Medical Loss Ratio payments of $1.5 Billion made

New York, NY, December 5, 2012—Consumers saw nearly $1.5 billion in
insurer rebates and overhead cost savings in 2011, due to the Affordable
Care Act’s medical loss ratio provision requiring health insurers to
spend at least 80 percent of premium dollars on health care or quality
improvement activities or pay a rebate to their customers, according to a
new Commonwealth Fund report.
Consumers with individual policies saw substantially reduced premiums
when insurers reduced both administrative costs and profits to meet the
new standards. While insurers in the small- and large-group markets
achieved lower administrative costs, not all of these savings were
passed on to employers and consumers, as many insurers increased profits
in these markets.


“The medical loss ratio requirements are intended to give insurers an
incentive to be more efficient and use most of their premium dollars
for patient care,” said Sara Collins, Commonwealth Fund Vice President
for Affordable Health Insurance. “This report is encouraging, as it
demonstrates that these new rules are improving value for people buying
health insurance on their own, which has traditionally been very
challenging. However, it will be crucial to monitor insurers’ responses
to this regulation over time to ensure that all purchasers and consumers
benefit from the savings the law is designed to encourage.”


The new report, Insurers’ Responses to Regulation of Medical Loss
Ratios, by Michael McCue of Virginia Commonwealth University and Mark
Hall of Wake Forest University, looks at how insurers selling policies
for individuals, small-employer groups (up to 100 workers), and
large-employer groups (more than 50 or 100 workers, depending on the
state) in every state reacted to the Affordable Care Act’s medical loss
ratio requirement between 2010, the year just before the new rule took
effect, and 2011, the first year the rule was in place. The authors find
that in the individual insurance market, improvements were widespread:
39 states saw administrative costs drop, 37 states saw medical loss
ratios improve, and 34 states saw reductions in operating profits. Some
states stood out for significant improvements. In New Mexico, Missouri,
West Virginia, Texas, and South Carolina, medical loss ratios improved
10 percentage points or more, while administrative costs dropped $99 or
more per member in Delaware, Ohio, Louisiana, South Carolina, and New


However, the report finds that in small- and large-group markets,
medical loss ratios were largely unchanged, and while spending on
administrative costs dropped, profits increased. For example, in the
small-group market, administrative costs were reduced by $190 million,
profits increased by $226 million, and the medical loss ratio remained
at 83 percent, unchanged from 2010. In the large-group market, insurers
reduced administrative costs by $785 million, increased profits by $959
million, and kept their medical loss ratio at 89 percent, also unchanged
from 2010.

The authors note that while insurers in the individual market have a
less stringent medical loss ratio requirement—80 percent, as opposed to
85 percent in the large-group market—their traditionally higher overhead
costs and lower medical loss ratios mean they have to work harder to
reach the new standard. As a result, these insurers lowered both
administrative costs and profit margins, therefore reducing growth in

Conversely, insurers in the small- and large-group markets generally
already have medical loss ratios in the range of the required 85
percent, so while they reduced administrative costs, they had the option
of turning those cost savings into profits instead of passing them
along to consumers. In light of rising profits and falling
administrative costs, the authors suggest it is possible insurers took
profit increases in the small- and large-group markets to offset the
reduced profits in the individual market. And because many insurers sell
policies in all three markets, any reduction in administrative costs
could have been spread across all of a given insurer’s lines of

The Affordable Care Act aims to expand health insurance coverage to
almost all Americans while improving health care quality and reducing
costs. According to the new Commonwealth Fund report, the law’s medical
loss ratio provision is directed specifically at controlling costs by
attempting to restrain insurers’ spending on profits and administrative
expenses, with the hope that lower overhead will result in lower
premiums.. The authors conclude that stronger measures—like rate
regulation, tighter loss ratio rules, or enhanced competitive
pressures—may be needed to ensure that these administrative costs are
reduced in all markets and savings are passed along to consumers.