdf.
Note: * MA–PD combined with MA-only.
Table D-2. Credibility Factors for Part D Stand-alone Contracts
Member Months
Credibility Adjustment
<4,800 Not
Credible
4,800 8.4%
12,000 5.3%
24,000 3.7%
48,000 2.6%
120,000 1.7%
240,000 1.2%
360,000 1.0%
>360,000 Fully
credible
Source: Centers for Medicare & Medicaid Services, “Medicare Program; Medical Loss Ratio Requirements for
the Medicare Advantage and the Medicare Prescription Drug Benefit Programs; Final Rule,” Federal Register, May
23, 2013, http://www.gpo.gov/fdsys/pkg/FR-2013-05-23/pdf/2013-12156.pdf.
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Author Contact Information
Suzanne M. Kirchhoff
Analyst in Health Care Financing
skirchhoff@crs.loc.gov, 7-0658
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