How Much Are Consumers Saving from the ACA’s Medical Loss Ratio Provision?

Originally published Jun 06, 2013 by Cynthia CoxGary Claxton and Larry Levitt


Most of the conversation around the Affordable Care Act’s Medical Loss Ratio (MLR) provision has centered on the requirement that insurers issue consumer rebates when they fall short of spending a certain portion of premium dollars on health care and quality improvement expenses.  This makes sense as rebates are one of the more tangible ways consumers have benefited from the law so far, and it likely contributes to the MLR provision being among the more popular aspects of the health reform law.

However, as we've written before, rebates represent only a portion, albeit the most concrete portion, of the MLR rule’s savings to consumers.  The primary role of an MLR threshold is to encourage insurers to spend a certain percentage of premium dollars on health care and quality improvement expenses (80 percent in the individual and small group market and 85 percent in the large group market).  The MLR rebate requirement operates as a backstop if insurers do not set premiums at a level where they would be paying out the minimally acceptable share of premiums back as benefits.  Only if those thresholds are not met are insurers required to provide rebates to consumers or businesses. (You can read more about the MLR rule here).

Consumers and businesses, therefore, can realize savings in two ways as a result of the MLR requirement: by paying lower premiums than they would have been charged otherwise (as a result of lower administrative costs and profits), or by receiving rebates after the fact. So while insurers paid out considerable amounts for rebates – last year’s rebates totaled $1.1 billion – this is not the whole story for consumers.

Of course, it is hard to know with certainty what premiums would have been if the MLR rules were not in place: we cannot know for sure how insurers would have priced their products or what rates regulators would have allowed (to the extent that they reviewed rates prior to the ACA). It is also difficult to separate out the direct effects of the MLR provision from other aspects of the health reform law, particularly rate review, which works to moderate unreasonable premium increases and thus increase loss ratios.  There are also data limitations. For example, prior to new reporting requirements put in place to enforce the MLR provision, there were not good data sources that break out premiums and claims on a consistent basis for major medical coverage by all types of carriers. In the initial years this data became available (2010 and 2011), there were some issues with the quality of the data, particularly regarding expenses for quality improvement and other new categories of administrative expenses that are reported on the exhibit.

Within these limitations, we constructed an analysis that looks at the basic proportion of premiums that health plans paid out as claims for medical care over the three years since the ACA was passed, both before and after the MLR requirement went into effect for coverage in 2011.  These proportions do not include adjustments for quality improvement expenses, taxes or other factors that are used when determining whether or not rebates need to be paid; they simply represent the total payments for medical care as a proportion of premiums.  This is the traditional way medical loss ratios have been calculated.  Generally, if the proportion is rising, that means insurers are paying out more of each dollar they receive on enrollee health care, which in most cases would mean that enrollees are getting better value for the premiums they pay. We then quantify what the change in the traditional MLR means to enrollees by estimating how much they would have paid in premium if the observed MLR for 2010 (before the MLR requirement went into effect) were held constant for 2011 and 2012.1 This approach addresses the following question: If insurers had targeted the same claims to premium ratio for 2011 and 2012 as they achieved in 2010, would premiums have been higher or lower, and by how much?  In other words, it addresses how much consumers may have saved in lower premiums as a result of the MLR threshold in addition to receiving rebates.

Our analysis uses insurer data filed to state regulators and compiled by Mark Farrah Associates. These data (filed on the Supplemental Health Care Exhibit) suggest that the main beneficiaries of the MLR rule’s upfront premium savings are people who purchase insurance on their own.  The majority of plans sold to small and large businesses were already in compliance with their respective MLR thresholds before the law went into effect, and our analysis shows that traditional MLRs (claims divided by premiums) for group plans have stayed relatively flat over the past three years.  In the individual market, by contrast, fewer than half of plans were in compliance with the ACA’s MLR thresholds in 2010, and the average traditional MLRs in this market have been steadily increasing since the requirement went into effect. This means that individual market insurers are devoting a greater portion of premium dollars to health care claims and less to administrative costs and profits compared to before the ACA’s MLR rule went into effect.

This pattern is consistent with the idea that some insurers needed to improve their MLRs to comply with the new rebate requirements.  We know that the individual market MLR requirements in the ACA are higher than those that were in effect in many states, and there have been numerous reports that insurers worked to reduce their commissions and other administrative expenses to become more efficient.

So how might these changes have affected premiums?  As noted above, one way to address this question is to compute what these consumers would have paid in premiums in 2011 and 2012 had traditional individual market MLRs stayed at 2010 levels (the year before the provision went into effect). Looked at this way, premiums would have been $856 million higher in 2011, and premiums would have been $1.9 billion higher in 2012.

Adding to the premium savings the amount individual market consumers received in rebates yields a total savings of $1.2 billion for 2011. This year, individual market insurers are expecting to issue $241 million in rebates (based on our analysis of early estimates from insurers filed with state insurance departments), bringing the total estimated savings for 2012 to $2.1 billion. While this savings was not distributed evenly (with more going to people enrolled in plans that had low MLRs prior to the law), when averaged across all individual market enrollees, this amounts to a savings of $204 per person ($181 in premium savings and $23 in rebates) in 2012. Taking into account both premium savings and estimated rebates, people purchasing insurance on their own in 2012 spent 7.5% less on average on insurance than they might otherwise have in the absence of the law.

There are some potential limitations to this approach. While the pattern of increasing MLRs over the three years makes sense given the incentives under the ACA and reports of insurer behavior, we do not have comparable data from earlier years to tell us whether or not the 2010 MLR was typical for the pre-ACA period (though the available evidence suggests that it was).2 Also, MLRs in 2011 and 2012 might be overstated because insurers simply underestimated how much health care expenses would rise following the recession, though increasing MLRs still means that consumers have been getting better value for their premium dollars. Finally, rebate amounts for 2012 are based on preliminary estimates filed on the Supplemental Health Care Exhibit to state insurance departments, and actual rebate amounts will be based on insurer filings with the Department of Health and Human Services, which were due June 1.

If insurers’ preliminary estimates hold true, this year’s rebates (at a total of $571 million across all markets) are expected to be about half the amount of last year’s $1.1 billion in insurer rebates. Smaller rebates, however, are not an indication that consumers are now saving less money as a result of the MLR provision, but rather that insurers are coming closer to meeting the ACA’s MLR requirements and that this provision is having its intended effect of consumers getting more value for the money they spend on premiums. In fact, in the individual market, the $241 million consumers are expected to receive in rebates for 2012 represents roughly one tenth of our estimate of the overall savings from the provision in that year. Perhaps ironically, when the MLR provision is working as intended and insurers set premiums to meet the thresholds, consumers save money but are less likely to get a check in the mail as tangible demonstration of those savings.


  1. See methodology attached
  2. Based on our analysis of the Accident and Health Experience Exhibit submitted to state regulators, which has been required of all insurance entities since 2006 but is not directly comparable to newer and more precise data, the weighted average traditional loss ratio in 2010 was slightly higher (80%) than the average of previous years (79%). Our premium savings estimates for 2012 and 2011 are thus likely conservative compared with estimates that used MLRs in prior years.



2013 MLR Rebate Process Follows Similar Path

Original article posted on

The second year of reporting Medical Loss Ratio (MLR) is underway, as required by the Affordable Care Act.   All health insurance companies are required to spend a certain percentage of premium dollars on health care claims and programs to improve health care quality.

Individual and small group markets must achieve an MLR of 80%. There are limited exceptions where states have set a higher MLR threshold (Massachusetts and New York).  The large group market is required to reach an 85% MLR.

As happened in 2012 with the rebate calculation, fully insured policyholders are grouped in Aggregation Sets according to three criteria: group size, situs state and legal insurance entity.

Small group market size is generally up to 50 average total number of employees (ATNE), but 12 states have elected to follow the federal MLR standard of up to 100, with large group being those with an ATNE over 100.  In 2016, all small group markets will follow the federal standard of up to 100.

The process and timetable is very similar to last year’s first Rebate Reporting Year.  UnitedHealthcare has conducted its preliminary review and sent an April mailing to select customers seeking Written Assurance as to how they may use a potential premium rebate.

A critical date for brokers and customers is June 1, when the final MLR Rebate Report will be filed with the Department of Health and Human Services (HHS) detailing the states and Aggregation Sets eligible for premium rebate, along with the final total premium rebate payout.

After the June 1 filing with HHS, reports for sales and brokers listing the customers receiving rebates will be available in the mid-June time frame.  Rebate checks will be issued in staggered mailings beginning the first week of July, with August 1 the deadline for all rebates to be paid to policyholders.

Policyholders receiving premium rebates will receive their checks with the rebate notification.  Their subscribers also will receive a notification that their employer has received a premium rebate.

Rebates will be distributed in the following ways:

  • For ERISA plans, in most cases, the rebate will be paid to the group policyholder.  The exception to this are those groups for which coverage is terminated at the time of the rebate payment and cannot be located by the applicable issuer.  Each group policyholder receiving a rebate will generally have an obligation to use a portion of the rebate to benefit the subscribers of the relevant plan consistent with Department of Labor requirements.
  • For Federal government plans, the rebate will be paid directly to the group policyholder as well.
  • Non-federal governmental plans, the rebate will be paid to the group policyholder, with the policyholder having an obligation to use the portion of the rebate attributable to the premium paid by subscribers in one of the following three ways:Non- ERISA and non- government plans, the rebate will be paid to the group policyholder provided the issuer received a Written Assurance that the group policyholder will use the rebate according to standards applicable to non-federal government plans (details above).  Customers needing to provide Written Assurance were sent a form in April and have until the end of May to return it.
    • To reduce the subscribers’ portion of the annual premium for the following policy year for all subscribers covered under any group health policy offered by the plan;
    • To reduce the subscribers’ portion of the annual premium for the following plan year for only those subscribers covered by the policy on which the rebate was based;
    • Provide a cash rebate to subscribers covered by the policy on which the rebate was based.

Written Assurance forms are “evergreen,” meaning that customers with a Written Assurance on file from a previous rebate reporting year are not asked to complete another one.   If customers do not return a completed Written Assurance by the required deadline, we are required by the federal rules to divide any rebate equally among all applicable subscribers.

Unlike last year, there will be no notifications in 2013 to either the applicable policyholders or subscribers if the group was not included in an Aggregation Set that qualified for a rebate.

The insurer notice that will be sent when the rebate is paid to the employer is here:

The Long Arm Of The U.S. Healthcare Ruling


The Supreme Court ruling to uphold the core of President Barack Obama's 2010 healthcare law has wide-ranging political and economic implications.

Here is a snap analysis of what it means for Americans, healthcare providers, insurers, the law and the presidential campaign.

How does the ruling affect the average American?

* Working families with annual household incomes up to nearly $90,000 will be able to purchase private insurance through new state insurance markets at prices subsidized according to income level, beginning in 2014. But people with household incomes of around $29,000, who qualify for coverage under the Medicaid government health insurance program for the poor, may have to wait for their respective state governments to decide whether they will join the program's huge expansion. Preventive healthcare measures including mammograms and other cancer screenings will be available without deductibles or co-pays. Adult children up to age 26 can remain on their parents' health insurance plans. Senior citizens can expect to continue receiving discounts on prescription drugs aimed at closing the Medicare coverage gap known as the "doughnut hole." Health insurers will continue to pay rebates on premiums not sufficiently targeted at healthcare services. Beginning in 2014, insurers will no longer be able to deny coverage to adults with pre-existing medical conditions and would be required to stop or curb discriminatory pricing based on gender, age and health status.

What about healthcare providers?

* The ruling removes one cloud of uncertainty over the future of healthcare reform and would help the administration's efforts to implement it fully by January 1, 2014, when the law is scheduled to go into effect. Under the decision, physicians and hospitals continue to move away from the traditional fee-for-service healthcare business model and toward more efficient systems that coordinate care. For healthcare providers, the affirmation represents millions of potential new patients, either through private plans or the government's Medicaid program for the poor. Some, however, would be under added pressure to enact more savings, which could cut into revenues. The administration still faces some fairly tall hurdles, such as establishing regulated health insurance markets in all 50 states so consumers can purchase subsidized coverage. Up until now, over a dozen states have done little or nothing to create such exchanges, partly because of the uncertainty over the fate of the law. Down the road, if Republicans succeed in taking control of the White House and the Senate in November (they already control the House of Representatives), they would likely try to repeal the law in 2013.

Where does the ruling leave health insurers?

* The health insurance industry can expect premium revenue from millions of new, healthy customers through state exchanges. But the industry will also have to operate with new consumer protections that require coverage access for people with pre-existing medical conditions and other health status issues, and mandate preventive care without customary charges.

How might the ruling influence the presidential campaign?

* This is a big victory for Obama, who has weathered years of criticism from conservatives about his reforms. The decision could energize the president and his supporters, while undercutting presumptive Republican presidential nominee Mitt Romney, who introduced similar reforms as Massachusetts governor but opposes their use as national policy. But there could be a silver lining for Republicans: the opinion could light a fire under party candidates and constituents who want a president who would repeal the law in 2013.

(Reporting by David Morgan and Lewis Krauskopf; Editing by Michele Gershberg and Will Dunham)


The Affordable Care Act requires health insurers to spend a minimum percentage of their premium dollars on medical claims and quality improvement.  Insurers in the large group market must achieve a medical loss ratio (MLR) of 85%, while insurers in the individual and small group markets must achieve an MLR of 80%.  Insurers that fail to achieve these percentages must issue rebates to their policyholders.  The first of these MLR rebates are due in August of 2012, so plan sponsors should begin planning how to handle any rebates they might receive.


Which Plans Are Covered?

The MLR rules apply to all fully insured health plans (even grandfathered plans).  Self-funded plans are exempt.  Certain types of insured coverage, such as fixed indemnity, stand-alone dental and vision, and long-term disability, are also exempt.

If a rebate is payable to a group policyholder, the insurer must issue a single rebate check to the plan.  The plan sponsor must then decide whether and how to pass the rebate on to the plan's participants.

Calculating a Medical Loss Ratio

The calculation of an MLR is not specific to each policyholder, but is a state-by-state aggregate of the insurer's overall MLR within a particular market segment (e.g., individual, small group, or large group).  Thus, even if a specific employer plan has a low MLR (i.e., favorable claims experience), the employer may not necessarily receive a rebate.

States are permitted to set higher MLR targets.  In those states, insurers must comply with the more stringent state requirements.

Notices to Subscribers

Insurers must send written notices to their subscribers, informing them that a rebate will be issued.  Plan sponsors should be prepared to respond to questions from participants who receive these notices, particularly if the sponsor does not intend to share any of the rebate with those participants.

Likewise, even if an insurer meets the MLR requirements, it must notify subscribers that no rebate will be issued.  This notice must be included with the first plan document provided to enrollees on or after July 1, 2012.  Model notices<> are available on the Centers for Medicare & Medicaid Services website.

How to Allocate MLR Rebates

The Department of Labor (DOL) issued Technical Release 2011-04<>, summarizing how ERISA plan sponsors should handle MLR rebates.  To the extent that all or a portion of the rebate constitutes a "plan asset," the sponsor may have a fiduciary duty to share the rebate with plan participants.

In the absence of specific plan or policy language, the determination of whether an MLR rebate is considered to be a plan asset will depend, in part, on the identity of the group policyholder.  If the plan or trust is the policyholder, the MLR rebate will likely be considered a plan asset under ordinary notions of property rights.

However, if the employer is the policyholder, the determination will hinge on the source of the premium payments and the percentage of premiums paid by the employer, as opposed to plan participants.  If the premiums were paid entirely out of plan assets, the DOL's view is that the entire amount of the rebate would be considered a plan asset.  In other circumstances, only the portion of the rebate that is attributable to participant contributions will be considered a plan asset.

If all or a portion of a rebate does constitute a plan asset, then the plan sponsor will have to determine how and to whom to allocate the rebate.  For example, must a portion of the rebate be allocated to former plan participants?  The selection of an allocation method must be reasonable and it must be made solely in the interest of plan participants and beneficiaries.

However, a plan fiduciary may weigh the costs to the plan - and the ultimate plan benefit - when deciding on an allocation method.  Thus, for example, if the cost of calculating and distributing shares of a rebate to former participants approximates (or exceeds) the amount of the proceeds, a fiduciary is permitted to limit the allocation to current plan participants.

Similarly, if it is not cost-effective to distribute cash payments to plan participants (because the amounts are de minimis, or they would produce negative tax consequences for the participants), a fiduciary may use the rebate for other permissible plan purposes.  These might include a credit against future participant premium payments or benefit enhancements.

Tax Consequences

Before deciding to pass an MLR rebate on to participants, a plan sponsor will want to understand the tax implications of doing so.  The IRS has issued a set of questions and answers<,,id=256167,00.html> on this topic.  Because this guidance is entirely in the form of examples, with few general principles provided, the tax treatment may not always be clear.  What is clear is that a number of factors will affect the taxability of an MLR rebate.

For individual policyholders receiving an MLR rebate, the IRS treats the rebate as a return of premiums (i.e., a purchase price adjustment).  As long as the premium payments were not deducted on the individual's federal tax return, the MLR rebate should not be taxable.  However, if an individual did deduct the premium payments, the MLR rebate will be taxable to the extent the individual received a tax benefit from that deduction.

For participants in a group plan, the tax consequences will depend on factors such as the source of the premium payments (employer versus participant), whether participant premiums were paid on an after-tax or pre-tax basis, and whether a participant who paid premiums on an after-tax basis later deducted those premiums on his or her federal income tax return.

Another key factor is whether the rebates are passed through only to participants who participated in the plan during both the year to which the rebate relates and the year it is received, or to all participants who participate during the year the rebate is received (i.e., without regard to whether they also participated during the year to which the rebate relates).

For instance, if a participant paid premiums on an after-tax basis and the MLR rebate is specifically conditioned on the participant having participated in the plan during both the year to which the rebate relates and the year it is received, any rebate allocated to that participant will generally not be taxable - regardless of whether the rebate takes the form of a cash payment or a reduction in future premium payments.  However, if the participant claimed a tax deduction for the premium payments (as might be the case for a self-employed individual), the rebate will be taxable to that participant.

On the other hand, if an MLR rebate is passed through to all current plan participants (regardless of whether they participated in the plan during the year to which the rebate relates), the rebate should not be taxable even if a participant took a tax deduction for premiums paid during that year.

Finally, if a participant paid premiums on a pre-tax basis (i.e., through a cafeteria plan), the return of those premiums - whether received in cash or as a credit against future premiums - will be subject to both income and employment taxes.