Issues with the ACA MLR
July 28, 2009. Bruce Webb posted on what he considered to be the most important provision of the original House Tri-Committee Health Care Bill. “Sec 116: Golden Bullet or Smoking Gun. Smoking Gun referred to the belief by Republicans that this bill was designed to ultimately transition to Single Payer. Golden Bullet referred to the belief they were right. If you forced private insurance to give up its predatory business model, they ultimately would abandon less profitable markets just as they did in the heyday of managed care.
What Sec 116 did was to establish minimum Medical Loss Ratios for all plans participating in the proposed Exchanges. Medical Loss Ratio is the industry term for percentage of premium dollar actually spent on provider payments with the remainder retained by the company to pay for marketing, administration, executive compensation, and profit. Under the House Bill the actual mandated MLR for each area would be set by an auction process and in that model you pretty much needed a Public Option to establish a baseline.”
The Affordable Care Act (ACA) introduced the medical loss ratio (MLR) requirement to the individual, small group, and large group markets with the stated goal of improving the value and affordability of health insurance benefits by capping insurers’ profit margins and administrative costs. The requirement requires insurers to spend a large percentage of premium revenue on medical services. Eighty percent for individual and small group plans, and 85 percent for large group plans, thereby limiting administrative costs and profits to the remaining 15–20 percent.
While the MLR requirement applies to fully insured plans in the individual, small group, and large group markets, its most visible impact has been in the individual market. From 2011 to 2021 and after adjusting for medical inflation, median annual premiums per enrollee in the ACA individual market increased 59 percent (from $3,574 to $5,683), even though subsidized premiums seem affordable to the vast majority of consumers insured in this market. In 2025, approximately 24 million individuals obtained health insurance through exchanges, with four out of five (19 million) enrollees’ monthly net premiums at $10 or less after subsidies. These enrollees received an estimated $98 billion and $107 billion in subsidies in the form of premium payments to insurance companies in 2024 and 2025, respectively.
If an insurer’s MLR falls below the required thresholds, the ACA requires refunds to be paid to enrollees. These refunds have totaled hundreds of millions of dollars. In 2012 this amounted to $192.2 million to 2.7 million enrollees in 2012 and $491.0 million to 3.6 million enrollees in 2023. Yet, in many cases, these payments go to enrollees whose premiums were already almost entirely subsidized by the federal government, even though the government was the party was paying the extra premium.
After more than a decade, there is little evidence that the MLR requirement has promoted premium affordability or constrained insurer profits as intended. Instead, the MLR drives higher premiums and higher medical care spending and presents other unintended consequences warranting attention. In this Forefront article, the discussion is how the MLR statute has led to these negative outcomes and propose policy solutions.
The Unintended Consequences of The MLR Requirement
Driving Premium Inflation
With the MLR requirement capping profit margins and administrative costs, insurers are discouraged from containing health plans’ premium increases. Economists have noted the MLR requirement effectively turns health insurers into “cost-plus” businesses. If insurers’ predicted premiums are less than the actual medical care spending on claims, it can lead to higher MLRs and less profits, within MLR restrictions.
Professor Scott Harrington warned early on the MLR requirements could reduce insurers’ motivation to control premium increases. Prior research found the MLR requirement is associated with stronger financial performance for insurers. Insurers can raise premiums to cover higher claims and still comply with the MLR threshold.
Incentivizing Insurer Consolidation
The MLR requirement can encourages insurer consolidation, both horizontally and vertically. Large, national insurers, with millions of enrollees across multiple markets, can dampen their claim volatility and spread their administrative costs across more premium dollars and many business units. Thus they are more likely to meet the MLR threshold. In contrast, small or regional insurers, with fewer enrollees from the same population pool, face greater challenges to covering administrative costs and absorbing high claim risks to stay competitive. Horizontal consolidation, ongoing pre- and post-ACA from 2001 to 2020 for all markets, is intensifying.
The MLR requirement incentivizes vertical integration. When an insurer acquires health care providers, such as hospitals, physician groups, pharmacies, and pharmacy benefit managers, it can pay them a higher price than an arm’s-length rate, which shows up as higher medical claims, and raising the reported MLR. Although the overall profit remains the same for the vertically integrated insurer; medical spending appears higher, profits appear lower, MLR requirements are met.
As shown in exhibit 1, four major insurers incurred substantial internal revenues within subsidiaries compared to their external premium revenue. This occurring from 12.4 percent for Cigna to 50.7 percent for UnitedHealth Group. Yet they maintain an MLR of 80 percent or higher. Although vertical integration can streamline care and reduce administrative redundancies, it creates advantages for larger insurers, reduces competition, limits enrollees’ choices, and drives up premiums further. Such results undermine the ACA’s affordability goals.
Overall, highly concentrated markets are associated with less competition, higher premiums, and narrower networks, which can lead to fewer choices and longer wait times, particularly for rural areas with limited provider supply. The MLR requirement by itself has not materially expanded access or slowed underlying cost growth.
Deterring Innovative And Affordable Plans
The MLR requirement deters insurers from offering low-premium, high-deductible plans. These plans incur relatively low medical claims, particularly for low-value outpatient services such as unwarranted imaging and lab tests, making it harder for insurers to meet the MLR’s 80–85 percent spending requirements and stay ACA compliant. As insurers favor high-premium ACA-compliant plans offering comprehensive coverage and funded by taxpayer subsidies, healthy individuals who prefer low premium plans and more control over health care spending are driven away from the individual market. This furthers adverse selection and leaving sicker individuals in this market.
The MLR requirement can also dampen innovation. Innovative models require strategic and administrative investments. These are generally considered non-medical-care costs and do not help insurers meet MLR requirements. For example, although payments for telehealth as well as other activities improving care quality (if they meet prescribed criteria) qualify as medical claims, costs to establish new care models (for example, platform build, network development, marketing, and so forth) do not. The narrow MLR gates and their documentation burdens can discourage administratively intensive innovations, especially for smaller insurers. As a result, insurers prioritize high-premium, less-innovative plans, pushing insurance markets to become increasingly rigid, unaffordable, and unable to serve enrollees’ diverse needs.
Looking Forward
The MLR requirement is well-intentioned, but its cost-plus design is flawed. By capping insurer overhead and profit margins without addressing the structural drivers of unaffordable health care, the requirement unintentionally incentivizes insurers to prioritize horizontal and vertical integration over cost containment and innovation. These dynamics compromise plan quality, reduce enrollees’ choices of affordable plans, and increase taxpayer burdens.
Insurers have proposed premium hikes between 5 percent and 50 percent in 2026. Under the ACA affordability provision, if the lowest-cost self-only plan offered by a small employer exceeds 9.96 percent of an employee’s household income in 2026, workers can choose an individual market plan, shifting more costs to federal subsidies. Large employers governed by the Employee Retirement Income Security Act (ERISA) of 1974 are increasingly turning to self-funded arrangements that sidestep the MLR altogether. As a result, both small and large employers are moving away from the MLR framework, underscoring its ineffectiveness as a tool to control premium increases in private health insurance markets.
While more regulatory oversight and transparency may temporarily ease these consequences, they cannot feasibly address the MLR requirement’s structural flaws that distort insurer incentives. In the short term, policy makers should at least consider a range of options to mitigate the MLR requirement’s negative impacts on competition and patient choice. First, in markets with robust competition and for small/new entrants, they should allow MLR relief, such as a reduction in required thresholds or a time-limited suspension. Second, for households receiving advance premium tax credits, MLR rebates should be calculated on the self-pay portion of premiums (post-subsidization), or a proportional share of rebates should be allocated to state reinsurance funds to lower future premiums. Finally, policy makers should build on and enforce price transparency mandates and the No Surprises Act of 2022 to empower and educate patients.
Affordable, accessible, and sustainable health plans are critical for US workers, small business owners, large employers, and taxpayers. Reforming the MLR requirement would be an important step toward achieving this goal.
It appears we need an adjustment.
The Unintended Consequences of the ACA’s Medical Loss Ratio Requirement, Health Affairs, Randolph W. Pate
Sunjay Letchuman. Elizabeth Plummer, Xiaoxi Zhao. Joshua Brooker, Lynn Lewis, Ge Bai
Thinking way, way back, can someone explain why it was believed (or at least pitched by President Obama) that ACA would save families something like $2500 a year? The pitch was that the changes to be ACA-compliant would make this the case for families not getting insured through ACA also. I saw pretty much immediately that MLR would encourage insurers to not exercise too much control over costs….that what cost plus arrangements do. But was there something(s) else in ACA that was supposed to go strongly in the other direction that maybe didn’t work? I feel pretty confident that at no moment since passage has ACA actually swung the costs lower. Maybe a deep dive into what ACA was intended to do way back when and where it is today would give some guidance to reforms, which I think there is low chance with this Congress would only be about MLR.
@Eric,
My understanding is that the ACA was intended to get more people insured. AFAIK, it accomplished that. For low- and middle-income individuals, the ACA has significantly lowered insurance costs.
Joel:
Correct. And if the republicans and people like Eric have their way, the ACA will do one of two things:
– Increase in pricing to placate the Healthcare industry. This will result in people not being able to pay for it.
– Be Eliminated. This will cause a return to the way it was in the past. People with no insurance will have to depend upon the good will of doctors and hospitals. Or die.
We have strong political interference to having a program of healthcare for all regardless of income, politics, race, etc. There are some amongst us who can not get it into their head that the profit motive does not work as well in providing such care as it limits people access to healthcare. If you can not pay, then work harder.
Eric has one good point. The nation should not trust the profit motive to be our guide in getting things done. The ACA and Medicare can limit what is paid with the ACA being more expensive than Medicare. But Medicare alone does not provide all care, hence commercial supplemental insurance which one has to shop around for to find the best pricing. Another $2400 a year for two people and Plan N.
Gotta feed the industry.
@Bill,
Or Plan G.
All the other industrialized nations on the planet insure more of their citizens for half the cost that US citizens face and with better outcomes than US citizens experience.
Joel:
Yep, the amount for plan N or G we pay now should pay for a family.