Effects of the New Medical Loss Ratio on the Health Insurance Marketplace
What is the Medical Loss Ratio (MLR)?
Under the Patient Protection and Affordable Care Act (PPACA) health care reform law, health insurance carriers must comply with a new requirement called the “Medical Loss Ratio” starting 01/01/2011.
With the MLR, insurance companies who sell health insurance plans to individuals or small employers (< 100 employees) must spend at least 80 cents of every premium dollar they collect on “the payment of medical care and prescription drug expenses”. The remaining 20 cents of each premium dollar can be used by a carrier to fund their state-mandated minimum cash reserves and administration costs. Any net remaining amount of the 20 cents is available to be taken as profit.
If an insurance company spends less than 80 cents of each dollar collected in premium on claim payments, then the MLR requirement is not met and the carrier must refund the difference back to policyholders.
What Is the Effect of the MLR on Health Insurance Carriers?
PPACA requires that carriers comply with the new MLR regulation on a state-by-state basis. That means that an insurance carrier who sells health plans in 20 different states cannot average or ‘blend’ their MLR calculation across those 20 states. Instead, a carrier must successfully maintain a separate 80% MLR within each of those 20 individual states.
This has created challenges for carriers with modest market saturation in any given state. With a smaller subscriber base/ risk pool, thinly-spread national carriers with smaller market presence in a state have less room to maneuver to reach their 80% MLR while still maintaining their minimum cash reserves and supporting administrative costs.
Recent Withdrawal of Carriers from the Marketplace
As a result of the new MLR regulations, we have started to see the withdrawal of a few health insurance companies from our market. The Guardian Insurance Company announced on January 25th that they will be exiting the health insurance market with an agreement to have their former competitor UnitedHealthcare provide comparable transition medical plans to impacted employers. A month earlier, The Principal Insurance Company also announced its departure and similarly worked out a deal to transition its employer group health plans to UnitedHealthcare.
The MLR, however well-intentioned, may ultimately result in reduced competition among health carriers in our marketplace. In the end, the carriers best equipped to survive the MLR requirements may be smaller Wisconsin-only carriers focused on specific regions (like those in Madison or LaCrosse) and, conversely, the very large national carriers like UnitedHealthcare who have heavy market saturation in most states across the country.
As always, we appreciate the continued opportunity to service your benefit programs. Please feel free to contact us with any questions on this or other aspects of federal health care reform.
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