The House and Senate bills for healthcare reform would eliminate the Federal requirement that insurance carriers pay out (for actual clinical care) at least 80 cents for every premium dollar collected. The penalty for failing to achieve that threshold is that the insurer is required to rebate excess premiums back to policy holders. Since this law took effect in 2010/11 Healthcare insurers have rebated 2.4 billion dollars in the first 3 years.

Prior to 2010 the various states have had a hodgepodge of MLR thresholds, in Ohio the threshold was 80% while in Pennsylvania it was 50% and New Mexico was 85%. Some 6 states had no rule at all..PDF

The apparent intention of the ACA requirement of 80% was/is to encourage healthcare insurers to become more efficient in their operations.

The CBO estimates that about 50% of the states would impose that 80/20 rule, others would adopt their own rule or no rule.

What are the ramifications of eliminating the MLR rule or allowing it to "float"?

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    I don't have the data to back up or refute the claim, BUT there is a popular claim that this MLR threshold's main effect was to simply drive up the medical service prices, in an effort by insurers to maximize that 20% remainder (in other words, using an extremely oversimplified mode, you as insurer can charge a premium of $100, pay the doctor $50, and keep $50 without the threshold. With 20% one, to keep "your" desired $50 as insurance company, you need to pay the doctor $200; thus are incentivized to raise your premium to $250 to cover that. NOT really helpful to the end consumer)
    – user4012
    Jul 24, 2017 at 6:30
  • @user4012 94 % of physicians accept medicare assignment so let's use a real-life example: A medicare physician "charges" $50 to read an EKG (CPT code 93010). Medicare Physician Fee Schedule will only allow the doctor to be get 8.93 for that service (regardless of who actually pays the 8.93). The fee schedule of private insurers is generally the same as or very close to the medicare fee schedule. That an insurer would voluntarily pay providers significantly more (as in your example) in an effort to "balance" out the impact of changing MLR requirements is highly implausible.
    – BobE
    Jul 24, 2017 at 14:57
  • @BobElston - Absent actual data, you're merely stating an assumption as baseless as the one I cited - only actual facts can decide if yours or mine is correct. Except that, at least, the assumption I cited aligns with insurers' incentives (they can get to keep more money as profit if they raise fee schedule).
    – user4012
    Jul 24, 2017 at 15:14
  • @BobElston AFAIK, the medicare fee schedule is often not the same or even close to the private payer scale.
    – user1530
    Jul 24, 2017 at 19:31
  • @ blip "Payments for Medicare benefits substantially influence the prices paid by private-sector insurers. Many private insurers simply adopt Medicare’s levels of reimbursement to providers, and those that do not still are affected when Medicare changes its rates." see: ( mercatus.org/publication/… )
    – BobE
    Jul 25, 2017 at 0:27

1 Answer 1


I'd disagree that it's about making insurers be more efficient.

Basically, the idea behind that rule is that the MSF should be the administrative costs of running health insurance, plus any profit-taking by the insurance company. By capping what percentage of premiums the company can collect for their own expenses and profit, that cap more closely links premiums to health care costs.

In the past, if investors wanted to see a 20% annual increase in corporate profits every year, instead of being the most innovative, best-run businesses, insurance companies could just gouge their premium holders, say "costs are going up," increase rates by 30% to 40%, and pocket most of the increase.

Another variation of this scenario, or even a multiplicative effect, is if the corporation tries to boost their profit margins by investing in riskier, higher-return investments in the stock market. If the stocks go bust that year, they mask the consequences of their own failed investment decisions by just boosting premiums. If they lose money and still want to see a big profit increase, then the premium payers get double-screwed.

By making a minimum percentage of premiums collected to directly to payment of medical claims, it prevents companies from padding profits or making up for investment losses via increases unrelated to actual health care cost changes.

If they remove that requirement, companies will add premium charges because they can. This is the problem with for-profit health insurance. If you have a mandate to maximize profits, you need to maximize premiums collected while minimizing premiums paid, which does not fit for a product like health care financing and the health care system in general.

Medicare and Medicaid generally run at about 2% to 4% administrative cost. Of course, they don't have to have any kind of a sales or marketing presence, but I've seen non-profits that must compete in the general marketplace that run at about 8% to 10%, so the difference in allowing more than 15%/20% and not is almost entirely the amount of profit they take or how lavishly their C-level executives want to compensate themselves.

  • For clarification: you seem to be saying that absent the MLR requirement, insurers will increase premiums because they are not constrained by the 80/20 or rebate requirement.
    – BobE
    Jul 24, 2017 at 18:40
  • regarding the apparent intention of MLR, It appears (to me) that the ACA legislation that created the 80/20 standard effectively said to healthcare insurers "you have a 20% window from which to take profit and pay for administration and overhead". If you wish to maximize profit, tighten up the Administration and overhead expenses. If you wish to use all 20% of your window to cover cost-of-running the business, then profits will be minimized. That's the (simple) way it appears to me.
    – BobE
    Jul 24, 2017 at 18:55
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    @BobElston - yes, that's what I am saying. More than a statement dictating how they can improve profits, I feel it was a desire to more strongly link insurance costs to actual health care costs. Jul 24, 2017 at 19:02
  • Note that there really aren't any incentives for insurers to be efficient. They are a middleman operation. They are simply the pass-through channel. About the only incentive there is is competition, but there's actually very little competition in many areas given how much the industry (as well as related industries, such as hospitals) have consolidated over the past couple of decades.
    – user1530
    Jul 24, 2017 at 19:33

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