Medical Loss Ratio and MLR Rebates

What is Medical Loss Ratio (MLR)?

Medical Loss Ratio (MLR) is the percent of premiums an insurance company spends on member care, claims, and administrative expenses that improve health care quality.


What is the Medical Loss Ratio (MLR) rebate?

The Patient Protection and Affordable Care Act (PPACA) of 2010 requires insurance companies to pay annual Medical Loss Ratio (MLR) rebates for groups of health insurance policies issued in less than 80% for small and 85% for extensive employer group policies. This is to prevent medical insurance carriers from price gouging enrollees.


What is the purpose of the minimum MLR provision?

The MLR provision is intended to ensure that a minimum percent of health insurance premiums are used to pay claims and be spent on member care. This limits the amount health insurance companies can spend on administrative expenses and profits.

Health insurance carriers must achieve certain Medical Loss Ratio (MLR) thresholds for specific business segments.
For each MLR reporting year, the insurance carriers must provide a rebate to policyholders if their MLR does not meet or exceed the minimum percentages (80% for small groups and 85% for large groups) required by law.


How are MLR rebates determined?

Medical Loss Ratio (MLR) rebates are determined on a state-by-state basis and based on all the premiums and claims for a group of policies issued by an insurance company in a state during the previous calendar year.

Rebates are not based solely on the claims for your group. If claims for all policies similar to your size in your state for the previous calendar year were lower than the required MLR percent (80% for small groups and 85% for large groups), your group would receive a rebate.

If you are not receiving a rebate, it means a high percentage of the premiums for policies in your group were spent on health care, so no refund is due.


How is MLR calculated?

The calculation is as follows:
Claims plus expenses that improve health care quality divided by premiums equals Medical Loss Ratio (MLR).


What are “expenses that improve health care quality?”

Expenses that improve health care quality include:

  • Activities to improve patient safety and health care
  • Programs that encourage healthy living
  • Strategic partnerships with care providers.


What should employers do with the MLR rebate?

Employers who receive an MLR rebate must share the refund with employees. However, there are some nuances to the obligation.

According to the U.S. Department of Labor’s Publication No. 2011-04, the employer’s responsibility for distributing the MLR rebate to participants is dependent on who paid for the insurance coverage.

If the employer paid the entire cost of the insurance coverage: no part of the rebate would be attributable to employee contributions. Therefore, no refund would need to be shared with employees.

If employees paid the entire cost of their insurance coverage, the whole rebate amount would be attributable to the employee contributions. The employees should receive the rebate themselves.

If the employees and employer each paid a fixed percentage of the insurance coverage: a rebate would be due to the employees and employer based on their pro-rated contributions.


What is the guidance from the Department of Labor (DOL)?

The DOL provides employers with three options regarding MLR rebate distribution:

  1. The employer can reduce the employees’ portions of subsequent premiums for employees currently enrolled in the plan.
  2. The employer can reduce the employees’ portions of subsequent premiums for employees on whom the rebate was based and who are still on the plan (potential differences in employee contribution resulting from this rebate will not violate ACA nondiscrimination rules).
  3. The employer can provide a direct cash refund to current employees and current COBRA enrollees covered by the group health policy on which the rebate was based.


Will my group be notified if we are receiving a rebate?

Would you please watch for your MLR rebate letters sent directly from your insurance carrier? These letters and rebates will begin to be distributed at the end of September 2020.


What if I have other questions?

We understand there are many moving parts to the Medical Loss Ratio (MLR) rebate, so please do not hesitate to reach out to us to discuss your particular situation further if you have additional questions.

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