One of the provisions of the Affordable Care Act is what’s known as the medical loss ratio requirement—better known as MLR. This requirement at one time caused a mild panic among insurers. But it turns out that the medical loss ratio requirement isn’t all that scary, and as the provision goes into effect this year, insurers are beginning to realize that not only will they NOT lose earnings, but it is very likely their profits will continue to grow.
The medical loss ratio requirement calls for insurers to spend a certain percentage of their premiums on medical care and quality improvement as opposed to on administrative costs, marketing, and profits. It breaks down like this: Insurers that provide large-group coverage must spend at least 85 percent of their premium dollars on care-related costs; insurers that sell to small employers and in the “individual market,” must spend at least 80 percent.
An analyst for Morningstar remarked, “It sounded worse than it is when you actually look at the financial impact,” noting the provision was really just a “mild negative” for the industry. And as a result, the industry is adjusting.
Despite the dire predictions of insurance companies dropping out of markets due to reduced competition, most insurers are staying in the markets but being forced to readjust their game plan. They are finding ways to operate more efficiently, reinvesting in their own businesses, and making their product more attractive—which facilitates competition.
This is not to say that all insurers and all markets will be able to adjust. Some insurers will claim they genuinely can’t meet the new medical loss ratio standard. If this is truly the case, the U.S. Department of Health and Human Services can grant states adjustments to the medical loss ratio requirements.
It is important to remember that the medical loss ratio requirement was put in place to finally hold insurers accountable for premium dollars and to make sure that they operate fairly and effectively It ensures that companies no longer make gigantic profits off the backs of consumers, while consistently failing to provide high-quality coverage. The medical loss ratio requirement promotes better health care for the American consumer while keeping insurance companies stable and strong . Sounds like a win-win.