How do you measure the value of a health insurance policy? With controversy roiling over the quality of individual health insurance plans sold prior to 2014, we examined one measure of the “value” of health insurance policies sold in the individual, small group, and large group markets in 2010: the medical loss ratio.
The medical loss ratio measures the percentage of premiums spent on health services consumed by enrollees, as opposed to administrative expenses, marketing, and profits.
The Affordable Care Act (ACA) established federal standards for minimum medical loss ratios, commonly known as “the 80/20 rule.” Insurers who are subject to the rule must meet or exceed a medical loss ratio of 80 percent in the individual and small group markets and 85 percent in the large group market. In other words, if you have an individual market plan, 80 percent or more of what you, the consumer, pay in monthly premiums must actually be spent on health care, rather than administrative expenses, marketing, profits, and other overhead. (The most common type of employer plans, “self-insured” plans where employers collect premiums and pay the medical claims of the enrollees directly or through an administrator, are exempt from the rule.)
Beginning in 2011, insurers subject to the 80/20 rule who did not meet the new standards were required to issue premium rebates the following year. As a result, in 2012, these rebates provided 4.1 million individuals and families with more than $1.1 billion. In 2013, 8.5 million individuals and families received about $500 million in rebates. These rebates will continue to be issued on August 1 of each year.
We found that medical loss ratios in the individual health insurance market varied widely by state in 2010—before the 80/20 rule was in effect— and that medical loss ratios in the group markets varied much less. (See below for full paper citation and image notes; paper has more detailed results by state and market.)
During 2010, prior to the implementation of the ACA’s new federal standards, insurers with low medical loss ratios dominated coverage in the individual market in more than one-third of states (see the chart below). For example:
- In Texas, West Virginia, New Hampshire, Arizona, Nevada, Oklahoma, and Kentucky, 95 percent or more of the state’s individual market enrollees were in plans with loss ratios below the federal 80/20 standard in the year before the rule was enforced.
- In contrast, in New Mexico, New York, New Jersey, Vermont, Hawaii, and Massachusetts, less than 5 percent of the state’s individual market enrollment was in plans that had medical loss ratios below new federal 80/20 standard in the year before the rule was enforced.
The reasons for these wide differences in medical loss ratios in the individual market are complex, due to differences in the enrolled populations, variation in medical prices, and other factors. To shed light on the potential effects of the new 80/20 rule, we focused on the association between medical loss ratios and state regulations in place in 2010. We found that higher average medical loss ratios among insurers were generally associated with the presence of medical loss ratio regulation at the state level in 2010, either alone or in combination with rate review regulation (a process where state insurance departments review premium rate increases and sometimes also whether the state’s medical loss ratio standard was met) to determine that rate increases are not excessive.
Finally, we found that in the individual market, bigger was often better, at least in terms of medical loss ratios. Insurers with a larger market share had higher average medical loss ratios. Taken together, these findings suggest that the new federal standards could lead to a higher share of premiums being spent on health services, a change that would benefit consumers in plans subject to the rule in many states.
Paper: Lisa Clemans-Cope, Linda Blumberg, Stephen Zuckerman, and Jeremy Roth. “Wide Variation in Medical Loss Ratios within States In 2010 Suggests the Affordable Care Act’s Standards Could Lead To Higher Value Insurance Options.” NAIC Journal of Insurance Regulation, 2013. http://www.naic.org/store_jir.htm
2010 Supplemental Health Care Exhibit (SHCE), provided by the National Association of Insurance Commissioners (NAIC). States are listed in increasing order of average medical loss ratio in the individual market. Chart shows the mean and interquartile range of the medical loss ratios in each state’s market. To calculate the interquartile range, insurers were ranked by medical loss ratio in each state’s market and then divided into quartiles based on covered lives. The range indicates the 25th and 75th percentile covered life in the state’s market. An analogous calculation was used to produce national interquartile ranges. Some states lack an indicator for the 25th and 75th percentile because the value is equal to the mean. Georgia, Iowa, Kentucky, Maine, Nevada, New Hampshire, and North Carolina have been granted temporary adjustments (expiring in 2014) that permit lower medical loss ratio requirements than those specified under the Affordable Care Act.