Navigating the Medical Loss Ratio in the Time of COVID-19

Insurance Companies Have a Spending Problem. Here’s How to Solve It.

Under the Affordable Care Act, insurance companies are required to spend at least 80-85% of their premiums on medical care, clinical services, and quality improvements for their insured individuals and employer groups. The remaining 15% may be used for administrative costs and profits, including executive salaries, overhead, agent commissions, and marketing. Anything related to the operation of their business sits outside that 85%.

If the MLR standards are not met, a rebate will be paid back to the customer.

In a normal health environment, the MLR provides increased value to consumers and transparency on the part of insurance companies. During a pandemic, the MLR leads to writing huge checks in the form of rebates and risking the poor public perception that premiums are too high and of little value.

Making Up the 85%: Medical Expenses During COVID-19

At the beginning of the Coronavirus outbreak, the American College of Surgeons (ACS) released a set of guidelines advising hospitals to postpone elective surgeries. This was a necessary effort to conserve critical resources and lessen the risk of contagion. But, it also meant that billions of dollars worth of medical expenses to pay for these optional operations were no longer being spent by insurance companies.

Despite the perceived increase in medical expenditures due to COVID-19, insurance companies typically spend 60-70% of their medical expenses on these elective surgeries.

With these procedures being canceled or postponed, the bulk of the 85% reserved for medical care is not being spent during a pandemic. Meaning, insurance companies will be paying back significant portions of their premiums.

In fact, in this year alone, insurance companies with Affordable Care Act plans are giving back a record $2.6 billion. The goal and the challenge for insurance companies during these unprecedented times is to get as close to that 85% as possible. Otherwise, they are not going to be able to utilize that money. As costs go down, the ability to retain profit goes down with it.