Health Law Saves Consumers by Requiring Insurers to Spend Premium Dollars on Medical Care

Medical Loss Ratio ExplainedOriginally published at Third and State

A key reform in the Affordable Care Act requires health insurers to spend 80% to 85% of premium dollars directly on medical care or quality improvement expenses as opposed to other administrative costs, marketing, or profits. If an insurer does not meet the standard, it must provide rebates to consumers or businesses.

Insurers issued $1.1 billion in rebates to nearly 13 million consumers for 2011, the first year the rule was in effect, and are expected to return more than $500 million in rebates to 8.5 million consumers for 2012. The 2012 figures include nearly $6.9 million that will be returned to 123,581 Pennsylvania consumers — an average of $77 per family.

These rebates are among the more tangible ways that consumers have benefited from the law so far, but it is important to remember, as researchers with the Kaiser Family Foundation recently noted, that rebates represent only a portion of the savings to consumers from this provision, known formally as the "Medical Loss Ratio" Rule (MLR):

"The primary role of an MLR threshold is to encourage insurers to spend a certain percentage of premium dollars on health care and quality improvement expenses (80 percent in the individual and small group market and 85 percent in the large group market). The MLR rebate requirement operates as a backstop if insurers do not set premiums at a level where they would be paying out the minimally acceptable share of premiums back as benefits...

Consumers and businesses, therefore, can realize savings in two ways as a result of the MLR requirement: by paying lower premiums than they would have been charged otherwise (as a result of lower administrative costs and profits), or by receiving rebates after the fact."