The medical loss ratio (MLR) is the share of premium an insurance company spends on medical care and quality improvement rather than on overhead and profit. Under the Affordable Care Act, insurers that fall short of the required ratio must pay rebates, and when the policy is an employer’s group plan, the employer receives the check and has to handle it correctly.
Key takeaways
- The standard is 80% or 85%. Insurers must spend at least 80% of premium on care in the individual and small group markets and 85% in the large group market.
- Rebates are due by September 30. An insurer that misses the ratio must pay rebates no later than September 30 following the reporting year.
- Part of the rebate may belong to employees. Under ERISA, the share that reflects employee premium contributions is a plan asset and has to be used for participants.
- Only fully insured plans get them. Self-funded plans do not pay premium to an insurer for claims, so the MLR rule does not apply to them.
How the medical loss ratio works
Each year, health insurers report to the federal government how their premium was spent in each state and market. Spending on clinical services and on activities that improve health care quality counts toward the ratio. Administration, marketing, broker compensation and profit do not. The ratio is calculated over a rolling three-year period, which smooths out a single unusual year.
| Market | Minimum MLR | What it means |
|---|---|---|
| Individual | 80% | At least 80 cents of each premium dollar on care and quality |
| Small group | 80% | The same 80% standard for small employer plans |
| Large group | 85% | At least 85 cents of each premium dollar on care and quality |
States can set a higher standard. The ratio is measured across an insurer’s whole block of business in a state and market, not group by group, so a rebate says nothing about your own group’s claims. An employer with very high claims can still receive one.
When rebates are paid
An insurer that falls below the standard must pay the rebate no later than September 30 following the end of the reporting year. For group coverage, the rebate goes to the policyholder, which is usually the employer. Insurers typically pay it as a check or as a credit against future premium, with a notice explaining the amount.
What an employer must do with the rebate
Most employer health plans are ERISA plans. The Department of Labor’s guidance on MLR rebates, Technical Release 2011-04, says the portion of a rebate that is attributable to employee contributions is a plan asset. It has to be used for the exclusive benefit of plan participants, not kept by the business. How much belongs to employees depends on who paid the premium.
| Who paid the premium | Plan-asset portion of the rebate |
|---|---|
| Employer paid 100% | None; the employer may keep the rebate |
| Employees paid 100% | All of it |
| Fixed split, for example employer 75% and employees 25% | The employees’ share, in this example 25% |
| Employer paid a fixed dollar amount and employees paid the rest | The share that reflects what employees actually paid |
How the employee share can be used
- Reduce future employee premium contributions, a premium holiday for enrolled employees
- Pay cash refunds to the participants who contributed
- Enhance plan benefits, if refunds or premium reductions are not practical
Whatever method you choose, it must be reasonable, fair and objective, and the employer cannot favor itself or one group of employees over others. The Department of Labor has said the rebate should be used within three months of receipt; plans that hold it longer can run into the rules that require plan assets to be held in trust.
Former employees and cost
Employers may decide that the cost of tracking down former participants to pay small amounts outweighs the benefit, and allocate the employee share to current participants instead, as long as the decision is made prudently and documented.
A practical checklist
- Read the insurer’s rebate notice and confirm which policy and plan year it covers.
- Pull the premium split for that year from payroll records.
- Calculate the employee share and choose how to return it.
- Document the decision, then apply it within three months.
- Coordinate with payroll on tax treatment, which depends on whether employees paid their share pre-tax through a Section 125 cafeteria plan.
What a rebate tells you about your renewal
A rebate is money back, but it is also a signal that the insurer priced its block of business higher than claims required. It is worth asking whether your own renewal reflects your group’s experience or the carrier’s whole book. Our renewal second opinion and our overview of Michigan health insurance carriers are good places to start.
More plain-English benefits explainers
- What Is Commercial Health Insurance?: private coverage versus government programs
- What Is Stop-Loss Insurance?: specific and aggregate coverage for self-funded plans
- What Does EE Mean?: EE, ES, EC and family coverage tiers
- Health Insurance for Employees: how Michigan employers set up a group plan
- What Is an ASO Health Plan?: how administrative services only, self-funded plans work
- What Is an HMO?: how HMO plans work and who they fit
Frequently asked questions
What is a medical loss ratio?
It is the percentage of premium a health insurer spends on medical care and health care quality, as opposed to administration and profit. The Affordable Care Act requires at least 80% in the individual and small group markets and 85% in the large group market.
When are MLR rebates paid?
Insurers that fall short must pay rebates no later than September 30 following the end of the reporting year.
Does an employer have to share an MLR rebate with employees?
For an ERISA plan, the portion of the rebate attributable to employee premium contributions is a plan asset and must be used for plan participants, through premium reductions, refunds or benefit enhancements.
Can an employer keep the MLR rebate?
Only the portion attributable to what the employer paid. If the employer paid 100% of the premium, it may keep the whole rebate.
Do self-funded plans get MLR rebates?
No. The MLR rule applies to health insurers. Self-funded plans pay claims directly and are not subject to it.
Got a rebate notice and not sure what to do?
CFH Insurance Consultants is an independent employee benefits firm. We are licensed insurance brokers, and for proper coverage of an account we work in teams of five. We will work out the employee share from your premium split, recommend a method that fits your payroll setup, and look at what the rebate says about your next renewal. Start here, call 248.370.8853, or book a 30-minute call.
This article is general information, not legal or tax advice. ERISA and tax treatment of MLR rebates depend on your plan documents and premium arrangement; confirm your approach with counsel or a tax advisor.
