Do Health Insurers Manage Their Medical Loss Ratios? At What Cost?

Abstract

We use plan-level data to examine a reporting incentive unique to health insurers—the federal Affordable Care Act’s (ACA’s) Medical Loss Ratio (MLR) provisions—which require that health plans spend a specified percentage of premiums on claims or else pay policyholder rebates. While there are no penalties for noncompliance with the MLR provisions, incentives for insurers to comply include avoiding political and reputation costs, reducing administrative burdens, and eliminating rebate payments. We find that health plans with pre-managed MLRs— i.e., the MLRs that would be reported without reporting discretion—below the required MLR overstate claims, thereby increasing their MLRs and reducing or eliminating rebate payments. Overall, results suggest that overstating claims reduced rebate payments by approximately $190 million to $325 million for 20112013; i.e., about 10–17% of total rebates actually paid. We also find that plans with pre-managed MLRs significantly greater than the minimum required MLR understate claims, thereby improving plan earnings while still complying with the MLR provisions. These understatements average between 14–34% of plans’ pre-tax earnings.

Health insurers' use of quality improvement expenses to achieve a minimum medical loss ratio requirement

“…Lei and Browne (2020) evaluate data from the SHCE and find that the ACA MLR requirement is associated with higher profitability in ASO business and lower profitability in fully insured (i.e., risk‐bearing) plans. Plummer et al (2021) find that health insurers with MLRs below the required minimum overstate claims, thereby increasing their MLRs and reducing or eliminating rebate payments. While acknowledging that the MLR provisions allow adjustments for other costs (such as quality improvement), they focus their work solely on the claims portion of the MLR.…”