Medical Loss Ratio (MLR)

The Medical Loss Ratio (MLR) is the percentage of premium dollars an insurance company spends on medical claims and quality improvement activities, as opposed to administrative costs and profit. The ACA requires large-group fully-insured plans to maintain an MLR of at least 85 percent, and small-group and individual plans must maintain at least 80 percent. If an insurer falls below these thresholds in a given year, it must rebate the difference to policyholders — employers receive MLR rebates that they're then required to distribute to employees in a specific way under DOL guidance.

MLR is a regulatory tool designed to ensure that a minimum share of premium dollars goes toward actual healthcare. It's also a useful lens for understanding the economics of fully-insured versus self-funded plans. A fully-insured carrier operating at exactly 85 percent MLR is retaining 15 percent of premium for administration and profit. A self-funded employer with a well-run TPA arrangement typically pays 8 to 12 percent of claims in administrative costs (TPA fees, stop-loss, network access fees) — significantly less than a fully-insured carrier's retention. This spread is one of the primary financial arguments for self-funding at larger group sizes. MLR rebates sound appealing, but they're a consequence of overpaying in premiums — an employer who receives a $50,000 MLR rebate was effectively giving the carrier an interest-free loan of that amount throughout the year. The calculation for distributing rebates to employees is also administratively complex — the DOL requires that the portion of the rebate attributable to employee premium contributions be returned to employees within three months of receipt.

The takeaway: if your fully-insured plan generates an MLR rebate, it's confirmation that you paid more in premiums than was actuarially warranted. Use it as a signal to re-evaluate your plan structure — at the group size where MLR rebates are recurring, a self-funded arrangement is usually more efficient than waiting for an annual rebate on overpaid premiums.