Private Health Insurance: Early Indicators Show That Most Insurers Would Have Met or Exceeded New Medical Loss Ratio Standards Page: 4 of 16
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The MLR formula and reporting requirements specified in PPACA differ from the way
MLRs have traditionally been calculated and reported. The traditional MLR is
generally calculated by dividing an insurer's medical care claims by premiums,
whereas the PPACA MLR formula includes additional components to the formula.9
(See fig. 1.) Additionally, PPACA included adjustments to the MLR formula and new
Figure 1: Key Components of Traditional and PPACA MLR Formulas
Traditional Medical care claims
PPACA Medical care claims + Expenses for activities that improve health care quality
MLR Premiums - Federal and state taxes and licensing or regulatory fees
Key components of the PPACA MLR formula, adjustments, and reporting
requirements include the following:
* Activities that improve health care quality. These include activities designed to
increase the likelihood of desired health outcomes in ways that can be objectively
measured, including related health information technology costs.
* Federal and state taxes and licensing or regulatory fees. These include all
federal taxes and assessments, excluding taxes on investment income and
* Credibility adjustment. To help address the disproportionate impact of claims
variability on small health plans, an adjustment to the MLRs is permitted for these
plans. Specifically, MLRs for plans with
* less than 1,000 life years will be considered "noncredible" and will be
presumed to meet the MLR requirements;
* 1,000 to less than 75,000 life years will be considered "partially credible" and
will receive a credibility adjustment, which is made up of two factors-a base
credibility adjustment factor based on the number of life years and a
deductible adjustment factor that further increases the adjustment for plans
with high deductibles; and
* 75,000 life years or more will be considered "fully credible" and will not
receive an adjustment.
9For the purposes of this report, medical care claims is broadly defined as payments made or
anticipated to be made for medical care expenses. For example, medical care claims would include
medical care expenses paid, medical care expenses incurred but not yet paid, as well as changes in
an insurer's contract reserves. Contract reserves are funds set aside to pay certain claims expected
to be incurred in the future.
GAO-12-90R Medical Loss Ratios
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United States. Government Accountability Office. Private Health Insurance: Early Indicators Show That Most Insurers Would Have Met or Exceeded New Medical Loss Ratio Standards, text, October 31, 2011; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc298662/m1/4/: accessed December 16, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.