The Affordable Care Act (ACA) requires that insurers spend a minimum amount of the premium they collect on medical claims and clinical expenses. If the minimum threshold is not met, insurers will rebate a portion of the premium paid during the calendar year to the policyholder. To determine if insurers are meeting these requirements, the law requires insurers to calculate and report annually their medical loss ratio (“MLR”) to the federal regulatory agency. The MLR provisions within the PPACA became effective January 1, 2011, but the MLR will first be calculated and reported with rebates issued in mid-2012. Per federal guidelines, rebates must be sent to applicable groups by August 2012. A notification letter will be sent with all rebates. This 5 Minute Guide to Medical Loss Ratios (MLRs) should give you a solid understanding of the MLR requirements.
How is MLR calculated?
The MLR calculations are defined within the PPACA regulations. All insurers must calculate the MLR using the same methods and must make certain government-specified adjustments to the MLR for claims, premium, taxes and quality improvement expenses. Generally, the MLR is expressed as a percentage and is calculated by dividing an insurer’s claims paid plus expenses related to quality improvement by the premium collected less any taxes or fees associated with that premium.
Example: If an insurer paid out $850 in allowable expenses ($800 in claims and $50 in quality expense) related to $1,000 in adjusted premium ($1,050 premium less $50 in taxes and fees) the calculated MLR would be 85.0% (850/1000=85.0%). In general, the minimum MLR is 80% for the Individual and Small Businesses and 85% for Large Businesses.
How are Group Market Segments defined?
The group market (subdivided into Small and Large Groups) is defined as a health insurance policy whereby an individual obtains health insurance coverage through a group health plan maintained by an employer.
In general, a Small Group under PPACA is defined as any group that has between 1-100 employees; however, for MLR reporting, the Federal Government has said that until 2016 if a state defines small employer as an employer having up to 50 employees, insurers should use 50 as the upper limit for that State's experience unless the State indicates otherwise. Therefore a small group is defined as between 1-50 employees for MLR reporting unless the state has indicated otherwise.
In general, a large group under PPACA is defined as any group with 101 or more employers; however, for MLR reporting, the Federal Government has said that until 2016 if a state defines small employer as an employer having up to 50 employees, insurers should use 50 as the upper limit for that State's experience unless the State indicates otherwise. Therefore, a large group is defined as 51+ employees for MLR reporting unless the state has indicated otherwise.
What plans/markets will be impacted?
Effective January 1, 2011, all fully-insured medical products are subject to the MLR regulations of the ACA. Self-insured commercial plans are exempted from the minimum MLR requirement.
Who will get rebates?
In cases where the minimum MLR percentage is not met, insurers will issue rebates to the policyholders. Rebates will be issued based on the difference between the calculated MLR percentage and the target MLR. For example:
- If the minimum MLR is 80% for the Small Group or Individual market in a given state and the PPACA-prescribed calculated MLR for a legal entity was 78%, a 2% rebate would be issued to all Small Group policyholders of that legal entity in that state.
- If the minimum MLR is 85% for the Large Group market in a given state and the PPACA-prescribed calculated MLR for a legal entity was 83%, a 2% rebate would be issued to all Large Business policyholders of that legal entity in that state.
Unlike the MLR percentage calculation, the rebate dollar amount will be calculated based on the amount of premium paid by the individual policyholder less any taxes or fees associated with that premium. In the example above, if a policyholder paid $1,000 in premium and the insurer paid $50 in taxes related to that premium, the 2% rebate percentage would be applied to a basis of $950 for a total rebate of $19. Rebates for other policyholders within the state-legal entity-market segment aggregation will be similarly calculated.
How will rebates be distributed and how can they be used?
The ACA also provides guidance on how the rebates can be distributed to policyholders and how the rebates may be used. If an employer is the policyholder, rebates will typically be issued directly to the employer. In general, the group/policyholder must utilize the rebate for the benefit of employees in accordance with guidance provided by the Department of Labor.
What are the MLR reporting requirements?
For each year the MLR is calculated, insurers must file reports with the Department of Health and Human Services (HHS). The reports include data on medical claims, collected premiums, costs incurred to improve health care delivery and quality, and adjustments that exclude certain administrative costs.