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MLR Rule a Baby Step Toward Spending Reductions

Christopher Cheney, for HealthLeaders Media, August 13, 2014

The medical loss ratio, also known as the 80/20 rule, is trimming spending by payers. But the fate of the nation's drive to cut healthcare costs rests in the hands of the biggest spenders—providers.

Are healthcare payers parasites or purveyors of value?

As the nation struggles to rein in healthcare spending, which federal officials pegged at $2.8 trillion in 2012, payers and providers have been subjected to intense pressure to boost efficiency and reduce waste. The necessity to take action is undeniable: The share of the economy devoted to healthcare spending is about 17 percent and it is threatening to crowd out other essential goods and services.

One step in the monumental journey toward healthcare cost control is the Medical Loss Ratio law under the federal Patient Protection and Affordable Care Act. Also known as the 80/20 Rule, the MLR requires insurers to spend at least 80 percent of every premium dollar on patient care. Insurers that fail to meet the 80/20 Rule standards are required to pay refunds to health plan members.

In 2012, health plan members gained from upfront premium reductions estimated at $3.4 billion and $500 million in rebates. Last year alone, the 80/20 Rule saved consumers $3.8 billion up front on their premiums as insurance companies operated more efficiently.

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3 comments on "MLR Rule a Baby Step Toward Spending Reductions"


JKuriyan (8/27/2014 at 1:48 PM)
MLRs play a very important role in keeping health plans honest when they demand premium increases annually. Without MLRs the greed of health plans will know no bounds. Unfortunately medical costs are not reported correctly by health plans and so MLR calculations are often wrong. There are no penalties for making such false statements, and we see false MLRs especially in Medicaid managed care. Thanks to ACA, private health plans are being caught and punished for low MLRs. Hopefully this will reduce the billion dollar severance pays of insurance executives.

Ramesh (8/13/2014 at 9:24 PM)
Please correct me if I am wrong. I did a quick calculation based on the figures in this article and arrive at 0.135% ($3.8 Bn saved out of $ 2.9 Tn spent. Am I missing something?

Myles Riner, MD (8/13/2014 at 2:52 PM)
RE: MLR and the response from AHIP: "this regulation places an arbitrary cap on what health plans can spend on a variety of programs and services that improve the quality and safety of patient care, help patients navigate a complicated delivery system, and help control soaring medical costs." Just what you would expect from AHIP. Commercial plans hate anything that stands between them and making a buck. Where is the validated evidence that the 20% spent on administering health plans does anything to improve quality and safety? How much of the remaining 80% is actually spent on overhead that is trussed up to appear to be related to direct medical care in order to work around the profit limitations of this rule? Want to see some meaningful savings instead of the 0.00139 percent figure? Try strictly enforcing the 80/20 rule, or better yet, make it a 90/10 rule, and bring the cost of administering these plans down to something close to what it costs to administer Medicare.