# How the Medical Loss Ratio (MLR) is Calculated

11/19/2010 - 4:20pm

A Medical Loss Ratio (MLR) is the percentage of money a health insurance plan spends on health benefits from each premium dollar. Obamacare sets a minimum MLR of 85% (80% for plans that insure individuals or small businesses with fewer than 100 employees). If an insurer’s MLR falls below this minimum, it must issue refunds to its enrollees for the difference.

But the formula is a little more complex than that. The regulation actually states that the MLR equals claims plus quality improvement measures, divided by premiums minus federal and state taxes and licensing or regulatory fees.

Here is what that looks like graphically:

This equation may become more clear if we plug in some arbitrary numbers (Claims= \$60,000; QIM = \$10,000; Premiums = \$100,000; Taxes = 5,000; Fees = \$5,000):

The insurer in this case would be under Obamacare’s minimum MLR requirement of 85% and would have to send refund to its enrollees for the difference.

The Even Nittier Grittier

For most, the above explanation will suffice. But for the most wonkish of our readers there are actually two additional adjustments in the MLR regulation.

First, if an insurer’s plan has between 1,000 and 75,000 participants per year (as measured by “life years”) an “additive adjustment” will be added to the insurer’s MLR—effectively lowering the minimum MLR (80% or 85%) which the insurer must meet. In the case where the insurer only insures 1,000 people, the “additive adjustment” would be 8.3% (see Table 1). If this same insurer had a base MLR of 77.78% his new MLR would become 86.08% after adding the additive adjustment. The minimum base MLR for such an insurer would effectively be as little as 71.7% (80% - 8.3 %).

The second adjustment is made for insurance companies whose plans have an average deductible of \$2,500 or more per year. In such cases the base MLR plus any Additive Adjustment from Table 1 will be multiplied by an “Adjustment Factor” from Table 2.

If, then, our insurer’s plans have an average \$2,500 deductible, its base MLR of 77.78% plus its additive adjustment factor from Table 1 will be multiplied by the 1.164 adjustment factor of Table 2 giving it a final MLR of 100.1%.

Two Definitions of Note

1. The NAIC defines “federal taxes” as “federal taxes except those attributable to investment income and capital gains.”

2. Quality Improvement Measures include fraud prevention, but only “amount[s] recovered that reduce[] incurred claims.”