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Medical Loss Ratios: An Impetus to Offer ‘Valuable’ Plans

By Pat Look, J.J. Keller & Associates Inc.  3/1/2011

One provision of the Patient Protection and Affordable Care Act (PPACA) is directed at insurance carriers and pertains to medical loss ratios (MLRs)—the percentage of premium dollars that an insurance company spends on health care and improving the quality of health care.

This provision has a significant impact on participants in group health plans. The intent is to ensure that consumers get the most health care for their money, so it caps the amount that insurance companies can spend on overhead, marketing and advertising as well as salaries and bonuses.

Beginning in 2011, the law requires that 80 percent (small group market) or 85 percent (large group market) of the money collected by insurance companies be used on health care services and health care quality improvements.

The National Association of Insurance Commissioners (NAIC), after months of discussion, hearings and consultations, presented recommendations of uniform definitions and standard methods for calculating MLRs to the U.S. Secretary of Health and Human Services (HHS) in October 2010. HHS followed with an interim final rule that adopted all of the NAIC's recommendations. HHS plans to continue issuing regulations in several phases to implement the health care reform law's MLR provisions fully.


In addition to helping ensure that policyholders receive value for their money, the regulation is designed to create incentives for insurance companies to become more efficient in their operations.

Implementation of the interim final rule will provide participants with the information to determine how much of the premium reimburses providers, improves health care quality and pays for administrative expenses. If an insurance company fails to meet the goals of this regulation, it is required to provide rebates to the health plan participants. Rebates must be paid annually to eligible consumers beginning in August 2012 based on 2011 MLRs.

Rebate Calculation

The amount of rebate paid to each participant is based on the premium paid by or for that participant minus taxes and other permissible adjustments. The law requires that the total rebate owed by the insurer is a percentage of the insurer’s total earned premium.

There are several exceptions to the rebate calculation if the MLR standard is not met. New plans, so-called "mini-med" plans and expatriate plans are considered to be special circumstances and must be looked at individually.

If an insurer has fewer than 1,000 covered persons, it is not considered to be a credible issuer and rebates are not required. An insurance company with 1,000 to 75,000 enrollees is considered to be “partially credible” and an adjustment to the actual MLR calculation is applied. Any plan with more than 75,000 enrollees is considered to be a “fully credible” issuer and required rebates must be made without any adjustments.

The regulation has set a limit of less than $5 per subscriber, under which insurers need not pay a rebate. However, insurers may not keep the rebates but rather must aggregate these de minimis rebates and distribute them in equal amounts to all current enrollees who receive a premium credit.

In situations where locating certain enrollees has become impossible, unclaimed rebates will be subject to state law provisions.

Type of Rebate

It is the insurer’s choice to provide a rebate to current participants in the form of a premium credit, a lump sum check or by credit card or debit card reimbursement if the enrollee used that method to pay the premium. However, former participants who are eligible for a rebate must receive it in a lump sum payment.


An insurer that has not met the MLR standards must provide a rebate to each enrollee on a pro-rata basis. This means that each individual should receive a rebate that is proportional to the amount of premium paid by that enrollee, and the group policyholder should not keep more than its proportional share of the rebate. This interim final regulation allows an insurer to delegate the distribution of each rebate to a group policyholder but provides that the issuer is still liable for complying with all of its obligations under the law and maintaining records from the group policyholder showing that rebates were distributed accurately.

Required Notices

In addition to the rebate, enrollees must be provided with an explanation as to the reason for the rebate. This notice must include data such as the premiums earned by the insurer, the MLR, the required MLR threshold, the percentage being rebated and the total amount being paid or credited to enrollees. It must explain the method of rebate (premium credit, check, etc.).


Not only must insurance companies follow the MLR standards, they are subject to civil penalties for failing to comply with the reporting and rebate requirements. The regulations allow for a penalty for each violation of $100 per day, per individual affected by the violation.

This interim final rule took effect on Jan. 1, 2011.

Patricia Look has been the editor of the BottomLine Benefits & Compensation newsletter for J.J. Keller & Associates since its inception in 2007. She has worked in benefits and compensation management, with a focus on retirement plans and executive compensation, for over 25 years. In particular, her expertise includes 401(k) plans, qualified pension plans, deferred compensation and supplemental plans for executives.

Related Articles:

Medical Loss Ratio Rules Could Boost Self-Insuring, SHRM Online Benefits Discipline, December 2010

HHS Issues Medical Loss Ratio Interim Final Rule, SHRM Online Benefits Discipline, December 2010

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