Why insurers care about the medical-loss ratio

The Wall Street Journal‘s Avery Johnson explains the significance of the “medical-loss ratio,” a single metric within the reform bill that holds great significance for the insurance industry.

The ratio, known to wonks as the MLR, signifies the percentage of premiums insurers use for medical costs versus the amount that goes to paying administrative overhead. For individual and small-business plans, it’s set at 85 percent medical to 15 percent administrative. For larger businesses, the magic medical number is 80. Those who don’t meet the threshold would be forced to pay rebates to customers.medical-loss-ratio

At present, the key issue seems to be subsidiaries. Major insurers have hundreds of them each, and while the insurer could meet the requirements if all subsidiaries were averaged together, they won’t be able to hit the numbers at every single subsidiary. Current draft documents, Johnson reports, seem to imply that each subsidiary would be judged separately, a practice which insurers say might force them to stop providing insurance in certain high-risk areas.

Applying uniform numbers to the segmented, fragmented insurance industry could prove tricky. Johnson looked at the numbers.

UnitedHealth, for instance, has about 392 subsidiaries, according to Goldman Sachs health-care analyst Matthew Borsch. Its average MLR for individual policies is 69%, dragged down by a 63% ratio at its dominant Golden Rule subsidiary, according to a report by Goldman Sachs that examined state insurance filings. The Minnetonka, Minn., insurer could owe about $280 million in rebates in 2012, Mr. Borsch estimates, based on his reading of the methodology in the health care law.

The rules will be set by the National Association of Insurance Commissioners, a coalition of state insurance regulators. They’re hoping to have recommendations ready for HHS by the end of this month.

5 thoughts on “Why insurers care about the medical-loss ratio

  1. Avatar photoMedical Quack

    Medical Loss Ratios are a big deal especially as noted about with UnitedHealthGroup who recently changed their name from United Healthcare, seems the “care” is gone:)

    I try to cover health insurance subsidiary actions for the purpose of consumer awareness too as I come across information and United seems to have many long tentacles all over the place and sometimes one may kind of wonder if they are insured by an insurance or technology company?

    Here’s one summary post that shows some subsidiary actions and how they all come together. We are also seeing a lot of private equity groups investing in some ventures related to United too.


    This link shows private equity partners buying up a PPO plan that markets a lot of what United has to sell.


    Also worth a mention is the over charge claims that doctors and consumers can file for with out of network charges that were paid less due to the Ingenix (subsidiary) algorithms used and licensed to other carriers as well, so they made money from other insurers too.


    How do they calculate medical loss ratio might be a very good question indeed as it looks very complicated.

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