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Health insurance premiums may be affected by federal medical loss ratio mandate Posted: July 21st, 2011

By Maryalene LaPonsie

An important provision of the Patient Protection and Affordable Care Act (PPACA) went into effect in 2011. It requires health insurance companies to spend a certain percentage of premium dollars on medical care or quality improvement activities. The percentage is known as a "medical loss ratio" and dictates how much insurers can spend on medical care and health care quality improvement compared to administrative costs. Examples of administrative costs include executive salaries and marketing expenditures.

New medical loss ratios for 2011

According to the Department of Health and Human Services (HHS), prior to 2011, about 45 percent of consumers purchasing individual health insurance bought policies with medical loss ratios that were less than 75 percent. Therefore, for each dollar the health insurance company received in premiums, more than 25 cents went to administrative expenses. In some extreme cases, insurers were spending more than half of premium dollars on administration costs.

Under the PPACA requirement, the medical loss ratio for large group plans was set at 85 percent in 2011. For individual health insurance and small group policies, the required medical loss ratio is 80 percent. The federal government estimates that 74.8 million insured Americans belong to plans that must adhere to the new guidelines.

Health insurance rebates in 2012

Some limited benefits medical insurance policies, often called mini med plans, received a waiver from the HHS allowing them to be exempt from the new medical loss ratios for one year. However, all other health insurance must implement the ratios for 2011.

Those medical insurance companies that fail to meet the mandated ratios in 2011 will be required to issue rebates to customers in 2012. HHS estimates indicate that $1.4 billion will be spread among 9 million policyholders in 2012, and average rebates for health plans in the individual market could be $164 per person.

Provision aims to lower health insurance rates

Along with requiring the new ratios, the PPACA requires health insurance companies to publish how they spend the premium dollars they receive. It is believed that this transparency will keep insurers accountable to their policyholders.

In addition, it is hoped that premiums will be reduced or that services will increase. A health insurance company that spent more than 20 percent of its premiums on administrative costs, such as advertising, marketing and executive salaries, before 2011 will need to make adjustments to conform to medical loss ratio requirements.