If you recently received a notice in the mail from your health insurance company about “medical loss ratios,” you’re not alone. The MLR notification is part of a requirement included in the monumental Patient Protection and Affordable Care Act of 2010, also known as the affordable care act or healthcare law, which was upheld by the U.S. Supreme Court in June.
Background: Typically, health insurance companies spend substantial amounts on administrative costs such as executive compensation, marketing, underwriting and overhead. Of the $2.6 trillion in premiums that individuals contribute each year, an estimated $650 billion goes toward these expenses. Under the affordable care act, insurance companies must spend 80 to 85 percent of the premium dollars received on medical care and activities to improve health care quality, rather than using it to pay for administrative costs. Otherwise, the insurance company will be required to provide a rebate to customers, beginning in 2012.
An estimated 9 million Americans may be eligible for rebates worth a total of $1.4 billion. The average rebates per individual depend on the plan and may be less than $100.
The medical loss ratio (MLR) provisions in the affordable care act are designed to improve the insurance marketplace for consumers. It should help you obtain a better value for the premiums you pay — and understand how the money is being spent.
Here’s a brief review of the main requirements that may benefit individuals.
Greater transparency and accountability: The affordable care act requires insurance companies to publicly report how they spend the premium dollars they receive. Consumers will be provided with detailed information on expenditures. Each insurance company must account for the amount of funds used for actual medical care and healthcare quality improvement activities versus the amount of money spent on administrative costs.
Value for premium dollars: Insurance companies in the individual and small group markets must spend at least 80 percent of the premium dollars they receive on medical care and health quality improvement activities. The companies in the large group market must spend at least 85 percent in the same manner.
Premium rebates: Beginning in 2012, if a health insurance company doesn’t meet the appropriate MLR standard, it will be required to provide rebates to customers. The rebates, which must be paid by August 1 of each year, will first be made available in 2012. An individual who is eligible for a rebate will either receive a check, have his or her premiums reduced or be credited on a credit card account (if it was used to pay for premiums).
Rebates are generally issued by insurers to plan participants. (If you are an employer who wants more information about MLRs, contact your employee benefits adviser.) The U.S. Department of Labor issued guidelines on the handling of rebates, which can be read by clicking here.
Regardless of how the rebate is paid, it will be proportional to the premium amount paid by the participant.
Notification requirements: Insurance companies that issue policies to individuals, small employers and large employers must report the following information in each state in which they do business:
- Total earned premiums;
- Total reimbursement for clinical services;
- Total amount spent on activities to improve health quality; and
- Total amount spent on all other non-claims costs (excluding federal and state taxes and fees).
These reports will be posted publicly so consumers can better assess the value of plans offered by different health insurance companies in their state.
While the affordable care act was in limbo prior to the U.S. Supreme Court’s ruling, the Department of Health and Human Services was busy churning out regulations concerning the MLR provisions. The regulations outline disclosure and reporting requirements, the methodology for calculating the MLR and provisions for rebates and adjustments to the MLR standards. The final rule amending the regulations was issued on May 16, 2012. This rule can be viewed at www.federalregister.gov/articles/2012/05/16/2012-11753/medical-loss-ratio-requirements-under-the-patient-protection-and-affordable-care-act.