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Medical Loss Ratio Requirement: Penalizing Health Plans For Investing In Initiatives That Improve Health Care Quality And Safety

posted by Federal Affairs

on January 11, 2013

Background

The Affordable Care Act (ACA) requires health plans to comply with a medical loss ratio (MLR) requirement of 80 percent in the individual and small group market, and 85 percent in the large group market—effective January 1, 2011. Generally speaking, a health plan’s MLR is the ratio of its benefit payments (the numerator) divided by its premiums (the denominator). Therefore a health plan with non-benefit expenses that comprise 20 percent of premiums would have an MLR of 80 percent. If a health plan does not meet the applicable MLR threshold, it must rebate the difference to subscribers.

The MLR requirements were established under the premise that they would “ensure… consumers receive value for their premium payment.” However, many experts agree that a health plan’s MLR may provide a poor, and potentially misleading, measure of that plan’s “value.”

As the non-partisan Congressional Budget Office has noted, a relatively low MLR may be the result of a health plan devoting more resources to managing the use of health care services, leading to lower overall premiums, while a high MLR could indicate higher overall premiums and coverage of additional services that provide limited benefits. The MLR also does not recognize significant variations in claims expenses, such as changes in health care usage patterns (e.g., shifting from a high-cost surgical treatment to a low-cost pharmaceutical treatment) and unpredictable trends in diseases (e.g., more moderate than expected flu season) that can occur. Despite best forecasting by health plans, such variables may result in plans falling below the MLR minimum standards in any given year, but would not mean that a health plan provides “less value.”