What is the Medical Loss Ratio of the Affordable Care Act?

The medical loss ratio is a financial standard that plans on the Affordable Care Act exchanges must uphold. It sets the baseline for how much of payer revenue must go directly toward covering consumer claims.

For example, a medical loss ratio of 80 percent means that payers have to apply 80 cents out of every premium dollar toward medical claims. This ensures that payers are not contributing an exorbitant amount of their revenue to their own profit or administrative costs.

Importantly, the Affordable Care Act’s medical loss ratio formula differs from the “loss ratio” formula which payers once used to ascertain their profitability.

Whereas the traditional loss ratio simply divides claims by premiums, the Affordable Care Act medical loss ratio formula divides both claims and quality improvement costs by premiums and taxes. Additionally, the rebates are cumulative, based on a payer’s past three years of spending.

The medical loss ratio may be vary based on the size of the group health plan. Individual health insurance market plans and small group health insurance market plans have a medical loss ratio of 80 percent. For larger groups—companies that exceed 50 employees—payers must adhere to a medical loss ratio of 85 percent.

Additionally, payers do not have to abide by the medical loss ratio in states or markets where they serve less than 1,000 enrollees and neither do self-insured plans, according to the National Association of Insurance Commissioners.

The goal of the medical loss ratio is to uphold the quality of care for beneficiaries on the Affordable Care Act exchanges. As such, payers face a penalty if they underspend on their consumers.

If a payer fails to meet the 80 percent—for example, if the payer spends only 70 percent of its revenue on medical claim and 30 percent on marketing, administrative costs, and other expenses or on profit—then it must repay consumers some portion of their premium costs called a “rebate.”

Consumers can receive rebates in one of four ways. They could receive it as a rebate check, a deposit into the consumer’s appropriate credit or debit card account, or a reduction on future premiums.

As a final alternative, the rebate may go to the employer, who can then decide how to distribute it to her employees. The employer may choose to apply it in one of the ways mentioned above, but she also has the option to apply it in an innovative way that serves her employees.

In some cases, however, the penalty can be far more severe. For example, in 2019, CMS suspended UnitedHealthcare’s Medicare contract H5322 because it did not meet the medical loss ratio requirement for three years. The plan could not accept new Medicare Advantage or Part D enrollees the entire 2020 plan year.

Unpredictable, expensive events can prevent a health plan from meeting its medical loss ratio, including tax corporate rate changes and fraud prevention and recovery costs. In 2021, payers may see record-high medical loss ratio rebates as consumers migrate from employer-sponsored health plans into Affordable Care Act marketplace plans due to COVID-19.

The record high rebates of 2019 exemplify the impact of aggregating three years of performance. At the end of 2019, payers paid consumers $1.3 billion in rebates, driven by the stabilization of the individual health insurance market.

“In 2016, insurers in the individual market were operating with significant losses on average, but by 2017 financial performance in the market had begun to stabilize as premiums rose. Insurers in 2018 were highly profitable and arguably overpriced, which is why rebates are so large despite being averaged across less favorable years (2016 and 2017),” Kaiser Family Foundation experts explained.

The medical loss ratio has multiple names, including the 80/20 rule, the medical loss trend, and the medical cost ratio.