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MLR – The Dirty Secret of Health Insurance Accounting

By Dr. Nilesh Kalyanaraman
. 1 Comment(s)

Until a few months ago I had no idea that the insurance companies had a term to describe how much money they lost providing health care. I know what you’re thinking, health care insurers are supposed to pay for health care, that’s why they collect our premiums. Well, in their world, paying a claim is a “loss” - and a good business tries to minimize its losses.

The medical loss ratio (MLR) is the accounting term that insurance companies use to describe the percentage of every dollar they lose to spending on health care. For example, if an insurance company takes in $100 million in premium revenue, and spends $85 million to pay health care claims, their MLR is 85. The rest of the money, $15 million in this example, is for administrative costs. Some administrative costs are necessary and include plan administration, billing services and credentialing. On the other hand, some costs are unrelated or detrimental to providing care such as profits, sales commissions and rescissions.

While the costs of health care have been going up over the years, the MLR for insurance companies has been going down. In the mid 1990’s the MLR for private insurance companies was in the high 80’s and 90’s. Nowadays the MLR for small group insurance is in the 70’s and for individual plans it’s in the 60’s. (For comparison Medicare’s MLR is 97 and large company health plans’ MLR is around 90.) The bottom line is that people are paying more for health insurance but aren’t getting more health care.

An important part of the new health care law is to cap administrative costs by setting a floor on the MLR starting in 2011. For small group and individual plans the minimum MLR will be 80 and for large group health plans the minimum MLR will be 85. Small groups and individuals will benefit as plans will no longer be able to spend more than 20% of costs on administrative services. First, this will force insurers to spend more on health care and less on administrative costs in order to get the MLR up to 80, thereby delivering better value to consumers. Second, this should slow the rate of premium increases since a company near an MLR of 80 could only raise rates if the actual costs of care were going up (not just to add to their profit margin). For large company plans, administrative costs have not gone up as steeply, and the main intended benefit of the MLR requirement in the new law will be to limit premium increases for the individual and business.

Sadly, prior to this law, companies felt free to gouge their customers and did so. The implementation of a minimum MLR is an important first step in improving the value we get from our health insurance. What’s harder to change is the mindset of an industry that came up with the idea of a medical loss ratio in the first place.

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  1. Gail

    It is laughable to think that 97% of medicare's collected premiums (and other government money) goes to pay medical bills. There is no other government program that comes close to this efficiency. Is this really a valid number???
    Furthermore, given the extensive fraud in Medicare, versus private insurance, it seems clear that Medicare could use more administration!!!!

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