Obamacare: why insurers give money back/ medical loss ratio rules

What is the medical loss ratio?  And why is it part of health reform?

Math Geek

Dear Math Geek,

The medical loss ratio is the proportion of the health plan’s revenues (income from plan members) that are spent on medical care — hospital bills, doctor bills, etc.  Insurers get to throw other things into this too, like the work they do with hospitals and doctors to improve quality and efficiency.  This means that things like prior approval of hospital stays, drug utilization review, and other similar tasks “count” as a medical cost.

Under health reform, plans have to spend at least 80% of their premiums on “medical care” for small group or non-group (individual) plans.  For large group plans, they have to spend 85%.  The rest of the money goes to their other operating costs, like marketing and accounting, etc.  If these costs do not make up 80/85% of their premium income, then they have to give customers back the difference as a rebate.

In previous years, insurers have given people money back.  It’s a hassle and an administrative nightmare to do this, so they would rather set the rate high enough to meet the standard and not higher.  This is why you may not hear much about this part of health reform in the future — plans are avoiding having to handle rebates.

Linda Riddell

About Linda Riddell

A published author and health policy analyst with 25 years’ experience, Linda Riddell's goal is to alleviate the widespread ailment of not knowing what your health plan can do for you.