Last Updated 10/18/2023

Issue. The Affordable Care Act of 2010 (ACA) established the first minimum medical loss ratio (MLR) standard for many private market health plans and insurers (there were MLR requirements for Medicare Supplement policies before the ACA). The goal of the MLR standard under the ACA is to restrain premium growth by limiting the profits and administrative costs of health insurers. The ACA requires health insurers in the individual and small group markets to spend at least 80% of their premium revenues on clinical care and quality improvements. For the large group market, the MLR requirement is 85%. The ACA requires these plans to provide annual rebates to policyholders if they do not meet MLR requirements.

Overview. The medical loss ratio (MLR) is the share of total health care premiums spent on medical claims and efforts to improve the quality of care.[1] The remainder is the share spent on administration costs and fees, as well as profits earned. Section 2718 of the Public Health Service Act (PHS Act), as amended by the ACA, requires health insurance issuers to annually submit an MLR report to the Secretary of Health and Human Services. If the issuer’s MLR is less than the applicable percentage established in the PHS Act (three-year rolling average), it is required to issue a rebate to enrollees. The MLR rules became effective on January 1, 2011.

The MLR is based on an insurer’s annual aggregate financial allocations within each market (individual, small group, or large group) and state. The MLR does not extend to self-funded health insurance plans, which are plans for which the employer is responsible for the payment of covered claims; “mini-med” plans, which have total annual benefits of $250,000 or less; or expatriate plans (45 CFR § 158.120).

The ACA permits adjustments to the MLR requirements in a state if it is determined that the 80% MLR requirement could destabilize the state’s individual insurance market. Specifically, the Secretary of Health and Human Services may adjust the MLR standard for a given MLR reporting year if there is a “reasonable likelihood” that an adjustment to the 80% MLR standard would help “stabilize the individual market” in that state (45 CFR § 158.301). Adjustments were made for several states in 2017 and prior years, but no state requests for MLR adjustment have been received from CMS since (see CMS, “State Requests for MLR Adjustment”).

Average MLRs rose significantly from 2011 through 2015, then plummeted by 2018 (Figure 1). For example, in the individual market, the average MLR climbed from 80% in 2011 to 103% in 2015 (Figure 1). By 2018, the average MLR had fallen to 72%. Although the average MLR returned to 79 percent by 2019, it retreated in 2020 back to 72%, likely due to deferred care during the early months of the COVID-19 pandemic and associated reduced medical spending by health insurers. A significant increase in the MLR in 2021 was likely also due in large part to COVID-19, reflecting a recoupment of care deferred during the COVID-19 pandemic, as well as a return to normalcy in the demand for medical care. The MLR was comparatively stable from 2021 to 2022, dipping by 2 percentage points to 86%.

For the health insurance industry, average net premium per member per month increased 6.7% from 2021 to 2022 (NAIC, U.S. Health Insurance Industry Analysis Report, 2022 Annual Results). Net income increased appreciably in 2022 (by 29.3%) following a dive in 2021, but profitability remained well below COVID-19-era levels (down 31% from 2020). Mid-year reports suggest the gain in net income will be more subdued in 2023, as net income increased by 6% from Q2 2022 to Q2 2023 (NAIC, Health 2023 Mid-Year Industry Analysis Report). Underwriting gain surged by 68% in 2022 after dropping in half between 2020 and 2021, but underwriting gain declined modestly from mid-year 2022 to mid-year 2023.

Figure 1

If the MLR of an insurer falls below thresholds, the insurer must pay rebates to its consumers proportional to the divergence of the MLR from the threshold. A policyholder is not entitled to a rebate if their specific insurer met the MLR requirement. The MLRs charted in Figure 1 are averages across states for each market. For example, for plan year 2020 (payments in 2021), no insurers were required to pay rebates in North Dakota, Rhode Island, and Vermont.

In 2012 (2011 plan year), issuers were required to pay 8.5 million consumers a total of $504 million for an average rebate of $98/family [Center for Consumer Information and Insurance Oversight (CCIIO)] (Figure 2). These totals were significantly lower in 2015, when rebates were about $397 million for about 4.9 million families (average of $138/family).[2] MLR rebates are based on a 3-year rolling average. Thus, 2020 plan year rebates (paid in 2021) were calculated using insurers’ financial data for 2018, 2019, and 2020. Total rebates for 2018 (paid in 2019) reached a record $2.5 billion to 11.2 million families (average $219/family).

Figure 2

In the midst of the COVID-19 pandemic in 2020, health claims were exceeding low, leading to much lower MLRs. As a result, rebates were substantial, totaling over $2.1 billion and benefitting roughly 9.8 million consumer-families in 2021 (CMS, CCIIO, 2021). An analysis by the Kaiser Family Foundation (KFF) projected rebates of $1.1 billion for the 2022 plan year to be paid in 2023, yielding an average rebate of $128 to 8.2 million consumer-families (KFF, 2023 Medical Loss Ratio Rebates, May 17, 2023). Because rebates paid in 2023 reflect not only the MLR in 2022, but also MLRs in 2020 and 2021, even insurers with a relatively high MLR in 2022 may well have owed rebates.[3]

Importantly, within any given state, there is significant variance across insurers in rebates required, and the average rebate paid can be misleading on its own. For example, in Oregon, which had the highest average rebate at $647 per consumer-family for plan year 2020 (paid in 2021), only two insurers were required to pay rebates, of which only one was on the individual exchange. The two insurers combined had a very small share of the total market (311 consumer-families were paid refunds), and rebates in aggregate totaled only $201 thousand.

Status. The ACA requires the NAIC to establish uniform definitions and standardize methodologies for calculating the MLR and rebate amounts. A Medical Loss Ratio Blanks Proposal was approved by the NAIC full membership in 2010 in order to capture detailed information that can be used by regulators to  gain a directional sense of a company’s MLR prior to the actual MLR calculation that is submitted by insurance companies through the Health Insurance Oversight System (HIOS) later in the applicable year. Annual Statement Blanks are the actual forms submitted by insurance companies to report financial information to state regulators.