Cost of Service Regulation in U.S. Health Care: Minimum Medical Loss Ratios
59 Pages Posted: 1 May 2017 Last revised: 24 Apr 2022
Date Written: April 2017
A health insurer's Medical Loss Ratio (MLR) is the share of premiums spent on medical claims. The Affordable Care Act introduced minimum MLR provisions for all health insurance sold in fully-insured commercial markets, thereby capping insurer profit margins, but not levels. While intended to reduce premiums, we show this rule creates incentives analogous to cost of service regulation. Using variation created by the rule's introduction as a natural experiment, we find claims costs rose nearly one-for-one with distance below the regulatory threshold: 7% in the individual market, and 2% in the group market. Premiums were unaffected.
Suggested Citation: Suggested Citation