Medical Loss Ratio

The Medical Loss Ratio (MLR) refers to the percentage of insurer premiums spent on medical services and supporting quality efforts. The Affordable Care Act (Obamacare) established minimum MLR standards for most private health insurance plans. The medical loss ratio is a key financial requirement that insurance companies must spend between 80 to 85% of all premium dollars on medical services. That means insurers are limited to 15% to 20% for administrative, overhead, marketing, and profits. If an insurer falls below these thresholds (calculated as a multi-year average), they must issue rebates to enrollees (or policyholders, such as employers) to make up the difference.

Unfortunately, the MLR creates perverse incentives. Insurers are able to game the system because the higher the top line of spending on medical claims and quality improvement activities is, the bigger the bottom-line number (premiums) can rise. This is a prime driver of health care price inflation and rising costs throughout the U.S. health care system. The MLR incentivizes vertical consolidation of providers which leads to inflated internal prices, less competition, and less choice.

Additional Resources

• Managed Care Organization
• Premium
• Actuarial Value

Additional Paragon Research

• Path to Health Care Affordability: Holding Health Insurers Accountable
• Managed Care in Medicaid – Need for Oversight, Accountability, and Reform
• Improving Medicare Through Medicare Advantage