What is MLR?

MLR, or Medical Loss Ratio, is a prime example of misaligned incentives in the health care supply chain. The Medical Loss Ratio is a provision in the Affordable Care Act that was intended to keep insurance carriers from over charging their customers. It requires that carriers spend $.80 of each dollar collected in the small group market, and $.85 of each dollar collected in the large group market, to pay its customers’ medical claims and activities that improve the quality of care.  The remaining portion can be used for overhead expenses, such as marketing, profits, salaries, administrative costs, and agent commissions.  If health care costs go up, however, then the carrier is justified in charging higher premiums increasing the value of their 15% or 20%.  With a model like this, carriers benefit when health care costs go up.