Medical Loss Ratio Requirements

Interim Final Rule

Score: 21 / 60


This document contains the interim final regulation implementing medical loss ratio (MLR) requirements for health insurance issuers under the Public Health Service Act, as added by the Patient Protection and Affordable Care Act (Affordable Care Act).


There are twelve criteria within our evaluation within three broad categories: Openness, Analysis and Use. For each criterion, the evaluators assign a score ranging from 0 (no useful content) to 5 (comprehensive analysis with potential best practices). Thus, each analysis has the opportunity to earn between 0 and 60 points.



1. How easily were the RIA , the proposed rule, and any supplementary materials found online?
The NPRM is available via an RIN or keyword search on The RIA is in the NPRM. It includes a link to a "technical appendix" to the RIA that has more details and sources for calculations. A keyword search on the HHS home page leads to a page that has links to both the NPRM and the technical appendix. The NAIC model regulations are available via a link in the notice.
2. How verifiable are the data used in the analysis?
Most data are sourced but not linked. Data deficiencies, and imputation methods used to correct for them, are acknowledged and described.
3. How verifiable are the models and assumptions used in the analysis?
Several judgment call assumptions (e.g., staffing requirements used to calculate administrative costs) are simply sourced to consultations with "industry experts." Assumptions about uncertainties are judgment calls that would be difficult to substantiate. Calculations of rebates are spelled out.
4. Was the analysis comprehensible to an informed layperson?
Explanation of calculations is difficult to understand. The separate "technical appendix" explains things somewhat better. Nevertheless, it is difficult for a non-specialist to follow it all; we had to read it several times.


5. How well does the analysis identify the desired outcomes and demonstrate that the regulation will achieve them?
Does the analysis clearly identify ultimate outcomes that affect citizens’ quality of life?
Stated benefits are increased transparency, increased spending on health care, better quality care, and ultimately improved health because insurers reallocate resources to activities that improve care. Improved health is the ultimate outcome; the other "benefits" are means to that end.
Does the analysis identify how these outcomes are to be measured?
HHS did not quantify the benefits due to "data limitations." It quantified transfers (rebates) from insurers to insured.
Does the analysis provide a coherent and testable theory showing how the regulation will produce the desired outcomes?
Regulation motivates insurers to spend a higher proportion of premiums on paying claims and on quality-improving activities. These in turn lead to better health outcomes. The theory does not explain whether this hoped-for outcome is consistent with the incentives profit-seeking insurance companies would face under this regulation. No suggestion that the department realizes some increased medical expenditures could be waste (which the health literature suggests is the case for many expenditures). Nor does HHS consider whether this might increase health care costs overall.
Does the analysis present credible empirical support for the theory?
The analysis provides no evidence this will occur; calculation of rebates seems to indicate that many insurers will pay rebates rather than reallocate resources to health care services or quality-improving activities.
Does the analysis adequately assess uncertainty about the outcomes?
Performs a sensitivity analysis on rebates assuming expenditures on "quality improving activities" will range between 1 and 5 percent of premiums. Low, mid, and high ranges of rebates are calculated based on assumptions reflecting several other uncertainties. Since ultimate health outcomes are not quantified, there was no uncertainty analysis associated with health outcomes.
6. How well does the analysis identify and demonstrate the existence of a market failure or other systemic problem the regulation is supposed to solve?
Does the analysis identify a market failure or other systemic problem?
RIA claims that the health insurance market is insufficiently competitive. It also suggests a sort of "asymmetric information" market failure—there is "lack of transparency" in pricing that prevents the insured from knowing whether low premiums are due to efficiency, low coverage, or a healthy population served by the insurer. These are not elaborated in any great detail, so it is difficult to understand exactly what the department means.
Does the analysis outline a coherent and testable theory that explains why the problem (associated with the outcome above) is systemic rather than anecdotal?
The market failure claims are just asserted with no underlying theory showing how these affect ultimate health outcomes. In fact, the department assumes that insurance companies prefer to have an inefficiently high level of administrative costs, with no explanation of why this is consistent with profit-motivated behavior.
Does the analysis present credible empirical support for the theory?
Re the competition theory, the analysis cites a single journal article in support of the claim that the percentage of population in areas where health insurance markets are least competitive is increasing, but provides no information about whether this is a large or small share of the population or whether the level of competition is sufficient. Transparency/information problem is merely asserted with no supporting evidence.
Does the analysis adequately assess uncertainty about the existence or size of the problem?
Problem is assumed to be certain and large.
7. How well does the analysis assess the effectiveness of alternative approaches?
Does the analysis enumerate other alternatives to address the problem?
Alternatives discussed include omitting the "credibility adjustment" that reduces rebates from smaller plans, excluding fewer federal taxes from the calculations, narrower or broader definitions of "quality enhancing activities," and aggregating medical loss ratios at the national level for multistate companies.
Is the range of alternatives considered narrow (e.g., some exemptions to a regulation) or broad (e.g., performance-based regulation vs. command and control, market mechanisms, nonbinding guidance, information disclosure, addressing any government failures that caused the original problem)?
These are all tweaks to the same basic regulatory proposal.
Does the analysis evaluate how alternative approaches would affect the amount of the outcome achieved?
Analysis calculates how most of these alternatives would alter the size of rebates, but not ultimate outcomes.
Does the analysis adequately address the baseline? That is, what the state of the world is likely to be in the absence of federal intervention not just now but in the future?
Baseline is not extensively discussed but assumed to be state of affairs in recent past. No discussion of how markets might evolve or what legislation states might enact in the future if this regulation does not get adopted.
8. How well does the analysis assess costs and benefits?
Does the analysis identify and quantify incremental costs of all alternatives considered?
Administrative costs and rebates (transfers) from insurers to insured are calculated. Changes in rebates are calculated for several alternatives that could affect them.
Does the analysis identify all expenditures likely to arise as a result of the regulation?
Administrative costs are calculated. Analysis mentions several different ways insurers might respond, which could affect expenditures. Increased spending on medical care or quality-improving activities are mentioned but not calculated.
Does the analysis identify how the regulation would likely affect the prices of goods and services?
The only effect discussed is the rebates to consumers; no other effects on premiums acknowledged. No discussion of the possibility that insurance companies could comply by spending more money on care that is not very effective, thus increasing costs and premiums.
Does the analysis examine costs that stem from changes in human behavior as consumers and producers respond to the regulation?
Analysis acknowledges that some health plans may leave the market or "limit product offerings" in response to the regulation, which could reduce coverage or at least make consumers bear the burden of searching for a new plan. It lists possible behavioral changes but explicitly declines to analyze them.
If costs are uncertain, does the analysis present a range of estimates and/or perform a sensitivity analysis?
Low, middle, and high ranges of administrative costs and rebates are calculated.
Does the analysis identify the alternative that maximizes net benefits?
Since benefits were not calculated, net benefits were not calculated. Some assertions about the merits of alternatives imply that the department believes net benefits of the alternatives may have been lower.
Does the analysis identify the cost-effectiveness of each alternative considered?
Since benefits were not calculated, cost-effectiveness was not estimated.
Does the analysis identify all parties who would bear costs and assess the incidence of costs?
Rebates and administrative costs calculated separately for small health plans. The administrative costs are likely a small portion of total costs.
Does the analysis identify all parties who would receive benefits and assess the incidence of benefits?
Transfers calculated separately for individual, small group, and large group markets. No discussion of the incidence of ultimate health benefits.


9. Does the proposed rule or the RIA present evidence that the agency used the analysis?
Definitions and calculations adopted in the regulation were formulated by the National Association of Insurance Commissioners. Minimum percentage of premiums to be spent on medical losses is in the law. Decisions about alternatives justified with a few sentences saying the decision balances interests of insurers and subscribers. The estimated size of rebates may have influenced one or two decisions on alternatives, but HHS does not claim the RIA influenced its decisions. NPRM says this is an interim final rule because the NAIC transmitted its recommendations to HHS on October 27 and the law says the required reporting starts on January 1.
10. Did the agency maximize net benefits or explain why it chose another alternative?
HHS did not calculate net benefits, and they could not be calculated from information provided in the RIA, so the department made its decisions with no cognizance of net benefits.
11. Does the proposed rule establish measures and goals that can be used to track the regulation's results in the future?
No outcome-oriented goals or measures. The mandated medical loss ratio could be interpreted as a goal with sanctions for noncompliance, but since the RIA provided no evidence that a higher medical loss ratio leads to improved health outcomes, more work would need to be done to justify this as a measure of outcomes.
12. Did the agency indicate what data it will use to assess the regulation's performance in the future and establish provisions for doing so?
No commitment to gathering data for retrospective analysis. With more work, data on medical loss ratios might be used, but one would need to establish whether an increase in the medical loss ratio actually improves health outcomes. The RIA does not do this because it does not examine whether some of the increased spending could be waste incurred simply to comply with the regulation.
Total21 / 60

Additional details

Department of Health and Human Services
Regulatory Identification Number
Rule Publication Date