Medical Loss Ratio (MLR)

Definition

The Medical Loss Ratio (MLR) is a regulatory standard established by the Affordable Care Act that requires health insurers to spend a minimum percentage of premium dollars on medical claims and quality improvement activities. For large group plans, the minimum MLR is 85% — meaning no more than 15% of premiums may be used for administrative costs and profit. For small group and individual plans, the minimum is 80%. Insurers that fail to meet the MLR threshold must rebate the difference to policyholders.

What This Means for Employers

The MLR rule sounds like a consumer protection — and in some ways it is. But it has a structural consequence that matters for employers: because carriers can only profit on the non-claims portion of premium (capped at 15–20%), the absolute dollar amount of that margin grows as premiums grow. This creates a perverse incentive where carriers are not strongly motivated to aggressively reduce claims costs, because higher claims generally mean higher premiums, which means larger absolute revenues even at the same margin percentage. Understanding MLR helps explain why carriers behave the way they do — and why you need advocates whose incentives are truly aligned with reducing your costs.

Related Terms

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• ACA Employer Mandate
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• Self-Funded Health Plan