Explaining the Medical Loss Ratio Provision of the ACA

The Affordable Care Act (ACA) has changed many things for employers, employees, and the health insurance industry. One of the ACA provisions relates to the amount insurers must spend on health care and improving health care quality from each premium dollar received. It’s what called the Medical Loss Ratio or MLR.


Individual and Small Group MLR

Under the ACA, insurers must spend at least 80% of their premium income from Individual and Family Plan (IFP) and Small Group policies on health care claims and quality improvements. The remaining 20% can go toward insurance company expenses like administration, marketing, and profits.


Large Group MLR

For Large Group plans, health insurers must spend at least 85% of premium dollars on health care and quality improvements.


Self-Funded Plans

The MLR provision of the ACA applies to all types of licensed health insurers, Blue Cross and Blue Shield plans, and health maintenance organizations (HMOs); however, it does not apply to self-funded plans where the employer or another plan sponsor pays the cost of health benefits from its own assets. Nor does it apply to a self-funded plan administered by an insurer on behalf of an employer.


MLR Refunds

Since 2012, an insurance company not meeting the established ACA MLR standard has been required to issue a refund. Annually, it must provide notice to enrollees of any rebates they will receive or that will be paid to their employer.

According to the Kaiser Family Foundation (KFF), a non-profit organization not affiliated with Kaiser Permanente health plans, according to data released by the Centers for Medicare & Medicaid Services (CMS), more than $1.3 billion in refunds for 2018 will be issued across all markets in 2019. This amount exceeds the previous refund record of $1.1 billion for 2011 (paid in 2012).

According to KFF, the 2019 MLR figures includes $312 million to Small Group insureds and $284 million for Large Group insureds paid to 289,000 employers. The remaining $743.3 million in rebates is being distributed to 2,748,000 individual subscribers. Rebates can be paid out as a lump-sum or as a premium credit for those currently enrolled with their same insurer (if their coverage is in force at the time of the refund payment).

Rebates vary by state and market. In the California Small Group market, $78 million in refunds are being paid out. Data for Nevada was not included in the KFF analysis.

Employers have several options when it comes to dispersing MLR amounts, and they have 90 days to take action after reimbursements are paid (the ACA requires distributions by insurers no later than September 30).

There are three options provided by the Department of Labor for distributing MLR rebates:

  1. Reduce subscribers’ portions of the annual premium for the subsequent policy year for all subscribers covered under any group health policy offered by the plan.
  2. Reduce subscribers’ portions of the annual premium for the subsequent policy year for only those subscribers covered by the health policy on which the rebate is based.
  3. Provide a cash refund only to subscribers who were covered under the group health policy on which the rebate is based.

The ACA does not require employers to track down former employees to whom MLR rebates may be due; however, COBRA participants must be included in any premium rebates, if applicable.

If a health plan is solely funded by the employer, then the employer may keep the rebate check – so long as the funds are not considered “plan assets” under ERISA law. If refunded amounts are considered “plan assets,” the funds must be used to enhance employees’ benefits.


Help from Word & Brown

Word & Brown offers an MLR rebate calculator to help your clients decide how to refund MLR amounts. Click on the calculators below, based on your client’s business location:

If your client has a Section 125/Premium Only Plan (POP) in place, and employees pay premiums on a pre-tax basis, then any MLR rebate amount given to those employees is generally considered taxable income.

Your client may want to consult an accountant or payroll specialist for counsel. Because of the tax ramifications, most employers opt to utilize MLR rebate funds for future premium payments, or put them toward benefit enhancements for employees.

Whatever action your client takes, a documented plan is critical – and communication is equally important. The employer’s MLR rebate strategy should clearly summarize the 90-day action plan and be available for review by employees.

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