3 tips for optimizing your medical loss ratio (MLR)

The medical loss ratio (MLR), also known as medical cost ratio (MCR), is a basic financial measurement used in the Affordable Care Act to encourage health plans to prove value to enrollees.  

An insurer’s MLR is determined by adding total paid medical service claims and all quality improvement activities together, then dividing that number by the total premium revenue minus all allowable deductions.

As insurers are likely already aware, a good MLR is 80 or 85 percent (depending on the organization size). Falling short of the federal minimum MLR for a given year means delivering rebates to policyholders. If an insurer falls within the Small Group or Individual market, for example, their MLR is 80 percent. If this same insurer had an MLR of 76 percent for the year, they would owe all policyholders within their state a 4 percent rebate.  

The idea here is that 80 cents of every dollar earned should be put back into improving healthcare quality for the patient, and MLR is a means for enforcing this principle. 

MLR is a balancing act that may seem to favor the consumer at a glance, but there are ways that an insurer’s MLR can be optimized to ensure benefits are spread evenly among all involved parties: consumers and providers, as well as the insurers.  

Use the 3 tips below to avoid policyholder reimbursements while still ensuring top-notch partner and patient experiences. 

Tip #1: Maintain an accurate MLR projection 

Ensure that finance teams can provide accurate projections for an end-of-year MLR. With this working ratio in mind, strategies to appropriately balance said ratio throughout the year can be taken.  

Coming out above the minimum MLR is less than ideal for the consumer, the insurer, and the provider. If an insurer is over the minimum MLR, this means profits are not being optimized and consumer-provider relationships are left untouched — measures should be taken to remedy this. 

Ending the year below the minimum MLR, as mentioned earlier, plays out in favor of the consumer only — due to the mandatory policy rebate. One of the best ways to avoid falling below the minimum MLR is to pad the difference with quality improvement activities.  

Tip #2: Track the quality of in-network providers 

The Centers for Medicare and Medicaid Services (CMS) hospital Value-Based Purchasing (VBP) program is the beginning of an ongoing restructure of the Medicare payment system that rewards providers for the quality of care they provide. This is in opposition to more traditional fee-for-service (FFS) models that incentivize providers to perform higher billing procedures for greater reimbursements. 

CMS tracks provider service quality with the Total Performance Score (TPS) and, rather than only paying providers based on the quantity of services provided, the TPS is used to adjust the reimbursement for each Medicare FFS patient discharged. 

Private insurers that track provider quality metrics can leverage their data in a similar manner. 

Top 10 hospitals by Total Performance Score 

Fig. 1 Data pulled using the DHC Report Builder within the Hospitals & IDNs database (2020). 

Tip #3: Provide incentives for higher-quality care 

Use tracked provider quality data to create incentive programs that net improved insurer-provider relationships and, ultimately, a better quality of patient care. It can be as simple as using quality metrics to augment provider reimbursement rates. 

Making the push for quality-based care promises that insurers maintain a balanced MLR and make the most of this challenging regulation. 

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