Understanding the Medical Loss Ratio Under the ACA: A Guide to Allocating and Distributing the Received Premium Rebate - Part 1 of 2

By: Jennifer M. Yang

Part I: What Should Employers Know About the “Affordable Care Act” and the Medical Loss Ratio?

These days, with readily available access to various political and social media platforms, one may find that the phrase “Affordable Care Act” has evolved into a “buzzword” occasionally used to promote a partisan agenda. Regardless of the current political climate and differences in opinions, most employers should have a general understanding and knowledge of the medical loss ratio under the Affordable Care Act (ACA), and be prepared to take appropriate steps for allocating and distributing the premium rebate received, if any, to their employees who participate in group health insurance plans.

As a general matter, under the ACA, health insurers, such as insurance companies, are required to spend a certain threshold percentage (%) in medical plan premium dollars for healthcare expenses to provide value to enrollees that will improve their healthcare quality. Referred to as the medical loss ratio (MLR), this percentage (%) represents:

  • the percentage (%) of medical plan premiums actually spent on paying claims and health quality improvement initiatives, such as clinical services and activities that will improve healthcare quality

versus

  • the percentage (%) spent on administrative costs, such as advertising and marketing, and includes insurance company profits

See 42 U.S.C.S. § 300gg-18(a); see, also Medical Loss Ratio Requirements Under the Patient Protection and Affordable Care Act, 77 Fed. Reg. 28, 460, 28, 791, 28, 793 (May 16, 2012).

Subject to mandatory reporting and disclosure requirements, insurance companies offering health insurance coverage must make the MLR disclosure by July 31 with rebates paid, if any, by September 30 of the same reporting year.

In California, for employers sponsoring health insurance to their employees, the insurance companies providing coverage must spend the premium revenue received in a given reporting calendar year, equating to at least the threshold percentage under the MLR rules for the premium rebate to apply. There are different percentages for individual/small group market employers and large group market employers:

  • For individual or small group markets, at least 80% of the premium revenue must be spent on paying claims and healthcare expenses, with the remaining 20% (or less) spent on paying administrative costs, such as advertising and marketing (or “80/20”)
  • For large group markets, at least 85% of the premium revenue must be spent on paying claims and healthcare expenses, with the remaining 15% (or less) spent on paying administrative costs, such as advertising and marketing (or “85/15”)

If the 80% or 85% threshold is not met, the insurance companies providing coverage must issue refunds in premium rebates to the plan sponsors (or policyholders) amounting to the difference between (i) the threshold percentage and (ii) the percentage (%) of premium dollars actually spent on paying claims and healthcare expenses. See 42 U.S.C.S. § 300gg-18(b)(1).

Read Part II, “What Constitutes a ‘Plan Asset’ and How Do Employers Allocate and Distribute a Premium Rebate When the Employees’ Contribution to the Group Health Plan is Treated as a Plan Asset?” Click the “Subscribe For More Updates” button at the top to receive email alerts when new posts are added.

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