Understanding the Medical Loss Ratio & How Rebates Work

July 02, 2014

Under the Patient Protection and Affordable Care Act, insurers are required to report all MLRs to regulators in order to meet specific Medical Loss Ratio goals. If insurers exceed the minimum amount, refunds must be issued to the policyholders. August 2012 is the first due date for these annual rebates. It is important to understand how they are calculated.

The prior year's MLR determines rebate amounts, and these amounts are not individual or group specific. Market and carrier segments affect the amounts. In some cases, the markets may be merged. In order to calculate the MLR, the medical expenses of the carriers' segment is divided by the net earned premiums. Keep in mind that medical expenses include activities that improve health care quality. Regulatory fees, licensing fees and premiums paid by policyholders are what make up the net earned premiums. The thresholds established in 2012 were 80 percent for small groups and 85 percent for large groups. However, some states received exemptions to allow lower levels until 2014.

The following questions about MLR rebates are common.

How do insurance companies issue rebates?

When there are group health plans, insurers must issue rebates to the plan. Participants are then issued rebates from the plan.

Are there rebates when the plan's paid loss ratio is less than the target?

In this situation, there may not be rebates. They are not issued in response to a single plan's performance.

What should be done if a group receives a rebate?

The DOL issued a lengthy statement concerning the proper handling of such rebates. If employers and employees contributed fixed percentages, their rebate amounts would be subject to ERISA regulations. The funds must be invested in a way that benefits participants. This means all participants must benefit. If the employer is a participant and uses the benefits in a way that only benefit him or her, that would violate ERISA regulations. This is especially true if the action is costly to other participants and not the fiduciary joining as a participant. Full wording of this rule can be found in the DOL's Technical Release No. 2011-04.

Who can get a rebate?

Policyholders who are fully insured are eligible for rebates. This includes employer-sponsored group plans and individuals. If the amount is less than $20 for a group health plan, insurers are not required to issue a rebate.

How much will rebates be worth?

Research shows that rebates total $541 million nationwide. Of the insurers involved, 125 expect to issue rebates. However, insurers in 14 different states do not expect to issue them. For enrollees in large groups, only about 19 percent are supposed to receive rebates. Average annual rebates in the large group are expected to be slightly less than $15 per individual.

When do insurers issue rebates?

Rebates are due on the first day of August, but some insurers may send them before the deadline. Subscribers will receive written notice from their insurers indicating that a rebate has been issued. It is important for all plan administrators to be ready for plenty of questions from employees receiving these notices for the first time. Those who will not be receiving rebates must receive letters from their insurers explaining the MLR notification rule.