Health Care Reform

Medical Loss Ratio

ACA establishes medical loss ratio (MLR) targets for health insurance offered in the individual, small group, and large group markets. This requirement is applicable to coverage regardless of grandfathered status but does not apply to self-funded plans.

For policies offered in the individual and small group markets, the target MLR is 80%. For policies offered in the large group market, the target MLR is 85%. Rebates are based on the amount by which the target MLR is missed. For example, if a health insurer’s MLR in the large group market is 83%, the insurer will be required to rebate 2% of premiums. The numerator of the MLR calculation includes expenses for reimbursement of claims and activities that improve health care quality. The denominator of the MLR calculation includes total earned premiums. Administrative expenses such as broker commissions are generally not included.

If a health insurer does not achieve the target MLR, it must provide rebates to enrollees in that market. Rebating began in August 2012.  All rebates must be issued to consumers by August 1st of the year following the applicable MLR reporting period (i.e., August 2012 for the 2011 reporting period). Employers sponsoring non-Federal governmental plans that receive rebates must allocate to plan participants a sum that is proportionate to their individual premium contributions. Rebates may be distributed by reducing employees’ portion of the premiums or providing a cash refund. If the plan is covered by ERISA, the rebates may constitute plan assets. As such, plan sponsors of ERISA plans that receive rebates should work with their legal counsel to determine how the rebates may be used under the terms of the plan and ERISA.


MLR Requirements

Note:  The MLR rules only apply to certain types of health plans, such as major medical insurance. They do not apply to HIPAA excepted benefits, such as disability, cancer, hospital indemnity, or accident insurance. Click here for more information about the types of benefits that are exempt from the ACA plan design mandates.

For insurance that is subject to the MLR Requirements, certain exceptions also apply for insurers who only cover a small number of insureds in particular state. Federal regulations also provide an adjusted MLR percentage for mini-med or expense-based limited medical policies.

American Fidelity Assurance Company does not provide tax or legal advice.


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