Medical Loss Ratio Regulation Under the Affordable Care Act

Abstract

This paper analyzes the potential unintended consequences and incentive effects of the Affordable Care Act’s minimum medical loss ratio (MLR) regulations, which are designed to guarantee that a specific percentage of health insurance premiums are spent on medical care and activities that improve health care quality. Historical variation in individual market state-entity MLRs during 2001-2010 suggests that the regulations expose many insurers to non-trivial risk of having to pay rebates if claim costs are lower than projected when premiums are established, despite permitted “credibility adjustments.” That risk magnifies the scope of potential unintended consequences, including higher upfront premiums for some insurers, more limited consumer choice, increased market concentration, and less innovation to better align consumer, provider, and health plan incentives.

Keywords: health reform, Affordable Care Act, medical loss ratio, price regulation, rebates, credibility

JEL Classification: I10, I11, I18, L50