Medical Loss Ratio (MLR)

What Is Medical Loss Ratio (MLR)?

The medical loss ratio (MLR) is what is used to encourage health plans that provide the best value to people who are looking to enroll in health care. The Affordable Care Act (ACA) makes it so that insurers who provide healthcare have to spend a minimum amount of their client's premiums that are collected both on medical health claims and expenses for clinic visits. If the insurers do not spend the minimum amount of money from the collected premiums, they have to provide a medical loss ratio rebate of the paid premium to the back to the policyholders.

To make sure that insurers are meeting their requirements of spending the premium or offering back rebates, it is required by law to calculate and report their MLR, or ACA medical loss ratio, to the federal regulatory agency. The MLR provisions within the ACA became official on the first of the year on 2011, however medical cost ration was first calculated and reported with rebates that went out in the middle of 2012. 

How Is MLR Calculated?

ACA medical loss ratio is calculated within the ACA regulations, and every insurance company is required by law to calculate the MLR using uniform methods and make specific government-specified adjustments to their medical cost ratio for their claims, taxes, premiums, and customer quality improvement expenses. Medical loss ratio is usually articulated in the form of percentages and calculated by dividing the claims that insurer's pay and add any expenses related to the improvement of by the premium collected by any taxes or fees that are associated with that premium.

Group market segments

Group markets are divided into both small groups and large groups and each is defined as health insurance policies there individuals obtain health insurance coverage through group health insurance plans that are maintained by their employer. Small group ACA medical loss ratios are defined as a group that has between 1-100 employees. Large groups that are under the PPACA are defined as having 101 employees or more. Groups with 1-100 employees are to file for small group medical loss ratio reporting, and employers with 101 employees or over are mandated to file for large group medical loss ratio reporting unless the employer state government indicated otherwise.

Who Is Impacted By Medical Loss Ratio?

On the first of the year of 2011, every medical product that is fully insured becomes subject to the MLR regulations of the ACA medical loss ratio. Commercial employers that are Self-insured are exempt from any and all minimum MLR requirements put in place by the federal government. This makes it so that the only people impacted my MLR, or medical loss ratio, are employers who use public insurers that are regulated by the federal government, and ACA medical loss ratio standards.

Medical Loss Ratio Rebate

When the occasion arises that the medical cost ratio is not met, insurers are mandated to provide a medical loss ratio rebate to their policyholders. the medical loss ratio rebate is issues based on the difference between the percentage of medical cost ratio that was calculated and what the targeted MLR was. The medical loss ratio rebate is calculated based on the cost of premium that the individual policyholder paid unless taxes and/or fees are associated with that particular premium.

The rebate are distributed based on the strict guidelines laid out by the ACA. It is them who decides how they are distributed to their policyholders and how the rebates can be used. For example, if the policy is held by an employer, the rebate will be issued directly to them. Once the rebate is issued to the group, employer, or individual policyholder, they must use the medical cost ratio rebate for the benefits of employees as it mandated by the Department of Labor.

What Are The Requirements For Reporting Medical Cost Ratio?

Every year that medical loss ratios are calculated by the insurers, the insurers must file complete reports with the Department of Health and Human Services, HHS for short. These filed reports include the data on all the policy holder's medical claims, collected premiums, incurred costs for improving the quality of healthcare delivery and the adjustments that exclude some costs. Medical loss ratios can be confusing at first, but once studied it is actually a quite simple practice to understand. Whatever amount of premium that is not used by the insurers is returned to the policyholders that are to be used in a specific way as mandated by the Affordable Care Act.