Did you get an MLR refund from your health insurance company? Here's why

When health insurance carriers don't meet the Medical Loss Ratio rules, insureds get a rebate
If your carrier didn't meet the MLR requirements, you get a refund. Alyn Stafford/E+/Getty Images

$470 million in rebates for 3.7 million families

3.7 million families in the US are receiving refunds from their health insurance carriers this fall, because the insurers spent too much on administrative costs in 2014. That's according to a report published last week by the Centers for Medicare and Medicaid Services (CMS). Among those families, the average refund is $139 for families who purchased their coverage in the individual market, $134 for those who have coverage in the small group market, and $102 for those who have coverage in the large group market.

The requirement that health insurance carriers spend the bulk of the premiums they collect on medical care went into effect in 2011. For 2011 through 2014, carriers have had to refund a total of $2.4 billion to insureds. The refunds for 2014 total $470 million. 

A health insurer's Medical Loss Ratio (MLR) is the percentage of premiums that the insurer spends on medical claims and expenses that improve healthcare quality (as opposed to administrative expenses). Establishing minimum MLR thresholds was one of the first changes made under the Affordable Care Act.

MRL requirements took effect in 2011

Before 2011, there was no official guidance in terms of how health insurance carriers spent premium dollars. Carriers had to compete with one another, and in most states, rate proposals were subject to some degree of actuarial review. But the specifics of how that worked varied from state to state, and carriers were free to allocate funds to administrative costs and claims costs however they saw fit.

 Prior to 2010, the average MLR in 29 states was less than 80%.

The MLR requirements in the Affordable Care Act changed all of that. Starting in 2011, health insurers had to spend at least 80% of premiums on medical claims and improving healthcare quality (for large group plans, the MLR has to be at least 85%).

For every dollar that a health insurance company collects in premiums, at least 80 cents (85 cents for large group plans) must be spent on claims and quality improvements. No more than 20 percent can be spent on administrative costs. Administrative expenses include employee salaries, agent commissions, rent, utilities, and other overhead costs, as well as profits.

By 2014, the average MLR nationwide had climbed to 92%, and every state had an average MLR above 80%. But there were still some carriers in nearly every state with MLRs below the threshold required by the ACA, and their insureds are the ones receiving rebates. 

The rebates can come as a check or as a credit to offset future premiums. For group plans, the rebate is sent to the employer who then divides it out among the employees in accordance with the percentage of premiums that the employees pay (group plans are typically funded by both the employer and the employee).

Can the MLR be too high? 

In individual market, some carriers had MLRs that exceeded 100% for 2014.

That was particularly true of CO-OPs. Of the 22 CO-OPs that were still operational in 2015, all but three spent more on medical claims in 2014 than they collected in premiums. That means they were in the red even before accounting for administrative expenses (ultimately, only one CO-OP, in Maine, ended 2014 with a net positive income, and 12 of the original 23 CO-OPs will have shut down by the end of 2015). The CO-OP situation makes it obvious that when MLRs are too high, they threaten the viability of the health insurance carrier. 

That's why an 80% - 85% MRL threshold was established; it's high enough to ensure that the bulk of premium dollars are being spent on medical care and quality improvements, but not so high that it jeopardizes the insurance carrier's sustainability.

More carriers in compliance

Although every state had achieved an MLR of at least 80% by 2014, there were only five states (Connecticut, Minnesota, Rhode Island, South Dakota, and Vermont) where the average MLR rebate was zero dollars in 2014 for individual market plans (in the small group market, 22 states had MLR rebates, and 15 states had no rebates in the large group market). 2014 represented an improvement over 2013, when Vermont was the only state in which every plan was in compliance with the MLR requirements.

So although average MRLs are exceeding the requirements laid out in the ACA, there are still some carriers that are spending too much on administrative costs and not enough on claims and quality improvements. If you got a check from your health insurance carrier this fall, that's why.

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