Did you ever wonder how much of the money you pay for health insurance actually pays for medical bills? Under the Affordable Care Act’s Minimum Medical Loss Ratio (MLR) rule, you have a pretty good idea.
Under the MLR rule, your health insurance company must spend most of the premium dollars it gets on medical costs and programs that improve health care quality. The rule creates a strong incentive for insurers to limit spending on administrative costs.
Insurers always had to keep prices competitive to win business. With the MLR rule, they now have one more reason to price their products appropriately from the start.
In general, plans must spend at least 80 or 85 percent of premiums on medical care, quality programs and certain taxes and fees
But pricing products is not an exact science. Medical costs are the number one driver of the premiums people pay, so insurers work hard to predict what their plans’ medical costs will be the next year. If medical costs are lower than expected, and the plan doesn’t spend the required percentage of premium dollars on health care in a year, using a complicated formula set out in the MLR rule, it doesn’t get to keep the extra money. It has to pay rebates to policyholders.
Most of the time, the health plan pricing turns out to be accurate. Then there is no rebate.
This year, for example, Aetna, Coventry and Innovation Health plans are only paying rebates equal to only a fraction of a percent (0.06 percent) of the premiums its plans took in. This means the plans are delivering savings to customers through competitive pricing, rather than a rebate check.
Individual plans and plans for small employers (50 or fewer employees, or 100 or fewer in some states) must spend at least 80 percent of their premium dollars on these health care expenses.
Plans for large employers (at least 51 or 101 employees, depending on the state) have to spend at least 85 percent of premiums on these expenses.
Some states have even higher minimum MLR percentages.
The remaining 15 to 20 percent of premium is spent on other types of operational expenses, such as customer service, network development and information technology, as well as philanthropic contributions and programs. That 15 to 20 percent also has to cover things like developing new products and preventing fraud, waste and abuse and salaries. What’s left after all of those expenses can be the company’s profit.
Who gets the rebates, if there are any?
Generally the rebates go to employers for group plans, and the employer uses the rebate to benefit employees under the plan according to government requirements. People who buy individual plans get any rebates directly from the insurer.