NCPA - National Center for Policy Analysis

Medical Loss Ratios

January 27, 2012

Beginning in 2011, under the Patient Protection and Affordable Care Act (PPACA), insurers were required to maintain a medical loss ratio (MLR) of 85 percent for large group plans and 80 percent for small group and individual plans.  This ratio represents the fraction of insurers' premiums that are dedicated to cutting medical costs as opposed to "administrative" expenses, says Spencer Harris, a health care policy analyst with the Texas Public Policy Foundation.

But the PPACA also grants authority to the secretary of Health and Human Services (HHS) to grant waivers to states that sufficiently demonstrate that the MLR regulations would destabilize their insurance markets.

  • Since passage of the PPACA, HHS has received 15 requests from states for MLR requirement waivers.
  • Only one of those 15 waiver requests was fully approved.
  • Five other states were granted limited approval, while six others were rejected outright.
  • Texas and two other states await a decision.

The MLR mandate is damaging because it needlessly interferes with the way in which insurers conduct business, and can actually have the opposite of its intended effect.  By limiting how insurers spend their premium revenues, MLR requirements will limit optimal business strategies and distort priorities away from activities deemed "administrative," such as fraud investigation and agent compensation.

Furthermore, MLR requirements can raise premiums by forcing insurers to leave a given state.  Companies that cannot operate under the new regulation stop doing business, thereby limiting competition and driving up prices.  This was seen clearly with MLR regulations in Kentucky and North Dakota in the 1990s, and there is evidence to believe it will happen again: in seven states, insurers have signaled their intent to stop offering coverage in the individual market or have left altogether.

Insurers in Texas are no more ready to take on this additional burden.

  • In 2010, only seven of 26 carriers subject to the regulations achieved an MLR of 80 percent.
  • The largest carrier in the state individual and small group market, representing 56.1 percent of the market, had an MLR of 69.9 percent.
  • In 2010, the cost of noncompliance would have totaled $158.1 million for an industry whose total underwriting profits were only $158.6 million for that year.

Source: Spencer Harris, "Medical Loss Ratios" Texas Public Policy Foundation, January 2012.

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