MLR Rebates and trend

Column 9:  MLR Rebates and trend

First things first: I lost the trivia game last week!  COBRA stands for Consolidated Omnibus Reconciliation Act, and your employer has only 44 days to get the COBRA notice out to you.  But you have 60 days to make the election.  Thanks to Linda Stuart a compliance officer in Indiana for catching this! 

What is an MLR rebate?  I like the idea of getting money back from my insurance company!

Under the Affordable Care Act, health insurers are required to spend a minimum percentage of premium revenue on medical expenses. The percentage of premium spent on medical expenses is called the Medical Loss Ratio (MLR).

For individuals and small business health plans - health insurers must spend no less than 80% of premium revenue on medical expenses. For large groups - insurers must spend no less than 85% of premium revenue on medical expenses. The MLR requirements of health reform do not apply to self-funded plans or Medicare Supplement business.

How is the Medical Loss Ratio calculated?

Total Medical Expense Cost is divided into the Total Earned Premium to get the MLR.  For Example:  $75 in claims divided into $100 of premium= 75% Loss ratio.  If this was an individual or small group plan portfolio, the insurer would be required to refund 5% or $5 to the members. 

Who receives the refunds?

These will go to all insureds whose plans do not meet the loss ratios:  employers both large and small and individuals. 

What do I do when I get the money if I am a business owner?

The Department of Labor provides detailed instructions at:   The funds must be used for the exclusive benefit of the plan and/or its beneficiaries.  Examples of how it may be used are as follows:

·         Reduce premium for the upcoming year

·         Provide a cash refund to employees or subscribers that were covered by the health insurance plan on which the refund is based, prorated to their share of premium.


Note:  Remember that if employees had paid their premiums pre-tax and they receive a refund it will likely need to be added to the W-2. There is some reference to a de minimus amount that need not be refunded.  But there is no specific definition.   These are only examples of how employers can distribute MLR rebates. Employers should consult their own legal counsel or tax professional for guidance.


Will I continue to get these rebates?

Only if your employer does not meet the targeted loss ratios.  If the insurer meets or exceeds the target, no rebate will be issued.

I don't understand it, I just got notice of a rate increase on my plan.  Are they doing this just to get back what they gave me?

It certainly can seem that way.  But in reality, insurance underwriters set rates prospectively.  This means that they give it their best (educated) guess on how much money they need to collect to cover their costs for the coming year.  Underwriters are typically math wizard types who use formulas and statistics to determine this amount. 

They use past history and then a factor called "trend".  This is how much they expect health care costs to rise in the future.  In 2012, trend was running about 10%. 

 There are several factors that comprise trend:

·         Inflation: The cost of a service goes up over time.

·         Technology: Expensive equipment tends to get used

·         Utilization:  More procedures are done, more services received

·         Mandates: New laws require more services to be covered

·         Cost shifting:  When someone doesn't pay (uninsured)  at all or doesn't pay enough (Government programs like MediCal), the costs are shifted to the insured population

·         Litigation or Defensive Medicine:  A provider orders more tests than required for fear of future legal action

·         Prescription drug: Patent manipulation- a drug becomes available in generic, but the manufacturer tweaks the components just enough to keep the "new and improved version" on patent and charges the higher price.  Prescription drug costs are responsible for about 20-25% of your total premium.  Expensive brand name drugs are the driving force.  (This is why you see plans now establishing tiers that charge you more for using the brand name drug when a generic equivalent is available).

So underwriters set the rates to cover what they expect is needed.  If they are wrong, the law now requires that if there is a mistake in the clients' favor, it must be refunded.  Prior to the ACA, this was not the case.

Note: All information in this column is provided" to the best of my knowledge" subject to final regulation by the respective agencies.