MEDICAL LOSS RATIOS: AN OVERVIEW OF ACCOUNTING & PUBLIC POLICY ISSUES

Abstract

In the Patient Protection and Affordable Care Act of 2010 (PPACA), there are requirements to measure the percentage of premiums received by insurers that are used to provide medical care (called the “medical loss ratio” or MLR). If the MLR is below certain thresholds (80% for individual and small group markets and 85% for large group markets), the PPACA requires insurers to refund the difference to their insurance customers. This paper reviews the rationale for the minimum MLR provisions, presents an example of a pre-PPACA manipulation of the MLR ratio, and discusses the controversy surrounding measurement of the MLR. The paper concludes with some implications of the minimum MLR requirements for both health insurance executives (including corporate accountants) and auditors.