The Medical Loss Ratio (MLR) provisions of the Affordable Care Act require insurers and certain self funded group health plans to spend at least a certain percentage of employees’ premium dollars on clinical care, instead of on administrative expenses such as executive salaries, overhead, marketing and profit. If a plan does not spend enough on patient care to satisfy the MLR provisions, the plan must make financial adjustments and provide rebates to customers. Health care reform sets the minimum MLR level at 85 percent for the large group market (policies covering over 50 employees) and 80 percent for the small group market. This means that administrative and other non-clinical costs can be no more than 15 or 20 percent of the insurer’s revenue. If an insurer fails to meet these standards, the insurer will be required to provide a rebate to customers.
The Center for Medicare and Medicaid Services released the MLR Annual Reporting Form instructions for the 2021 MLR reporting year which may be accessed by clicking here.
Each year, plans must report information about their medical loss ratio to the Department of Health and Human Services. The medical loss ratio (MLR) is the cost of claims plus the amounts expended on health care quality improvement as a percentage of total premiums. If an insurer spends too much on administrative expenses instead of on providing benefits, it will fail the MLR requirements.
Plans pay MLR rebates to the policyholder (which is usually the employer) by September 30 following the end of the reporting year. Employers with insured plans may start to receive MLR rebates in the coming weeks. Rebates may be made in either a premium credit or a lump sum payment. They are generally considered plan assets, and employer sponsors of ERISA covered health plans must use the rebates for the benefit of plan participants. Employers are responsible for determining how to use any MLR rebate.
Generally, rebates may be used as follows:
- To reduce future premiums for current participants;
- To enhance benefits;
- To pay reasonable plan expenses;
- To pay current participants;
- To pay former participants.
An employer who receives a rebate will have to conduct an analysis to determine what portion of the payment should be given back to employees and what portion of the payment can be retained.