Medical Loss Ratio Q & A

What is a medical loss ratio (MLR)?

A "medical loss ratio" (MLR) is the share of premium dollars that a health insurer spends on health care and activities to improve health care, as opposed to expenses for administration, marketing, CEO salaries and profits. The Affordable Care Act creates new nationwide minimum standards that will force insurers to report this information - something they're often not required to do - and to meet certain minimum requirements. Beginning in 2011, health insurers serving individuals and small firms must spend at least 80% of premiums on medical care and quality improvement activities and health insurers serving larger businesses must spend at least 85%. Health insurers that fail to meet these minimum expense standards will be required to pay consumers a rebate reflecting the difference.

What will regulations do?

Key terms and necessary exceptions are specified during the regulatory process. Defining these terms correctly would make a substantial difference in how effective the law will be in protecting consumers from junk insurance.

How do these rules affect my state law?

Only a handful of states have MLR standards for the health plans regulated by their state. States will continue to enforce laws that are stronger than the new federal minimums (higher MLRs) but cannot go any lower.

What is the role of the National Association of Insurance Commissioners (NAIC) in the MLR regulations?

The NAIC is a private association representing the state insurance commissioners. The health reform law tasks the NAIC to write key definitions and recommend to HHS how to calculate the medical loss ratios. The federal Department of Health and Human Services (HHS) must approve the NAIC definitions and methodologies for calculating MLRs before they become official but HHS is likely to heavily rely on the NAIC's recommendations.

NAIC policies start in workgroups, where consumer representatives from groups like the American Heart Association and Consumers Union, insurance companies and insurance commissioners and their staffs participate. Workgroup recommendations will go to NAIC committees in the near future. If approved there, the recommendations will move to the NAIC's Executive Committee and then to a full vote by all insurance commissioners. The timing for completing these steps is unclear.

Many consumer concerns have been heard by the workgroups and incorporated into their recommendations, but as these issues move forward, insurance company lobbyists will turn up the pressure on insurance commissioners and try to weaken standards. It's more important than ever for consumers and advocates to weigh in on the process.