A basic financial measurement used in the Affordable Care Act to encourage health plans to provide value to enrollees.
If an insurer uses 80 cents out of every premium dollar to pay its customers' medical claims and activities that improve the quality of care, the company has a medical loss ratio of 80%.
• A medical loss ratio of 80% indicates that the insurer is using the remaining 20 cents of each premium dollar to pay overhead expenses, such as marketing, profits, salaries, administrative costs, and agent commissions.
• The Affordable Care Act sets minimum medical loss ratios for different markets, as do some state laws.
The ACA requires most insurance companies that cover individuals and small businesses to spend at least 80%. The threshold is higher for large group plans, which must spend at least 85% of premium dollars on health care and quality improvement.
♦ In some states, if the insurer failed to meet their loss ration they have been required to refund a portion of the premium back to the member.