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Thursday, December 13, 2012

Consumers Have More to Gain: Report Examines Insurance Companies’ Responses to Medical Loss Ratio Requirements

The “medical loss ratio” (MLR) requirement of the Affordable Care Act was supposed to result in lower premiums for consumers. But this hasn’t happened yet. Why? A recent report by the Commonwealth Fund found that consumers haven’t seen lower premiums primarily because of how insurance companies are handling the requirement.

First, a background on the medical loss ratio requirement: The medical loss ratio is the amount of the average subscriber’s premium that is used on actual medical care (not on, say, advertisements that interrupt our viewing of Miracle on 34th Street). For individual and small group markets, insurance companies must use 80 percent of premiums on medical care. For large group markets, they must use 85 percent. If a company doesn’t reach the threshold, they must give consumers rebates. For example, if an insurance company in a large group market uses only an average of 82 percent of subscribers’ premiums on medical care, they must refund their subscribers the difference (in this case, 3 percent).

There were two aims of this requirement. The first was that most consumers would pay a larger portion of their premiums on care they actually received and not on insurance company overhead, such as administrative costs or corporate profits. This aim has been met. The second goal was to reduce consumers’ premiums by providing the insurers with incentives to reduce overhead. While consumers were given rebates when companies didn’t spend 80 or 85 percent of premiums on care—totaling more than $1 billion, in fact—consumers didn’t generally see lower premiums.  

According to the Commonwealth Fund report, here’s why consumers haven’t gained on both grounds: Most insurance companies opted to use the administrative cost savings to benefit themselves, not the consumer. The report explains how this worked in more depth. The bottom line:  In the small and large group markets (not the individual market), insurers were able to actually increase their profits. In the individual market, consumers did see lower premiums and insurers actually did have lower profits. However, a much smaller segment of the insured population is in the individual market than is in the small and large group markets.

Stronger measures need to be in place to see that consumers actually see the significant benefits from this important requirement.