Cost of Service Regulation in U.S. Health Care: Minimal Medical Loss Ratios

58 Pages Posted: 26 Jul 2017

See all articles by Steve Cicala

Steve Cicala

University of Chicago

Ethan M.J. Lieber

University of Notre Dame

Victoria Marone

Northwestern University

Date Written: July 14, 2017


A health insurer's Medical Loss Ratio (MLR) is the share of premiums spent on medical claims. As part of the goal of reducing the cost of health care coverage, the Affordable Care Act introduced minimum MLR provisions for all health insurance sold in fully-insured commercial markets as of 2011, thereby explicitly capping insurer profit margins, but not levels. This cap was binding for many insurers, with over $1 billion of rebates paid in the first year of implementation. We model this constraint imposed upon a monopolistic insurer, and derive distortions analogous to those created under cost of service regulation. We test the implications of the model empirically using administrative data from 2005-2013, with insurers persistently above the minimum MLR threshold serving as the control group in a difference-in-difference design. We find that rather than resulting in reduced premiums, claims costs increased nearly one-for-one with distance below the regulatory threshold: 7% in the individual market, and 2% in the group market.

Suggested Citation

Cicala, Steve and Lieber, Ethan and Marone, Victoria, Cost of Service Regulation in U.S. Health Care: Minimal Medical Loss Ratios (July 14, 2017). Becker Friedman Institute for Research in Economics Working Paper No. 3007692. Available at SSRN: or

Steve Cicala (Contact Author)

University of Chicago ( email )

1155 East 60th Street
Chicago, IL 60637
United States


Ethan Lieber

University of Notre Dame ( email )

3049 Jenkins Nanovic Halls
Notre Dame, IN 46556
United States

Victoria Marone

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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