One piece of the Affordable Care Act (ACA) is the subject of Medical Loss Ratios (MLR). So, what is a MLR? It is the total amount of the premium dollar spent on paying medical claims and making quality improvements minus taxes and regulatory fees. And, why is it called a “loss”? Because, it is a loss to the insurance companies! The MLR rule went into effect on January 1, 2011. The new MLR threshold for insurance companies that offer health coverage to individuals and small businesses is 80% . For insurers that provide health coverage for larger groups the threshold is at 85%. This means that the insurance companies could only spend the remaining 15-20% on administrative services such as managing coverage, marketing products and earning profits for investors. This is no small matter if you consider that we spend $2,600,000,000 ($2.6 trillion) on healthcare in the United States. By some estimates, we spend approximately 25-30% of overall healthcare on administrative services. So, of the $2.6 trillion we spend on health care in this country, at least $650 billion goes toward overhead. Put another way, of the $7,960 we spend per person per year on health care in the US, about $2,000 goes to overhead. Recently, the National Association of Insurance Commissioners (NAIC) lobbied for the Department of Health and Human Services (HHS) to include payment of commissions to health insurance agents as a health benefit and not as an administrative expense. HHS denied this request. So what happens if insurance companies do not meet their administrative target? Consumers get a rebate. In fact, the first rebates will be issued starting August 1, 2012. The final numbers for the MLRs are not released yet, but Kaiser Family Foundation estimates that $1.3 billion will be returned back to employers and consumers. Here is the breakdown from Kaiser:
- Individual Market – $426 million will be returned to 3.4 million consumers. The national average rebate will be $127 per person for the year, although some states have much higher averages.
- Small Group Market – $377 million is expected to be returned to employers who provide health insurance for 4.9 million employees. The average rebate will be $76 per enrollee.
- Large Group Market – $541 million will be returned to 7.5 million enrollees. The average rebate will be only $14 per employee. The amount is much less than the rebates in the Individual or Small Group Markets because the larger groups cover more enrollees and are also more efficient.
Some states have higher rebates than others. The higher rebates mean that the insurers have been charging their enrollees more throughout the years leading them to pay more in rebates. Nevertheless, it seems that we are moving in the right direction–going forward. Moreover, the insurance plans have to notify their enrollees about rebates, even if they do not have to provide one. This will be a good step towards educating and directly involving everyone about cost control in healthcare. Read more about medical loss ratio requirements under the Patient Protection and Affordable Care Act in the Federal Register.