By Sabrina Corlette, Center on Health Insurance Reform

The Commonwealth Fund recently released a study evaluating insurers’ responses to the medical loss ratio (MLR) rules under the Affordable Care Act. The study’s authors found that the MLR has resulted in a total of $1.5 billion in savings from reducing insurers’ administrative costs and rebates for consumers.

The MLR, often called the “80/20 Rule,” measures how much a health insurer spends on paying for health care, compared to what it spends on administrative overhead and profits to shareholders. The ACA requires insurers selling individual and small group policies to maintain a minimum MLR of 80% (meaning 80% of their revenue must be spent on health care, or improving health care quality); 85% for insurers selling large group policies. If they don’t hit the target, insurers must pay a rebate to consumers and small business owners.  Insurers were required to meet these standards for the first time nationwide in 2011. The authors of the Commonwealth Fund study, Michael McCue of Virginia Commonwealth University and Mark Hall of Wake Forest University, found that individual market consumers in particular saw substantially reduced premiums when insurers reduced both administrative costs and profits to meet the new standards. In particular:

• Thirty-nine states saw administrative costs drop;
• Thirty-seven states saw medical loss ratios improve; and
• Thirty-four states saw reductions in operating profits among carriers.

A few states deserve special mention: New Mexico, Missouri, West Virginia, Texas, and South Carolina saw MLRs improve by 10 percentage points or more. In Delaware, Ohio, Louisiana, South Carolina and New York, per-member administrative costs dropped by $99 or more.

However, for the small- and large-group markets, MLRs stayed the same, on average. While insurers reduced overhead, they returned more profits to shareholders:

• In the small-group market insurers reduced administrative costs by $190 million but increased profits by $226 million. The MLR stayed at 83% on average, the same as in 2010.
• In the large-group market, insurers lowered overhead by $785 million but increased profits by $959 million. The MLR stayed at 89%, the same as in 2010.

All in all, the report shows that consumers, particularly those buying insurance on their own, have been helped by the new MLR requirement. However, while insurers were able to trim administrative costs in 2011, and possibly in 2012, next year could be a different ballgame. With new reporting and data collection requirements under the ACA, many insurers will have to invest in new IT and administrative staff to help meet the necessary deadlines. Nonetheless, the MLR will continue to protect consumers because insurers will still have to spend 80 or 85% of premium dollars on health care or quality improvement.

Stay tuned to CHIRblog for more updates on ACA implementation and health insurance reform!