The Affordable Care Act (ACA) requires health insurance companies to spend a minimum amount of premiums collected from members on specific categories of activities that are intended to benefit those members. This is known as the Medical Loss Ratio (MLR). Each year, health plans are required to report their MLR for the preceding year; in the event they do not meet the mandated ratio, those health plans must issue rebates to their customers. The MLR requirement is intended to provide greater transparency and accountability around the expenditures made by health insurers and to help bring down the costs of health care. The MLR requirement is based on the premise that the higher the MLR, the greater value the consumer will receive for each premium dollar paid to the plan.

The MLR Formula

Prior to the passage of ACA’s requirements, the MLR was simply calculated by dividing the claims paid by the premiums earned. Under the new federal MLR requirements, the calculation now includes adjustments for quality improvement activities and expenditures on taxes, licensing, and regulatory fees. The formula is as follows:
Assuming all other factors remain unchanged, increases in an insurer’s health care claims or quality improvement expenditures will increase the organization’s MLR and likely reduce the organization’s likelihood of having to rebate members for that year. On the other hand, a reduction in either health care claims or quality improvement expenditures could increase the likelihood that rebates will have to be paid as the MLR is likely to decrease.

Quality Improvement Activities & Health Information Technology

The ACA charged the National Association of Insurance Commissioners (NAIC) with drafting uniform definitions of medical and quality activities in order to classify which expenses should count towards the medical spending portion of the calculation and which should be deemed administrative and therefore not included. When crafting quality improvement activities, the goal was to encourage insurers to maintain programs that would help insurance consumers have better health care outcomes.

In recent years, the federal government has emphasized the role of Health Information Technology (HIT) in conjunction with health care quality improvement under the ACA and elsewhere. The department of Health and Human Services (HHS) has determined that under certain circumstances HIT expenditures can be considered quality improvement activities in the MLR calculation. These include HIT expenditures attributable to improving health care, preventing hospital readmissions, improving patient safety and reducing errors, or promoting health activities and wellness to an individual or an identified segment of the population. This could potentially include HIT expenses related to things such as electronic health records, health information exchange, and patient portals.