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The ACA’s Medical Loss Ratio requirement contributed to slowed growth in health care spending

By Claire McAndrew, Kathleen Stoll,


Last week, the Centers for Medicare and Medicaid Services (CMS) released the latest data from the National Health Expenditure Accounts, which show the portion of our economy that was devoted to health care spending in 2012. The data show that, while health care spending is growing, the rate of growth has slowed. As a result, the share of GDP that is comprised of health care spending went from 17.3 percent in 2011 to 17.2 percent in 2012. Furthermore, the authors explicitly point to a key provision of the Affordable Care Act (the Medical Loss Ratio requirement—a rule that requires insurers to trim the fat from excessively high administrative costs) as a factor in helping to reduce the growth in health care spending.

And, while journalists and policy makers have provided lengthy analysis on which factors are (or are not) contributing to this modest slowdown in spending, the encouraging data around the Medical Loss Ratio has been notably overlooked.

What is the Medical Loss Ratio rule and how did it contribute to a slowdown in 2012 health care spending?

We all feel the impact of health care spending growth rates through how much we spend on health insurance premiums, deductibles, copayments, or even for services not covered by insurance.

One way to trim health care spending and ease its impact on consumers is to slow the growth in the cost of insurance premiums by preventing insurers from incurring unreasonably high administrative costs (ranging from advertising campaigns to direct profits for insurers). The Medical Loss Ratio rule does just that. For large employer plans, the Affordable Care Act (ACA) requires that at least 85 percent of consumers’ premiums must be spent on medical care and health care quality improvement. For individual and small employer plans, an 80 percent standard is set.

The authors of the report explicitly credit the Medical Loss Ratio for helping to slow the growth of health care spending. The report’s data bear this out—the share of premiums attributed to nonmedical expenses (called the premium net cost ratio), dropped from 12.4 percent in 2011 to 12.0 percent in 2012.

This may not sound like a big difference, but in the world of statistics it is very significant.  It translates into an estimated 440 million dollars. That means consumers are getting more value for their premium dollars – more care for their money – thanks to the Affordable Care Act.

What other factors are contributing to the slowdown in health care spending?

It is hard to pin down the factors that impact total national health care spending. There are a number of reasons for the slowdown. Certainly one factor was the impact of the economic recession that still had a lingering impact in 2012 and made some people delay seeking health care. However, that’s not the whole story.

The nonpartisan National Health Expenditure Accounts Team’s own published analysis acknowledges that the ACA as a factor in the slowing of the growth of health care spending. It might not be the only factor or even the driving factor, but even in 2012—before the ACA was fully implemented—some of its provisions were already making a difference.

How states can help control the growth in health insurance premiums

And the further good news is that states can do more to control premiums by building on the ACA’s Medical Loss Ratio requirements. For example, states can strengthen their review of insurance companies’ proposed premium rates by requiring prior approval of rates by state regulators to make sure they are fair and reasonable and by requiring public review of proposed premium rates and rate increases. It is important not just that laws provide state insurance regulators with the authority to implement these practices, but also that insurance departments have the resources necessary to do so. To that end, the ACA provided states with federal grants to strengthen their review of premium increases.

Stay tuned for future blogs in which we’ll cover what certain states are doing to make health insurance premiums fair and reasonable for consumers.