What is the purpose of the Medical Loss Ratio (MLR) in health insurance?

The Medical Loss Ratio (MLR) serves a vital function in health insurance by measuring the percentage of premium revenue that insurers spend on medical care and health services rather than administrative costs or profits. Specifically, under the Affordable Care Act (ACA), health insurance companies that offer plans in the individual, small group, and large group markets are required to meet certain MLR thresholds, typically spending at least 80% of premiums on medical care for individual and small group plans and 85% for large group plans.

By enforcing these MLR requirements, the ACA aims to ensure that a significant portion of premium dollars goes directly to patient care, thereby improving the value of health insurance for consumers. If insurers fail to meet these thresholds, they are required to provide rebates to policyholders. This mechanism promotes transparency and accountability within the health insurance system, fostering consumer trust and ensuring that resources are appropriately allocated towards health services rather than excessive administrative costs or profits.