The Medical Loss Ratio (MLR) provision of the Affordable Care Act (ACA) limits the amount of premium revenue that insurers can keep for administrative, marketing, and profit-making purposes. Insurers that fail to meet the MLR threshold are required to return excess profits or margins in the form of refunds to individuals and employers who purchased insurance.
In the individual and small group markets, insurers must spend at least 80% of premium income on medical payments and quality improvement, leaving the remaining 20% for administrative, marketing expenses and profit. The MLR threshold is higher for large group insurers, which must spend at least 85% of premium income on paying for medical services and quality improvement. MLR refunds are based on a 3-year average, meaning refunds issued in 2024 will be calculated based on insurers' financial data for 2021, 2022, and 2023 and will be paid to people and companies that purchased health insurance in 2023.
This analysis, based on preliminary data submitted by insurers to state regulators and compiled by Mark Farrah Associates, shows that insurers estimate they will provide a total of about $1.1 billion in MLR rebates in 2024 across all commercial markets. Since the ACA began requiring insurers to provide such rebates in 2012, a total of $11.8 billion has already been provided to individuals and employers, and according to this analysis, the total for 2012-2024 will grow to about $13 billion when rebates are provided later this year.
The estimated total rebates in all commercial markets in 2024 ($1.1 billion) are similar to the total rebates provided in 2022 ($1.0 billion) and 2023 ($950 million). In 2023, rebates were provided to 1.7 million people with individual coverage and 4.1 million people with employer coverage. In the individual market, the average rebate per person in 2023 was $196, and the average rebates per person in the small group market and large group market were $201 and $104, respectively (although participants may only receive a portion of these amounts, as rebates may be split between employer and employee or used to offset premiums for the following year).
The estimated $1.1 billion in refunds that will be provided this year will be larger than in most previous years, but will fall short of the record refunds of $2.5 billion provided in 2020 and $2.0 billion provided in 2021, which coincided with the onset of the pandemic.
In 2023, the average simple loss ratio in the individual market (i.e., not adjusted for quality improvement costs or taxes and therefore not fully aligned with ACA MLR thresholds) is 84%, meaning that these insurers spent an average of 84% of their premium income in medical claims in 2023. However, the premium return in 2024 is based on the three-year average of insurers' experience in 2021-2023. Consequently, even insurers with high loss ratios in 2023 can expect a premium refund if they were highly profitable in the previous two years.
In the small and large group markets, average simple loss ratios for 2023 will be 84% and 88%, respectively. Only fully insured group plans are subject to the ACA MLR rule; about two-thirds of insured employees are enrolled in self-funded plans to which the MLR threshold does not apply.
Logistics of chargebacks
The 2024 refunding amounts in this analysis are still preliminary. Refund notices are mailed by the end of September, and the federal government will publish a summary of the total amount owed by each issuer in each state later this year.
Insurers in the individual market may issue a refund in the form of a check or a premium credit. For people with employer-sponsored insurance, the refund may be split between the employer and employee, depending on how the employer and employee share the cost of premiums.
If the amount of the refund is exceptionally small (less than $5 for individual refunds and less than $20 for group refunds), insurers are not required to process the refund because it may not justify the administrative burden required to do so.