The Patient Protection and Affordable Care Act introduced medical loss ratio rules into the U.S. health care system with the underlying intent to cap profits—and subsequently costs—by requiring each carrier to have a medical loss ratio of 80 percent for most small employer and individual group policies, and 85 percent for large employer group policies.

In practical terms, MLR is a measurement of both the medical claims and activities that improve the quality of enrollee care. If carriers can show that at least 80 percent of the income they receive from premiums is used toward medical claims or activities that improve care quality, then they've met the MLR rule; it's assumed the remaining 15 percent to 20 percent of premium dollars is used to pay overhead expenses, including marketing, salaries, administrative costs, commissions and profits.

That 15 percent to 20 percent seems like a fairly healthy profit margin until we compare it with the 40 percent profit margins insurance companies were pulling in before to the implementation of PPACA.

The federal government has set minimum MLR rules, and some states have their own MLR rules, as well. And, in fact, in 2012—the first year of true MLR application—many health insurance subscribers found small checks in their mailboxes for premium rebates, the result of premium dollars outside the allowable 20 percent profit margin that hadn't been re-invested in health care quality or used for claims. Some of those MLR rebate payments were sent to employer groups, while others were redistributed directly to consumers.

However, in 2013, MLR rebate checks were much rarer, and they seem to have disappeared altogether from the landscape this year—even as speculation emerges that the government might consider applying MLR rules to voluntary plans in the near future.

What's happened since 2012? Some experts say—rather cynically—that health insurance carriers have become savvier about how to portray their earnings. One industry analyst mentions a major health insurance carrier that's building an app for senior enrollees in its care plan. Although investing in new technology isn't necessarily bad in and of itself, the analyst points out that it's not necessarily the best use of funds for that patient population; perhaps the insurance company could better serve a patient in that demographic by increasing the number of paid physical-therapy sessions for a broken hip.

Another industry expert notes that some insurance companies are questioning whether a procedure should be classified as a medical or administrative procedure (and thus whether they should be on the hook for payment),particularly when a physician performs an administrative task or has an ambiguous title, such as “chief executive officer” or “medical director.”

In other words, many health care experts believe the MLR rules are no longer as effective as they were intended to be—and because insurance carriers have been exploring the existing loopholes in the MLR rules for several months now, the horse has essentially left the barn, and implementing MLR rules on voluntary plans won't have the cost-saving effects the federal government wants.

Instant Insights /

Why MLR rules might not be effective anymore

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