What a Medical Loss Ratio Rebate Is

Answer first: it is a floor on spending, enforced by a refund

42 U.S.C. 300gg-18(b)(1)(A) requires a health insurance issuer offering group or individual coverage — including a grandfathered health plan — to "provide an annual rebate to each enrollee under such coverage, on a pro rata basis," where the ratio of premium spent on clinical services and on activities that improve health care quality falls below a stated percentage.

The percentages are in the statute and repeated in the regulation. Section 158.210 states them cleanly: an issuer must provide a rebate to enrollees if it has a medical loss ratio of less than 85 percent for policies issued in the large group market in a state, and less than 80 percent for policies issued in the small group market or the individual market. The statute permits a state to set a higher percentage by regulation, and permits the Secretary to adjust the individual-market figure for a state where applying 80 percent may destabilize that market. Section 158.210(d) says that where the Secretary has adjusted the individual-market percentage for a specific state, the adjusted percentage is substituted for 80 percent.

That is the whole idea. The law does not cap what an insurer may charge. It requires a stated share of what it charges to come back out as care and quality spending, and turns any shortfall into a refund.

What goes into the ratio

Section 158.221 defines the arithmetic. The numerator is the issuer's incurred claims as defined in § 158.140, plus expenditures for activities that improve health care quality as defined in §§ 158.150 and 158.151, for the reporting years specified in § 158.220. Beginning with the 2020 reporting year, an issuer may also include in the numerator "any shared savings payments the issuer has made to an enrollee as a result of the enrollee choosing to obtain health care from a lower-cost, higher-value provider."

The whole ratio is subject to "the applicable credibility adjustment, if any," under § 158.232 — a cross-reference the regulation makes and which is not analyzed here. And the result is rounded to three decimal places, with the regulation supplying its own examples: 0.7988 becomes 0.799 or 79.9 percent, and 0.8253 becomes 0.825 or 82.5 percent.

The statutory description of what belongs where is in 300gg-18(a), which requires an issuer to report, for each plan year, the percentage of total premium revenue spent on reimbursement for clinical services provided to enrollees, on activities that improve health care quality, and "on all other non-claims costs, including an explanation of the nature of such costs," excluding federal and state taxes and licensing or regulatory fees. The statute also directs that the Secretary make reports received under the section available to the public on the Department of Health and Human Services website.

Two features of this design deserve attention. Quality-improvement spending sits in the numerator alongside claims, so it counts toward the floor rather than against it. And taxes and licensing and regulatory fees are excluded from the premium side, which is why the base the rebate is calculated on is smaller than the premium a person actually paid.

How the rebate amount is worked out

Section 158.240(c)(1) states the calculation. For each reporting year an issuer must rebate to the enrollee the total premium revenue received from that enrollee, after subtracting federal and state taxes and licensing and regulatory fees as provided in the referenced sections, and after accounting for payments or receipts for risk adjustment, risk corridors and reinsurance — multiplied by the difference between the required ratio and the issuer's actual ratio.

The regulation then works its own example, and it is the clearest statement of the mechanism. Its illustration: an issuer with a 75 percent ratio in the individual market in a state that has not set a higher standard must rebate 5 percent of the adjusted premium. In the worked version, total earned premium is $200,000, transitional reinsurance payments of $2,500 are added and net risk adjustment and risk corridor payments of $20,000 are subtracted, giving gross earned premium of $182,500; taxes and fees of $15,000 are subtracted and $17,500 of net risk adjustment and risk corridor amounts added back, for a base of $185,000; five percent of that is $9,250 owed in that state market. The example finishes by allocating it: an enrollee who paid $2,000 in premiums, or one hundredth of the issuer's total premium in that state market, would be entitled to one hundredth of the rebates owed, or $92.50.

Every figure in that paragraph is the regulation's own illustration. It is not data about any real insurer, and it is reproduced here only because it shows how the pro rata allocation in the statute actually operates: the rebate is a share of a state-and-market pool, distributed in proportion to what each enrollee contributed to that pool.

One definition prevents a misreading. Section 158.240(b) states that for the sole purpose of determining who is entitled to receive a rebate, "enrollee" means the subscriber, policyholder, and/or government entity that paid the premium for health care coverage received by an individual during the reporting year. The word is doing something narrower here than it does elsewhere.

In a group plan the rebate goes to the policyholder first

Section 158.242 assigns the recipient. In the individual market, the issuer meets its obligation by providing the rebate to the enrollee, and for an individual policy covering more than one person, one lump-sum rebate may be provided to the subscriber on behalf of all covered enrollees.

In the large and small group markets, with stated exceptions, "an issuer must meet its obligation to provide any rebate to persons covered under a group health plan by providing it to the policyholder." The policyholder is generally the employer or other group sponsor. What happens next depends on what kind of plan it is.

For a non-federal governmental group health plan, the policyholder must use the portion of the rebate proportionate to the total premium paid by all subscribers for the benefit of subscribers, in one of three listed ways: reducing subscribers' portion of premium for the subsequent policy year across all options under the plan; doing so for subscribers in the specific option the rebate relates to; or a cash refund to subscribers of that option. The reduction or refund may be divided evenly, divided by each subscriber's actual contributions to premium, or apportioned in a manner that reasonably reflects those contributions. And the distribution must be made within 3 months of the policyholder's receipt of the rebate, with late payment interest at the higher of the current Federal Reserve Board lending rate or 10 percent annually if it is not.

Section 158.250 requires the notice to say which of these applies. Among the items an issuer must disclose to a policyholder and to subscribers is the fact that the total aggregated rebate for the group health plan is being provided to the policyholder, together with a statement that where the policy provides benefits for a plan subject to ERISA, "the policyholder may have additional obligations under ERISA's fiduciary responsibility provisions with respect to the handling of rebates," plus contact information for questions about the rebate. For a group health plan that is neither governmental nor subject to ERISA, the notice must state either that the policyholder gave written assurance the subscriber-attributable portion will be used for subscribers' benefit by one of the listed methods, or that, absent such assurance, the issuer must distribute the rebate evenly among the policyholder's subscribers covered during the reporting year.

What form it takes, and when

Section 158.241 sets the permitted forms. For current enrollees an issuer may provide a rebate as a premium credit, a lump-sum check, or — if the enrollee paid by credit card or direct debit — a lump-sum reimbursement to the account used to pay the premium.

Where the form is a premium credit, the timing is fixed. Beginning with rebates due for the 2020 reporting year, "any rebate provided in the form of a premium credit must be provided by applying the full amount due to the monthly premium that is due no later than October 30 following the MLR reporting year," with any overage applied to succeeding premium payments until the full amount has been credited.

For former enrollees in the individual market, § 158.241(b) requires payment "in the form of lump-sum check or lump-sum reimbursement using the same method that was used for payment, such as credit card or direct debit." Leaving a plan does not forfeit a rebate for the year in which the person was covered.

What the notice has to tell you, and what it cannot tell you

Section 158.250 sets a required contents list for the notice accompanying a rebate. It must include a general description of the concept of a medical loss ratio; the purpose of setting such a standard; the applicable standard; the issuer's own ratio, adjusted under the subpart; the issuer's aggregate premium revenue as reported, minus federal and state taxes and licensing and regulatory fees that may be excluded; and the rebate percentage and the amount owed to enrollees based on the difference between the issuer's ratio and the applicable standard.

That list is unusually informative for a consumer notice. It requires the issuer to disclose the number it missed, the number it was measured against, and the arithmetic between them — which is a different thing from a check with an unexplained amount.

What the notice does not do is tell anyone what their own coverage cost or was worth. A ratio is a statewide, market-wide figure for one issuer over one reporting year. It says nothing about whether any individual claim was paid, whether any drug was covered, or whether the coverage was a good deal for the person receiving the notice. It is a measure of how an issuer allocated a pool of money, and the rebate is the remedy attached to that measure.

One boundary is worth stating for completeness. Part 158 governs issuers of health insurance coverage. Where an employer self-insures — paying claims out of its own funds and using an insurer only to administer them — there is no premium of the kind this part measures, and this mechanism does not reach the arrangement.