The Medical Loss Ratio (MLR) provisions of the Affordable Care Act require insurers 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 an insurer does not spend enough on patient care to satisfy the MLR provisions, the insurer 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.
Each year, health insurers must report information about their medical loss ratio to the Department of Health and Human Services and reimburse their customers for costs in excess of the MLR rebate threshold. 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.
Employers with insured plans may start to receive MLR rebates as insurers have until September 30 to distribute the rebates. 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.
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 may be retained by the employer.
