Medical Loss Ratios

Health insurers will soon be required to spend a specific share of the premiums they collect on health care for policyholders.

Beginning next year, the Affordable Care Act requires health insurance companies to spend a minimum percentage of the premiums they collect on health care services and quality improvement for the people they insure, what is referred to as the “medical loss ratio.”

Insurance companies that sell policies in the large group market must spend at least 85 percent of their premiums on health services. Insurers in the small and individual markets must spend at least 80 percent on health services.

Companies that fail to meet these requirements will have to issue rebates to their customers starting in 2012. Key to the debate is what gets categorized under “administrative” categories vs. what falls under “medical” and “quality improvement.”

The federal government will define what constitutes health services, administrative expenses, marketing costs and other insurance company activities. These definitions will determine how much money insurers must devote to health care, how much they can allot to business expenses and how much they may keep as profit. Deliberations are underway, and the results must be finalized by year’s end.

The outcome will have a significant impact on the costs and kinds of health care services that insurance companies will cover in the future.

This Health Policy Brief examines how the regulations will impact medical care costs, consumers’ premiums, and healthcare services, and was published online on November 12, 2010 in Health Affairs.