Medical Loss Ratio – What is it and Why Might I Get a Refund Check?

There are a number of provisions in the Patient Protection and Affordable Care Act (PPACA) that was passed in 2010.

Now that the legislation has been mostly upheld by the Supreme Court, there is little to stop many of the provisions from the PPACA from coming to fruition.  From the inability of insurers to drop you due to illness, to the individual mandate for health care coverage, to the establishment of state exchanges, there are a number of highly publicized new policies in the bill.

However, there are also plenty of other provisions in the law, some of which you might not know about.

One of the lesser known provisions is the rebates that insurance companies will be required to send a rebate to customers if they do not keep overhead costs lower.

Some estimates suggest that as much as 30% of what we spend on health care goes to overhead — and not to health benefits.  This is rather distressing when the costs of health care in the United States are compared to other developed countries that, in many cases, more efficiently keep the overhead to 1/3 of what it is in the United States.

What is the Medical Loss Ratio?

In the health insurance industry, “medical loss” is considered the money that goes to pay for your health benefits.

Take a moment to let that sink in.

Most of us would think that a loss in such a case would be the money that goes to overhead.  However, in the world of insurance, paying out benefits is the loss.  So, the idea of this provision of the the PPACA is to increase loss in insurance terms, requiring health insurance companies to put more of your premium toward actual health benefits (which you pay for).

medical loss ratio

The medical loss ratio measures overhead to actual medical use for the premiums you paid.

In order to try to force some measure of efficiency in health insurance, the PPACA requires that the companies start reporting their medical loss ratio, and try to reduce their overhead.  For individual and small group plans, insurers are supposed to bring the overhead costs down to 20%.  With large group plans, health insurers are supposed to get their overhead costs down to 15%.

This means that the medical loss ratio should be at least 80% (80 cents of each dollar goes to health benefits) for the smaller plans, and at least 85% for the larger plans.  Some health insurers did try to get commissions paid to insurance agents considered “benefits”, but that was shot down by the Department of Health and Human Services.

The PPACA doesn’t stop there, though.  Health insurance companies not only have to disclose their overhead costs, but they also have to send rebates to customers when they don’t meet their targets.  This year (2012) is the first year that the rebates are being issued.  Insurance companies were supposed to issue checks by August 1.

[Related: Thinking of getting health insurance? See what we think of eHealthInsurance]

Will You Get a Refund Check?

Whether or not you will get a rebate depends largely on whether or not your health insurance company meets its target.

Reports, though, indicate that the average refund is likely to be $151 per family.  (I don’t get one because my heath insurer, according to, meets the medical loss ratio requirements.)  Estimates are that $1.1 billion is being paid out in rebates.

However, payouts will vary be state, and not everyone will receive rebates in the same way.  For those with individual plans, a check might come in the mail, or the health insurer can apply it to your premium, instead of sending a check.

For those with employer-sponsored plans, though, things become a little trickier.

The rebate actually goes to the employer first.  The employer can then decide what to do with the rebate.  It can be passed along as a check, or as a reduction in premiums.  Employers can also choose to use rebates in a way that benefits employees, even if it doesn’t involve receiving cash.

All insurers were supposed report their medical loss ratios, and inform customers/employers of the law, even if they weren’t required to issue rebates.  If you have a question about whether or not you will be receiving a rebate, you can check with your insurance company, or with your employer.

It’s a good idea to find out more about what to expect, and whether or not you will be receiving a rebate check.

Have you received a check or a Medical Loss Ratio letter?

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Published or updated March 29, 2013.

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