For employers that sponsor fully insured health plans, having a clear understanding of how insurance carriers allocate premium dollars can lead to more informed renewal conversations, clearer plan evaluations and more effective employee communications.
Medical loss ratios offer a standardized way for regulators to evaluate how premiums are distributed between medical care and administrative costs. For employers, MLR rules can affect insurance carrier accountability, rebate eligibility and fiduciary responsibilities under certain plan arrangements.
What is a Medical Loss Ratio (MLR)?
Medical loss ratio is the percentage of health insurance premium dollars that an insurer spends on medical claims and approved quality improvement activities within a given state and year.
In simple terms, the medical loss ratio shows how much of the premium paid is used for health care expenses, rather than insurer operations or profit. For example, if an insurance carrier uses 85 cents out of every premium dollar paid to help pay its plan participants’ medical claims, the insurer has a medical loss ratio of 85 percent.
What counts as medical spending?
The “medical” portion of the medical loss ratio generally includes:
- Hospital and physician services
- Prescription drugs
- Care management programs
- Patient safety initiatives
- Approved quality improvement activities that promote wellness, prevent hospital readmissions or improve health information technology
What counts as nonmedical spending?
The remaining portion of premium dollars paid to the insurance carrier is used for operational and regulatory functions, such as:
- Enrollment and eligibility processing
- Customer service
- Billing and collections
- Network contracting
- Compliance activities
- Taxes and regulatory fees
ACA Medical Loss Ratio Standards
The Affordable Care Act established national minimum MLR standards beginning with the 2011 plan year. These thresholds apply to licensed, fully insured major medical plans and vary by market segment. Large group plans are typically those offered by employers or associations with 51 or more employees.
| Market Segment | Minimum MLR Threshold |
| Individual market | 80 percent |
| Small group plans | 80 percent |
| Large group plans | 85 percent |
It’s important to note that self-funded employer plans are not subject to these requirements. Additionally, certain states may have higher MLR minimums for certain markets, as permitted under the ACA.
How Medical Loss Ratio Is Calculated
MLR is calculated using aggregated results for an insurance carrier’s book of business in a particular market segment, not for a single employer. A carrier combines the premium and claims results for all plans within a segment, such as all small group plans in Texas, and calculates MLR based on those totals.
Insurance carriers use a rolling three-year average when calculating MLR to help balance out any year-to-year fluctuations in claims costs.
Under the Affordable Care Act, the formula is defined as: MLR = (Incurred Claims + Eligible Quality Improvement Expenses) ÷ Adjusted Premium Revenue
What Goes in the Numerator
The numerator is the sum of incurred claims and eligible quality improvement expenses. This includes spending that directly benefits enrollees, such as:
- Allowed medical and pharmacy claims
- Care management programs
- Wellness programs that meet established criteria
- Patient safety initiatives
What Goes in the Denominator
The denominator is the adjusted premium revenue, which can be calculated by subtracting certain federal and state taxes, licensing fees and regulatory fees from the total earned premiums collected.
ACA rules allow adjustments for certain circumstances. For example, insurance carriers with small blocks of business may receive credibility adjustments to account for limited enrollment, and some specialized plan types, such as mini-med plans, may be treated differently to help smooth volatility.
Employers do not calculate the MLR themselves. Insurance carriers calculate and report MLR data to federal and state regulators through the Department of Health and Human Services.
Medical Loss Ratio Rebates
When a carrier’s MLR for a given market and state falls below the MLR threshold (for example, if the MLR falls below 80 percent), the carrier may owe annual rebates to policyholders in that particular segment. These rebate provisions are designed to hold insurers accountable for how they spend premium dollars.
Timing of Rebates
Rebates typically must be paid by September 30 following the reporting year, based on a three-year average of plan experience.
Size of Rebates
From 2012 through 2023, insurance carriers returned nearly $11.8 billion in medical loss ratio rebates to policyholders nationwide. The average MLR rebate is highly variable depending on the state, but in 2024, the national average rebate was $156.
In most years, however, health plans meet or exceed applicable MLR requirements, so most covered individuals do not receive a rebate.
Who receives MLR rebates and how are they issued?
Rebates are paid at the policyholder level, so the recipient depends on whether coverage is individual or employer-sponsored.
Individual Policies
For individual market coverage, the rebate generally goes directly to the policyholder who purchased the policy. Carriers may issue rebate checks or apply credits to future premiums.
Employer-Sponsored Coverage
For fully insured employer-sponsored coverage, the insurance carrier will send rebate funds to the employer. For group plans that are subject to ERISA, the portion of the rebate attributable to employee contributions (rather than employer contributions) is considered plan assets. This amount generally must be used for the benefit of participants within a reasonable time frame.
For example, if an employer pays 75 percent of plan premiums and employees pay the other 25 percent, the employer must set aside 25 percent of its MLR rebate to use for the benefit of the plan participants. Employers have a few options for how to apply this plan-asset portion:
- Reducing future employee premium contributions
- Enhancing plan benefits
- Issuing taxable cash payments to participants (if administratively feasible)
Special Situations: Self-Funded Plans, Medicare and Medicaid
MLR rules vary by type of coverage, and not all employer-sponsored plans are treated the same. Here are a few notable exceptions:
- Self-Funded Employer Plans: Self-funded health plans are generally not subject to ACA medical loss ratio rebate requirements, even when a carrier or third-party administrator handles claims.
- Medicare Coverage: Medicare Advantage and certain Medicare Part D plans are subject to an 85 percent MLR requirement. Any remittances or adjustments are typically paid to the Centers for Medicare & Medicaid Services rather than to individual enrollees.
- Medicaid Managed Care: States that use Medicaid Managed Care programs are required to apply MLR standards, commonly set at 85 percent, as part of federal rate-setting rules.
How Higginbotham Can Help You Navigate Employee Benefits
Understanding medical loss ratio requirements is one part of building and maintaining a thoughtful employee benefits strategy. Funding arrangements, plan design and population health initiatives can all influence how these requirements apply to your organization.
As your benefits broker and advisor, Higginbotham works alongside you to evaluate your employee benefits program in the context of your workforce needs, business objectives and overall risk management strategy. To learn more about how Higginbotham can be your benefits partner, connect with a member of our team today.
