You may or may not have heard of MLR (or Medical Loss Ratio). MLR was part of Obamacare when it was enacted in 2010. What it means is that an insurance carrier MUST spend 80 to 85% of the premiums collected on medical claims and can use the remaining 15-20% of the premiums received for administrative fees, improvement, etc.
It had good intentions
While the implementation of MLR may have had good intentions, it has turned out to be anything but good. If an insurer falls short of the 80 to 85 claim spend, means that they must return the unused funds to the policyholders. For individuals and small groups, the MLR is 80% and for larger groups, the MLR is 85%.
What does that mean for you and your employees? If you are with a large carrier and are fully insured, chances are, your carrier will make sure they pay out that 85% in claims because otherwise, their profit drops. Of course, as we all know, lowering profit is not what insurance companies are about.
Let's look at it another way
Suppose you are wanting to buy a new house and you have a budget of $1,000,000. You approach your realtor and tell them what your budget is and also tell them that you have that much money and that they can make a 15% commission, no matter what the cost of the house (as long as it stays under $1,000,000).
What do you think the chances of that realtor showing you a house for $500,000 is? ZERO! If they find you a house for $500,000, their commission is only $75,000 instead of the $150,000 they would make for selling you a $1,000,000 house.
The same holds true for insurance companies. If your company pays $1,000,000 in premium and they do not pay claims of $850,000, they must refund (or rebate) the difference and any rebate given will negatively impact their profit margin.
Of course, there are loopholes. The carriers have what is called "incurred but not paid" that they can "project" to get your claims spend to the appropriate threshold and there really isn't any way to gauge whether that "projection" is accurate so your company will not likely see rebates often.
MLR Does Not Apply To Level Funding or Partially Self Funding
If your company is level funded or partially self-funded, there are no minimum thresholds to meet in claims payments. In actuality, you keep your money in your pocket until claims are paid. You can choose to "level fund" your claims at a specified monthly amount or you can pay as you go and pay claims as incurred. The DIFFERENCE is, at the end of the year, any funds not used for claims stays with you!