First, what is the commercial minimum medical loss ratio, or MLR? It’s part of the Affordable Care Act (ACA), the health care reform law passed in 2010. The MLR requirements set minimum percentages of premium dollars that health plans must spend on health care (medical costs and activities that improve health care quality). Let’s see how it works.
To calculate the minimum MLRs, we start with premiums. Premiums are what employers or group policyholders and individual members pay us for their health insurance. Then we determine how much of the premium dollars are spent on actual health care.
In general, the minimum percentage of premium health plans must spend on health care is 85 percent for large groups and 80 percent for small groups and individual policyholders. Some states have higher minimum MLR percentages.
The remaining 15 to 20 percent can be spent on other types of expenses, such as customer service, network development and information technology. That 15 to 20 percent also has to cover things like developing new products and preventing fraud, waste and abuse.
Large groups are generally companies with more than 50 employees, but that can go up to 100 employees in some states, until 2016. States can actively elect to use the Federal definition of 100 as the threshold or default to 50 as the threshold until 2016 when all states must use the Federal definition.
Second, we need to determine our actual MLRs so we can compare it with the minimum MLR requirements. Our actual MLRs are determined by a formula that is based on how much we actually spent on health care as a percentage of premiums for the year.
We make this actual MLR calculation for each insurance market in a state - large group, small group, and individual and for each legal entity that issues coverage. We place policyholders in these MLR “pools” based on their size, their contract issue state and the legal entity that issued the coverage.
Once we know the actual MLR for each pool, we compare it with the 80 or 85 percent minimum MLR requirement for that pool. We do not make a separate MLR calculation for each customer or group.
It has to pay rebates to policyholders in that pool.
Here’s a basic example: Let’s say we spent $100 in claims and quality improvement activities in a large group pool. We collected $150 in premiums and spent $25 for taxes and fees. Divide the $100 in claims and quality improvement by $125 in adjusted premiums, and we get a ratio of 80 percent.
Remember, for large groups insurers need to spend 85 percent. In this case, we would pay a rebate to the policyholders in the pool for the remaining 5 percent. Each employer gets its proportionate share of the 5 percent total, based on their premiums.
Most plans do not get rebates.
All policyholders and subscribers will receive a notice of rebate required by the federal government on or before September 30 if the policyholder or subscriber is due a rebate. These notices have details about the rebate. In the individual plan market, rebate checks are mailed to the individual policyholder. In the group markets, in most instances, we are required to issue the rebate check to the employer/policyholder.
The federal government set guidelines that group employers/policyholders are required to follow when using rebate dollars. We’ve provided an overview of these guidelines for employers.
A few important notes: Only insured medical plans are eligible for rebates. Many large employers fund their own health plans, and our company just administers the plans for them. These are called self-funded plans. They’re not eligible for rebates under the ACA rules.
Aetna is the brand name for products and services offered by Aetna Life Insurance Company and its affiliates. Innovation Health is the brand name for products and services offered by Innovation Health Plan, Inc., and Innovation Health Insurance Company. Coventry is the brand name for products and services offered by Coventry Health & Life Insurance Company and its affiliates.