Regulating the Medical Loss Ratio

To improve the functioning of the individual and small employer group health insurance markets and assure that revenues are used for clinical services rather than administrative overhead, health reform establishes minimum medical loss ratios (MLRs). For small group markets (under 100 workers), the MLR is 80 percent; for the large market, 85 percent. An insurer that has an MLR below that threshold must rebate to enrollees the difference between its MLR and the required MLR.

Using data from the National Association of Insurance Commissioners, these researchers estimated the size and structure of the individual market for health insurance from 2002 to 2009. They looked at the market in relation to three characteristics:

  1. Size and structure of the market. In 2009, five states had at least 15 insurers; 10 states had three or fewer. Most states saw increases in the number of insurers and modest enrollment growth.
  2. Insurers with MLRs under 80 percent. In 21 states at least half of the health insurers could not meet the MLR.
  3. Coverage disruption. Insurers with below-minimum MLRs may choose to cut administrative costs related to marketing, lower premiums, drop lines or exit the market. Enrollees, especially those with serious medical conditions, could experience coverage disruptions.