Under the Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148), certain health insurers are required to provide rebates to their customers for each year the insurer fails to meet its medical loss ratio (MLR) financial target. The Congressional Research Service (CRS) issued a report for Congress about the MLR requirements and issues that have arisen following enactment of PPACA.
MLR Reporting Requirements
MLRs are intended to measure the value consumers receive from their health insurance provider. Section 1001 of PPACA imposes a federal minimum MLR requirement on fully-funded health plans; providers must issue rebates to policyholders for each year they fail to meet the requirements. For-profit providers were required to first provide MLR reports to HHS in 2012; non-profit providers will file reports beginning in 2014. Insurers in the individual and small group markets must meet a minimum MLR of 80 percent; insurers that sell group plans to employers with more than 100 workers are required to have a minimum MLR of 85 percent due to assumed lower administrative costs.
MLR Calculation Formula
The mathematical formula used to calculate a provider’s MLR is as follows: the sum of Medical Claims and Quality Improvement Expenditures divided by the difference between Earned Premiums and Taxes, Licensing and Regulatory Fees.
Medical claims include direct claims incurred in the MLR reporting year, unpaid claim reserves associated with claims incurred, any change in contract reserves, the claims-related portion of reserves for contingent benefits and lawsuits, and experience-rated refunds. Prescription drug costs are included in claims incurred, following deduction of any prescription drug rebates. Quality improvement expenditures are activities that improve health outcomes, prevent hospital readmissions, improve patient safety and reduce medical errors, or implement wellness and health promotion activities. Further, qualified quality improvement expenditures must be designed to improve health care quality and increase the likelihood of desired health outcomes in ways that can be objectively measured, directed toward individual enrollees or specific segments of enrollees, and grounded in evidence-based medicine.
For the denominator of the MLR formula, premiums are the sum of all monies paid by a policyholder in order to receive coverage from a health insurer. Federal taxes are all federal taxes and assessments allocated to health insurance coverage that are subject to the MLR reporting requirements under PPACA, and do not include federal income taxes on investment income and capital gains. State taxes and assessments are reported separately, as are licensing and regulatory fees. Fines, penalties, and fees for examinations other than those in lieu of premium taxes may not be used to adjust premium revenue.
State Flexibility and Rebates
PPACA gave the HHS Secretary the authority to adjust the 80 percent MLR standard for up to three years if applying that standard could destabilize the individual market in a given state. Seventeen states and a territory requested adjustments; the states of Georgia, Iowa, Kentucky, Maine, Nevada, New Hampshire, and North Carolina were granted a waiver adjustment. Health insurers that fail to meet the minimum MLR requirements must provide rebates to policyholders, issued by August 1 each year following the MLR-calculation year. Rebates are paid to the enrollee, who is the subscriber, policyholder, or entity that paid the premium for health insurance coverage. If someone other than the covered individual receives the rebate, as in the case of employer-sponsored coverage, the employer and employee receive their relative shares of the rebate depending on how much of the premium each paid. Rebates under group policies must be coordinated through the employer, while de minimus rebates must be aggregated by insurers and distributed to other enrollees due rebates or used for allowable activities that benefit enrollees by employers that oversee plans.