New federal rules mandate how much insurers must spend on medical care

In November, the federal government issued regulations that spell out how much insurance companies must spend on medical care.


Stateline Midwest, Volume 20, No. 1- January 2011

Regulations issued in November by the U.S. Department of Health and Human Services define how much insurance companies must spend on health care. These new “medical loss ratio” (MLR) rules pre-empt some Midwestern states’ laws and require all states to follow similar guidelines regarding the spending of health insurance companies.

MLRs set out what percentage of premium dollars must be spent on medical care as opposed to administrative costs, including executive salaries and marketing efforts.

Some states, including three in the Midwest, already have MLRs. Minnesota has an MLR of 65 percent in the individual market, 71 to 75 percent in the small-group market and 82 percent in the large-group market. North Dakota requires an MLR of at least 55 percent in the individual market and 70 percent in the small-group market, while South Dakota mandates an MLR of 65 percent in the individual market and 75 percent in the small-group market.

But as of Jan. 1, insurers in all states must now meet stricter standards than those in place in the Midwest. The new regulations are part of the federal health care legislation passed last year.

Beginning this year, insurance companies must report how they spend money from premiums. Companies in the individual and small-group markets will be required to spend at least 80 percent of premium dollars on medical care and quality improvement. Insurers in the large-group market must use 85 percent of premiums for these purposes.

When the regulations were issued last fall, HHS said that about 25 percent of insured Americans were in plans that spent 25 to 30 cents of every dollar on administrative purposes. More than 20 percent of consumers were enrolled in plans that spent more than 30 percent of premiums on non-medical costs.

Insurance companies that do not meet these new MLR requirements will have to issue refunds to consumers in 2012. HHS estimates that as many as 9 million Americans could be eligible for rebates next year totaling up to $1.4 billion (an average of $164 per person in the individual market).

The regulations were developed in conjunction with the National Association of Insurance Commissioners to ensure that all states use uniform definitions and methods for calculating the MLR.

The new rules will apply nationwide, but states can adopt stricter standards. In addition, the HHS secretary has the authority to adjust the MLR on a state-by-state basis. If, for example, policymakers believe that not enough insurers will be able to meet the guidelines (and access to insurance plans could therefore be compromised), the state can apply for an adjustment. Four states, including Iowa, have already done so.