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March 2011 St@teside

Medical Loss Ratio Implementation Challenges

On March 8, Maine became the first state to be granted a waiver from the medical loss ratio (MLR) requirement of the Patient Protection and Affordable Care Act (ACA).  The ACA requires that carriers covering large employers spend at least 85 percent of premiums paid on claims or quality improvements, and carriers covering small group and individual insurers spend 80 percent, or refund the difference to policyholders, beginning in 2012. However, the ACA gave Kathleen Sebelius, Secretary of the U.S. Department of Health and Human Services (HHS), the authority to waive the requirement if states can demonstrate that fulfilling it would destabilize the individual market in that state. On December 1, 2010, HHS published an interim final rule, giving states the opportunity to apply for waivers.

In a letter to Maine’s Superintendent of Insurance, Mila Kofman, HHS outlined the terms of the MLR waiver and HHS’s reasons for approving the state’s request. Maine will receive an adjustment to the MLR rule for three years, and continue to use its current standard for the individual market— 65 percent.  However, in 2013 the state will need to submit 2012 data showing the need for a continued adjustment to the MLR standard.

In its letter, HHS agreed with Maine’s assertion that the application of the MLR standard in Maine has a reasonable likelihood of destabilizing the individual market. HHS concluded that there are enough reasons to believe that one of Maine’s three major insurers, MEGA Life & Health Insurance Co., could leave the market if the 80 percent medical loss ratio standard were implemented. In recent years MEGA suffered losses when subject to a MLR standard lower than 80 percent in Maine. In fact, MEGA withdrew from the small group market when Maine implemented a 75 percent MLR standard. Nonetheless, the company has indicated that it would continue to operate in Maine if the current 65 percent MLR standard continues in the individual market, but will likely withdraw if it is increased. Given the company’s substantial market share—37 percent, covering approximately 13,732 enrollees—its withdrawal could lead to higher premiums and out-of-pocket costs for its policyholders seeking replacement coverage.

Since Maine submitted its formal application for a waiver on December 16, 2010, eight states have followed its example and submitted applications—Florida, Georgia, Iowa, Kentucky, Louisiana, Nevada, New Hampshire, and North Dakota. Others are also considering a request for a waiver.  Of the eight states that applied for the waiver, Florida is the largest. Unlike Maine, Florida has a vibrant individual market. Given that Florida’s large individual market, a waiver request approval in the state could have a substantial impact on plans and the effectiveness of the MLR requirement.1

MLR provisions are also raising the issue of broker commissions. The Professional Health Insurance Advisors Task Force of the National Association of Insurance Commissioners (NAIC) drafted model federal legislation that would exclude commissions paid to health insurance advisers from revenues used to calculate the MLR. This would allow carriers to keep broker commission payments at the same level as they have been; however, the increased commission costs would be passed on to consumers and employers in the form of higher premiums. Since commission costs have increased at a rate far in excess of inflation2 over the past two decades, this would detract from the effectiveness of the MLR.3 At a national meeting on March 27, after hearing from consumer groups and insurance agent representatives, NAIC voted to ask a committee to report back within four weeks on possible modifications to the law’s medical loss ratio regulation.4

The ACA intended for the MLR provisions to give consumers more value for their premium dollar.5 With potentially regulatory and legislative challenges, the future of the medical loss ratio provisions is still undecided.

1Citigroup Global Markets. (2011, March 16). Sometimes the Hardest Thing Is Knowing Which Bridge to Cross & the One to Burn. Analysis of Florida’s Minimum MLR Waiver. Retrieved March 24, 2011 from
2This is because commissions have remained constant as percentage of premiums and premiums have been rising at a rate far in excess of inflation.
4Ethridge, E. (2011, March 28). Delayed Decision on Brokers’ Fees Hinders Bill, Delights Consumer Groups. CQ Today Online News - Health (Subscription only). Retrieved March 29, 2011 from (2010, November 22). Medical Loss Ratio: Getting Your Money's Worth on Health Insurance. [Fact Sheet]. Retrieved March 22, 2011, from