Health Insurance Issuers Implementing Medical Loss Ratio (MLR) Requirements Under the Affordable Care Act (Interim Final Rule)
Interim final regulation implementing MLR reporting, calculation, and rebate requirements under section 2718 of the Public Health Service Act; applies to health insurance issuers offering group or individual coverage (including grandfathered plans).
Policy Summary
PayerMedicare
PolicyMedical Loss Ratio (MLR) reporting, calculation, and rebate requirements (Part 158) — OCIIO-9998-IFC
Policy CodePolicy OCIIO-9998-IFC
Change TypeInterim Final Rule (no material revision)
Effective DateJan 1, 2011
Next Review DateN/A
Key ActionIssuers must submit an annual MLR report to the Secretary by June 1 following the reporting year and provide any required rebates to enrollees by August 1.
No material clinical or coverage changes in this revision.
80% / 85%MLR minimum standards
Jan 1, 2011Effective date
June 1Report due
$5De minimis rebate threshold
442Estimated issuers
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3.2M
Estimated enrollees receiving rebates (mid-range)
MLR Reporting, Calculation, and Rebate Criteria
inv-01: MLR reporting, calculation, and rebate criteria
Reporting and rebate framework and requirements for issuers by market and state
Issuers must submit an annual report to the Secretary for each MLR reporting year containing the elements needed to calculate MLRs: earned premium, reimbursement for clinical services (incurred claims), expenditures for activities that improve health care quality, and other non-claims costs; reports are by State and separated by the individual, small group, and large group markets.
Issuers must provide annual rebates to enrollees when the calculated MLR for the applicable State/market is below the statutory standard (80% for individual and small group; 85% for large group), subject to applicable credibility adjustments and any higher State standards.
The regulation adopts NAIC uniform definitions and methodologies (certified by HHS) for reporting elements, quality-improving activities, credibility adjustments, and special-case treatments for certain plan types.
inv-02: MLR reporting, aggregation, attribution, and enforcement criteria
Reporting obligations and aggregation/attribution rules for issuers
Issuers must submit the MLR report to the Secretary by June 1 following the MLR reporting year; the reporting timeline allows inclusion of claims processed within three months after year-end.
When an issuer cedes all risk for a block of policies, the ceding issuer must exclude that experience; the assuming issuer must report all associated experience including claims and premiums earned prior to transfer.
Issuers must report data on an aggregate basis by State and by market (individual, small group, large group); State is the primary geographic aggregation unit and experience is attributed to the State of contract (situs).
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Special-case reporting: for 2011 certain plans must be reported separately (mini‑med plans with total annual limits ≤ $250,000; expatriate plans) and some of those plans must report on an accelerated/quarterly schedule if seeking special‑circumstance adjustments.
Issuers may combine individual and small group markets for MLR calculation only if the State requires such a merger for rating purposes, but must still report experience separately by market for transparency and Secretary review of potential adjustments to individual‑market standards.
inv-03: MLR reporting and calculation criteria
Reporting and calculation rules that determine what is included in MLR calculations and how special plan types and new business are treated.
Report experience separately by market (individual, small group, large group); data elements used to form the numerator and denominator are defined in §§158.140, 158.150–158.151, and §158.130.
Association/trust coverage is attributed to the group market only if offered in connection with a group health plan; otherwise attributed to the individual market.
Expatriate plans issued by U.S. issuers on State‑approved forms must be reported separately; for 2011 their incurred claims and qualifying quality expenditures are multiplied by two and quarterly reporting is required if using the adjustment.
Mini‑med plans (policies with total annual limits ≤ $250,000) reported separately for 2011 may multiply their incurred claims and quality‑improvement expenditures by two for 2011 and must report quarterly if they avail themselves of the adjustment.
Newer‑experience rule: an issuer may defer premium, claims and life‑years for policies first issued after the start of the reporting period to the next MLR year if those policies account for ≥50% of total earned premium in that aggregation for the MLR year.
inv-04: Quality activity classification, exclusions, allocation, and MLR standard
Standards for classifying expenditures as quality-improving activities and exclusions.
To be counted as a quality‑improving activity an expenditure must meet all of the following: be designed to improve health quality; be capable of objective measurement with verifiable results; be directed to individual enrollees or identified segments (population‑directed allowed if no added costs for non‑enrollees); and be grounded in evidence‑based medicine, widely accepted best clinical practice, or recognized criteria.
Allowable examples include case management, care coordination, chronic disease management, hospital readmission prevention programs, patient safety initiatives, wellness and health promotion activities, accreditation fees directly related to quality, and HIT expenditures that support qualifying activities or meaningful use.
Excluded activities: The regulation lists activities that must not be classified as quality improvement, including: activities primarily designed to control or contain costs; concurrent and retrospective utilization review; most fraud prevention activities (except recovery up to amount recovered); development/maintenance of claims adjudication systems; provider network development and credentialing; marketing expenses; administration of incentives; pure clinical data collection without analysis; and non‑clinical 24‑hour customer service hotlines.
inv-05: MLR calculation, credibility, and rebate rules
Applicable MLR standards: 85% for the large group market; 80% for the small group and individual markets, unless a State has a higher standard or the Secretary has adjusted the individual‑market standard for destabilization.
MLR calculation period: 2011 uses only 2011 data; 2012 uses 2012 data alone if fully credible or combined 2011–2012 if partially/non‑credible; 2013 uses a three‑year accumulated period (reporting year + two prior years).
Numerator = incurred claims + qualifying quality‑improvement expenditures; Denominator = earned premium minus Federal and State taxes and licensing/regulatory fees; adjustments for risk adjustment, risk corridors, and reinsurance are accounted for in premium reporting.
Credibility categories: non‑credible = <1,000 life‑years (no rebate obligation); partially credible = ≥1,000 and <75,000 life‑years (credibility adjustment applies); fully credible = ≥75,000 life‑years (no credibility adjustment).
inv-06: Rebate Reporting Elements
Reporting requirements for rebates to the Secretary:
Report the number and percent of enrollees who receive a rebate.
Report the amount of rebates provided to enrollees, including breakdowns between amounts paid to policyholders (group) and to subscribers (individual payers).
Report the amount of de minimis rebates that were aggregated and how they were disbursed, and report the amount of unclaimed rebates along with a description of good‑faith efforts to locate enrollees and how unclaimed rebates were distributed.
inv-07: MLR Adjustment Assessment Criteria
Criteria the Secretary will consider when assessing a State request to adjust the individual-market MLR:
The Secretary will consider the number of issuers reasonably likely to exit the individual market or cease offering specific products absent an adjustment and the resulting impact on competition, including issuer MLRs, profitability, and risk‑based capital.
The Secretary will consider the number of individual‑market enrollees covered by issuers likely to exit and the overall consumer impact of potential withdrawals.
The Secretary will consider potential loss of access to agents/brokers if issuers reduce compensation, and the availability of alternative coverage mechanisms (assumption of blocks, guaranteed‑issue products, State high risk pools, issuer capacity) to absorb displaced enrollees.
The Secretary will consider impacts on premiums, benefits, and cost‑sharing for enrollees that would remain in the market if issuers withdraw, and any other relevant information submitted by State officials.
inv-08: State Adjustment and Issuer Reporting Requirements
State request content and process for MLR adjustment applications
States must submit data and narratives when requesting an adjustment to the individual‑market MLR, including withdrawal requirements, consumer protections/mechanisms, the proposed adjusted MLR, issuer information, and contact details.
Submission process: requests must be submitted electronically; the Secretary will post the request, invite public comment (10 days), may hold hearings, and will make an initial determination within 30 days (with a possible 30‑day extension); denials may be reconsidered in writing within 10 days with a 20‑day resolution period.
Estimated State burden: Department estimates ~94 staff hours and ~$14,675 per State application; HHS may accept State audit findings if conditions met and will conduct audits and may impose civil monetary penalties for noncompliance as described in Subparts D–F.
Issuers must retain supporting documents for the current year plus six prior years to enable HHS verification; certain issuers required to submit quarterly reports in 2011 if seeking special adjustments (expatriate/mini‑med).
inv-09: Applicability and reporting granularity
Scope of applicability
Applies to health insurance issuers offering comprehensive major medical coverage in the individual and group markets (including grandfathered health plans); issuers must report and calculate rebates at the company/State/market level.
inv-10: MLR estimation and rebate determination rules
Approach to estimating which entities owe rebates and how MLRs are calculated and adjusted.
Estimates use NAIC annual statement data (2009) and apply adjustments for taxes/fees, credibility, and assumed quality‑improvement expenditures to model adjusted MLRs by State and market.
Adjusted MLRs deduct Federal/State taxes and licensing/regulatory fees from premium, apply credibility adjustments for partially credible entities (base credibility × deductible factor), and add assumed percentage points for quality improvement activities (mid‑range ~3% of premium; range 1%–5%).
Credibility base factors are life‑year dependent and linear interpolation is used between table values; non‑credible entities (<1,000 life‑years) are not required to pay rebates and partially credible entities (1,000–75,000 life‑years) receive credibility adjustments.
Estimates assume stability in enrollment and simulate combined‑year experience for partially/non‑credible issuers by doubling/tripling life‑years in multi‑year analyses (e.g., 2012, 2013) to assess how credibility status and rebates evolve over time.
inv-11: MLR adjustment and rebate estimation criteria
Formula components and assumptions used to calculate adjusted MLR and rebates
Adjusted MLR formula components: subtract Federal and State taxes and licensing fees from earned premium; apply credibility adjustment (base factor × deductible factor); add assumed percentage points for quality improvement activities and behavioral uncertainties per scenario (low/medium/high).
Rebate computation: compare adjusted State MLR (a) to market minimum (m); if a < m compute rebate per regulation formulas where rebate = (m − a) × total earned premium (net of excluded taxes/fees), with pro rata distribution to premium payers.
Time horizon and aggregation: use accumulated experience across reporting years for partially credible issuers; doubling/tripling life years in successive combined‑year analyses reduces credibility adjustments over time as described in the preamble and regulatory text.
inv-12: MLR regulatory criteria
Key regulatory criteria and topics included in this part:
Definitions and standards: quality‑improving activities must be grounded in evidence‑based medicine, designed to improve enrollee care, objectively measurable, and produce verifiable results; NAIC definitions are adopted in full.
Aggregation level: MLRs are calculated at the issuer/market/State level (not nationally) to preserve State‑level consumer protections and enable State‑specific adjustments where applicable.
Reporting obligations: issuers must submit annual MLR reports with specified elements (premium revenue, incurred claims, quality activities, HIT expenditures, taxes/fees, allocation methods) per Subpart A; Subpart B addresses calculation/rebate rules and Subparts D–F address enforcement, audits, and penalties.
Rebate rules: Subpart B covers rebate form, recipients, de minimis and unclaimed rebates, notice and reporting requirements, and effect of rebates on solvency and enforcement provisions.
Credibility adjustments: thresholds and methodology for credibility adjustments (non‑credible <1,000 life‑years; partially credible 1,000–75,000; fully credible ≥75,000) are specified in Subpart B and related sections.
inv-13: Aggregate reporting rules
Aggregation and exceptions for reporting by State and market:
Issuers must submit a separate report for each State in which they are licensed, aggregating data for each licensed entity and separately for large group, small group, and individual markets; group coverage is attributed by contract situs, with special rules for multi‑state and dual‑contract group plans (minimum 3‑year application if chosen).
Exceptions: Special reporting exceptions include: for 2011 separate reporting of policies with total annual limits ≤ $250,000 (mini‑med) and separate reporting of expatriate policies; newer‑experience exclusion allows deferral when ≥50% earned premium is from policies <12 months.
inv-14: Premium revenue reporting
Premium reporting and adjustments:
Issuers must report earned premium on a direct basis for each MLR reporting year and adjust earned premium for unearned premium, group conversion portions, experience rating refunds (excluding MLR rebates), and assessments/subsidies for Federal and State high‑risk pools; reinsurance and assumption transactions have specified reporting treatments.
inv-15: Incurred claims adjustments
Incurred claims and allowable adjustments:
Incurred claims include direct paid claims (including capitation), unpaid claim reserves (calculated using claims processed within 3 months after year‑end), change in contract reserves, reserves for contingent benefits and claim portions of lawsuits, and experience rating refunds (excluding MLR rebates).
Required deductions_and_allowed_adjustments: Adjustments that must be deducted from incurred claims include prescription drug rebates and provider overpayment recoveries; permitted additions include market stabilization payments tied to claims, State stop‑loss subsidies, and provider incentive/bonus payments; specified vendor overcharges and non‑clinical administrative costs are excluded from incurred claims.
Affiliate/blended‑rate group coverage: affiliated issuers may elect an objective adjustment to reflect aggregate employer group experience so each affiliate's incurred claims/earned premium ratio matches the employer's aggregate ratio, per rules to be defined prior to Jan 1, 2011.
inv-16: Quality improvement activities criteria
Activities that improve health care quality (countable as MLR quality expenditures):
Qualifying activities must be designed to improve health quality, be objectively measurable with verifiable results, be directed to enrollees or identified segments (or population‑directed without additional cost to non‑enrollees), and be grounded in evidence‑based medicine, accepted best practices, or recognized standards; examples include case management, care coordination, readmission prevention, patient safety initiatives, wellness programs, accreditation fees and HIT that support such activities.
Exclusions: Explicit exclusions include activities primarily designed to contain costs, concurrent/retrospective utilization review, most fraud prevention (except recovered fraudulent claims up to recovered amount), provider network development/credentialing, marketing, incentive administration costs, clinical data collection without analysis, claims adjudication system maintenance, and non‑clinical 24‑hour hotlines.
Issuers must allocate quality‑improvement and non‑claims expenses by State and line of business using generally accepted accounting methods; shared expenses are prorated and methods must be disclosed and supported by documentation retained for current year plus six prior years.
inv-17: MLR calculation and reporting criteria
Rules for when issuers must provide rebates and how MLR is calculated, including credibility adjustments.
Rebate trigger: issuer must provide rebates when its adjusted MLR for a State/market is below the applicable minimum (85% large group; 80% small group and individual), subject to any Secretary adjustment or higher State standard.
Numerator components: incurred claims plus qualifying quality‑improvement expenditures as defined in §§158.140, 158.150–158.151; special 2011 rule: for separately reported mini‑med and expatriate policies, numerator may be multiplied by two for 2011 if reported separately.
Denominator components: earned premium (direct basis) minus Federal and State taxes and licensing/regulatory fees; premium reporting adjustments account for risk adjustment, risk corridors and reinsurance as applicable.
Data aggregation: generally accumulate three years of data (reporting year + two prior years) for 2013 and beyond; 2011 uses only 2011 data and 2012 uses 2012 alone if fully credible or combined 2011–2012 if partially/non‑credible, with adjustments to prevent double counting of rebates.
Coding, Tables, and Key Values
Coding guidancemixed
No clinical coding or billing codes specified in this section of the document.
HIT-related expendituresmixed
Health Information Technology expenditures consistent with meaningful use may be treated as quality-improving.
Required data elements and special reportingmixed
Issuers must report annual data elements including reimbursement for clinical services, expenditures for activities that improve health care quality, other non-claim costs, earned premiums, and Federal and State taxes/licensing fees; certain plans (expatriate and mini-med) require separate reporting and quarterly submissions for 2011.
N/Amixed
No specific billing or procedure codes specified; sections describe earned premium and incurred claims reporting and adjustments rather than clinical billing codes.
inv-24: MLR thresholds
MLR thresholds (by market)Individual market: 80%; Small group market: 80%; Large group market: 85% (States may adopt higher standards that then apply in that State).
State higher-standard ruleIf a State has established a higher MLR standard under State law, that higher percentage applies instead of the federal percentages in that State.
Secretary adjustment for individual marketSecretary may adjust the 80% individual-market MLR for a State upon application if applying the 80% standard may destabilize the individual market.
Reporting granularityMLR data must be reported at the State level and separately for the individual, small group, and large group markets to support market-specific MLR calculations.
inv-25: Mini‑med annual limit threshold
Issuer and Provider Responsibilities
Note
Form of Rebate
Section 158.241 allows issuers to provide rebates to current enrollees as a premium credit (applied to the first premium due on or after August 1, with any excess carried forward to subsequent premiums), as a lump-sum check, or — if the enrollee paid by credit or debit card — by lump-sum reimbursement to the same account used to pay the premium. For former enrollees, issuers must provide rebates as a lump-sum payment (by check or by reimbursement to the payment account). All enrollees eligible for rebates must be notified as required by §158.250.
Billing Rule
Rebate distribution options and obligations
Section 158.242 requires that rebates be provided on a pro rata basis to the person or entity that actually paid the premium (e.g., employer or family member who paid). An issuer may contract with a group policyholder to distribute rebates on the issuer's behalf, but the issuer retains ultimate responsibility for compliance and must retain records from the group policyholder demonstrating accurate distribution. Issuers must ensure group policyholders do not retain more than their proportional share.
Key Definitions and Terms
inv-58: Medical Loss Ratio (MLR)
MLR definition (brief)MLR (Medical Loss Ratio) = incurred claims (including unpaid reserves and contract reserve changes) + expenditures for activities that improve health care quality, divided by earned premiums (adjusted for taxes and fees).
PurposeUsed to determine whether issuers must provide rebates when spending on clinical services and quality activities falls below statutory thresholds.
Regulatory adoptionHHS certified and adopted NAIC uniform definitions and methodologies for MLR reporting and calculation in this interim final regulation.
inv-59: Grandfathered health plans
Grandfathered health plans inclusionPart 158 applies to issuers offering group or individual health insurance coverage, explicitly including grandfathered health plans under the Affordable Care Act.
Applicability scope
Policy Summary
PayerMedicare
PolicyMedical Loss Ratio (MLR) reporting, calculation, and rebate requirements (Part 158) — OCIIO-9998-IFC
Policy CodePolicy OCIIO-9998-IFC
Change TypeInterim Final Rule (no material revision)
Effective DateJan 1, 2011
Next Review DateN/A
Key ActionIssuers must submit an annual MLR report to the Secretary by June 1 following the reporting year and provide any required rebates to enrollees by August 1.
Earned premium must be reported on a direct basis and adjusted for unearned premium, group conversion portions, high‑risk pool subsidies, and certain experience rating refunds; reinsurance and assumption transactions have specified reporting treatments.
Incurred claims include direct paid claims, unpaid claim reserves based on claims processed within three months after year‑end, change in contract reserves, reserves for contingent benefits and claim portions of lawsuits, and experience rating refunds; specified deductions (e.g., prescription drug rebates) and allowed adjustments (e.g., market stabilization payments tied to claims) are defined.
Quality‑improvement expenditures count toward the numerator only if they meet statutory/NAIC criteria (designed to improve quality, objectively measurable with verifiable results, directed to enrollees or defined segments, and grounded in evidence‑based medicine) and subject to enumerated exclusions and allocation rules.
Issuers must allocate shared and company‑level non‑claims and quality expenditures on a State‑by‑State and line‑of‑business basis using generally accepted accounting methods and disclose allocation methods in reporting.
HIT expenditures that demonstrably support qualifying quality activities and meet meaningful use criteria may be counted as quality‑improving activities.
Credibility adjustment is calculated as: base credibility factor (by life‑years from Table 1) multiplied by deductible factor (by average deductible), with linear interpolation between table values; the adjustment is added to the reported MLR before rebate determination.
If an issuer's (adjusted) MLR is below the applicable standard, the issuer must provide rebates pro rata to the person or entity that paid the premium (e.g., enrollee or employer/payer), calculated as the shortfall percentage times applicable earned premium (net of excluded taxes/fees).
Issuers must provide any required rebates no later than August 1 following the MLR reporting year; rebate notices explaining MLR, reported premium, issuer MLR, threshold, percent rebated, total amount, and form of rebate must accompany distribution.
Form of rebate: for current enrollees issuer may provide premium credits, lump‑sum checks, or reimbursement to original payment account; for former enrollees rebates must be lump‑sum payments; de minimis rebates may be aggregated and distributed to current enrollees per §158.243.
Issuers may contract with group policyholders to distribute rebates but remain ultimately liable and must retain distribution records; unclaimed rebates cannot be retained by issuer (subject to State law) and must be handled per reporting rules.
Effective date: provisions effective for plan years beginning January 1, 2011; reporting forms/instructions to be published later subject to OMB approval; interim final rule issued with 60‑day comment period.
Modeling limitations include lack of direct measurement of quality expenditures in NAIC data, incomplete allocation of administrative expenses by State/market, and uncertainty about issuer behavioral responses to the rule.
HIT expenditures that directly support qualifying activities or meet meaningful use requirements may be included as quality‑improving expenditures when attributable and documented.
Credibility categories and formula: non‑credible if <1,000 life‑years (assumed to meet minimum, no rebate owed); partially credible if 1,000–75,000 life‑years (credibility adjustment applies using base credibility factors from Table 1 and deductible factor from Table 2 with linear interpolation); fully credible if ≥75,000 life‑years (no adjustment).
Allocation and recordkeeping: expenses must be allocated to a single category (or prorated) with disclosed methodology and supporting records retained to enable Secretary review and audits; federal/state taxes and assessments must be reported separately and certain community benefit expenditures by tax‑exempt issuers may be treated like taxes for exclusion.
Rounding and calculation conventions: MLR rounded to three decimal places (nearest thousandth) per regulation examples; the credibility adjustment is added prior to rebate calculation; non‑credible aggregations are presumed to meet the minimum MLR.
Mini‑med annual limit threshold (2011 reporting)Policies with total annual limits of $250,000 or less must have their experience reported separately for the 2011 MLR reporting year.
2011 numerator adjustment for mini‑medFor 2011, incurred claims and expenditures for quality-improving activities for these mini‑med policies are multiplied by a factor of two when calculating the numerator of the MLR.
Purpose of adjustmentAdjustment accounts for higher relative administrative expenses and limited claims experience observed for mini‑med plans based on limited data.
inv-26: Claims processing window for unpaid reserves
Claims processing window for unpaid reservesUnpaid claim reserves included in incurred claims must be calculated based on claims that have been processed within three months after the end of the MLR reporting year (3‑month window).
Incurred claims componentsIncurred claims include direct paid claims, unpaid claim reserves (per 3‑month window), change in contract reserves, reserves for contingent benefits, claim portion of lawsuits, and experience rating refunds (excluding MLR rebates).
Numerator inclusion noteUnpaid claim reserves are included in the numerator to capture liability for claims incurred during the reporting year but paid after year-end using the 3‑month processing period.
inv-27: MLR thresholds
Minimum MLRs by marketLarge group market: 85%; Small group and individual markets: 80% (a State's higher standard supersedes these percentages in that State).
Application of State standardsWhere State law sets a higher MLR standard, that higher percentage applies to issuers in that State in lieu of the federal percentages.
Secretary discretionSecretary may approve a State request to adjust the 80% individual‑market standard if application shows reasonable likelihood of market destabilization.
inv-28: Credibility life-year thresholds and base factors
Credibility life‑year thresholdsNon‑credible: <1,000 life‑years (no rebate obligation); Partially credible: ≥1,000 and <75,000 life‑years; Fully credible: ≥75,000 life‑years (no credibility adjustment).
Purpose of credibility adjustmentCredibility adjustment addresses statistical unreliability in smaller blocks of business and is added to the reported MLR for partially credible aggregations.
inv-29: Deductible factor examples
Deductible factor examplesExamples from Table 2: $0 deductible → 1.000; $2,500 → 1.164; $5,000 → 1.402; $10,000 → 1.736. These factors multiply the base credibility factor and linear interpolation is used between table values.
How appliedCredibility adjustment = base credibility factor (by life‑years) × deductible factor (by average deductible); use linear interpolation when values fall between table entries.
RationaleDeductible factor accounts for greater variability in claims experience for higher‑deductible policies, increasing the credibility adjustment accordingly.
inv-30: de_minimis_rebate_threshold
De minimis rebate thresholdIssuers need not provide rebates when the combined rebate under a group policy or the rebate to a subscriber in the individual market is less than $5 per subscriber.
Aggregation of de minimis amountsDe minimis rebates may be aggregated and distributed to current enrollees; issuers must record distribution and retain documentation per reporting rules.
Administrative rationaleThreshold prevents requiring issuers to process rebates whose administrative cost would exceed rebate value.
inv-31: Minimum MLR threshold
Minimum MLR threshold (statutory/default)80% minimum MLR standard (applicable to individual and small group markets by statute; large group is 85%).
Regulatory citationMinimum MLR standards are specified in §158.210 of the regulation (see Subpart B, §158.210–158.211).
State higher standard replacementA State's higher MLR standard, if established under State law, replaces the federal minimum in that State per §158.211.
inv-32: Minimum MLR threshold (default)
Default minimum MLR80 percent is the default minimum MLR standard referenced for the individual and small group markets (85% for large group).
Where specifiedThe minimum percentages are codified in §158.210 and implemented in Subpart B (Calculating and Providing the Rebate).
State adjustment provisionSubpart C details the process by which a State may request an adjustment to the 80% individual‑market threshold if justified.
inv-33: Credibility life-year thresholds
Partially credible definition (life‑years)Experience is 'partially credible' if based on at least 1,000 life‑years but fewer than 75,000 life‑years; such experience is eligible for a credibility adjustment.
Fully and non‑credible boundariesNon‑credible: <1,000 life‑years (no rebate requirement); Fully credible: ≥75,000 life‑years (no credibility adjustment).
Computation methodBase credibility factors from Table 1 are interpolated linearly for life‑year values between table entries to compute the base factor used in the adjustment.
inv-34: Quality improvement adjustment range
Quality improvement adjustment (assumption range)Assumed average addition to MLR ≈ 3 percentage points of premium (range used in sensitivity analysis: 1%–5%).
Scenario impactsCombined with behavioral assumptions, low/medium/high scenarios add +7, +4, or +1 percentage points respectively to estimated MLRs (quality + behavioral adjustments).
Use in estimationThese quality improvement assumptions are applied in adjusted‑MLR estimates to reflect likely issuer investments in qualifying activities and uncertainty in issuer responses.
inv-35: Minimum MLR thresholds by market
Minimum MLR thresholds by marketIndividual market: 80%; Small group market: 80%; Large group market: 85% — State law may set a higher percentage which then applies in that State.
Regulatory basisThese standards implement section 2718(b) and are codified in §158.210–158.211 of Subpart B.
Reporting requirement linkIssuers must report data by State and market so MLRs can be calculated separately for each market and State per regulatory requirements.
inv-36: Individual-market MLR threshold
Individual‑market MLR thresholdDefault individual‑market MLR threshold is 80%. A State may apply for an adjustment to this threshold if application demonstrates a reasonable likelihood that applying 80% would destabilize the individual market.
State application processSubpart C sets forth the information, timing, and criteria the Secretary will use to consider State requests to adjust the individual‑market threshold.
Effect of approvalIf approved, the adjusted lower MLR would reduce or eliminate rebate obligations in the affected State's individual market while aiming to preserve market stability.
inv-37: Minimum medical loss ratio
Minimum medical loss ratio referenceSee §158.210 for minimum MLR standards and Subpart B (158.210–158.270) for the regulatory framework governing calculation and rebates.
Subpart contentsSubpart B includes sections on applicable MLR standards, aggregation, calculation formula, credibility adjustment, rebate calculation, form, recipients, de minimis rules, unclaimed rebates, notice and reporting.
Implementation noteThese provisions operationalize section 2718(b) of the PHS Act, including State higher‑standard substitution and Secretary adjustment authority.
Newer‑experience exclusion ruleIf ≥50% of total earned premium for an aggregation is attributable to policies with <12 months' experience in the MLR reporting year, the issuer may exclude that newer experience from the report for that year and add it to the following year's report.
2011 reporting exceptionsFor the 2011 MLR reporting year, issuers must report separately policies with total annual limits ≤ $250,000 (mini‑med) and expatriate plans; special multiplicative adjustments and quarterly reporting apply to these categories in 2011.
Deferral mechanicsIf an issuer defers newer‑experience reporting per §158.121, the excluded experience must be included in the following MLR reporting year's aggregation.
Interpolation methodLinear interpolation is used to determine base credibility factors for life‑year values falling between table entries per §158.232(b).
Role in adjustmentThe base credibility factor is multiplied by the deductible factor to compute the credibility adjustment added to partially credible MLRs per §158.232(a).
Note
Unclaimed Rebates
Issuers must make good faith efforts to locate enrollees entitled to rebates and distribute amounts owed. Issuers are prohibited from retaining unclaimed rebates; unclaimed rebates are subject to applicable State law. De minimis rebates may be aggregated and distributed equally as premium credits to all then-current enrollees who receive a premium credit.
Denial Risk
Audits and Civil Penalties
HHS may conduct audits of issuer-reported MLR data and may accept State audit findings if the State's laws permit public release of audit findings and the State submits findings to HHS within required timeframes. HHS retains authority to conduct its own audits, requires issuers to retain documentation and provide access to HHS or its auditors, and may impose civil monetary penalties for failures to comply with reporting and rebate requirements. Penalty amounts follow existing enforcement rules (e.g., $100 per entity, per day, per individual affected), with consideration of aggravating and mitigating factors. If a State has assessed a penalty, HHS will consider that in its enforcement determination.
Documentation Required
Expense allocation and categorization
Issuers must allocate company-level administrative and non-claims expenses by State and by market (individual, small group, large group) for MLR reporting. The regulation requires aggregation of experience by State and market and attribution rules (e.g., situs of the contract for multi-state group coverage). Issuers should adopt reasonable, supportable methodologies for allocating expenses across states, markets, and affiliates because these allocations affect MLR calculations.
Note
Adjustments to compute adjusted MLRs
Adjusted MLR calculations permit specified deductions and adjustments: (1) deductions from premium for Federal and State taxes, licensing, and regulatory fees; (2) credibility adjustments based on life years and average per-person deductible (base factor times deductible factor); and (3) inclusion of qualifying quality improvement expenditures in the numerator. These adjustments are applied as described in the regulation and supporting preamble methodology.
Billing Rule
MLR reporting and rebate submission
Issuers offering coverage in the individual and group markets must submit an MLR report to the Secretary for each MLR reporting year by June 1 of the following year (on the form and in the manner prescribed by the Secretary). For certain issuers with separate reporting, quarterly submissions were required for 2011 experience. Issuers that transfer or assume blocks of business are responsible for submitting required information for assumed business. The Department expects a single MLR data submission to satisfy both NAIC and Secretary reporting where practicable.
Note
Quality improvement activities inclusion
Activities counted as quality improvement (eligible for inclusion in the MLR numerator) must: be designed to improve health quality; be objectively measurable and produce verifiable results; be directed toward individual enrollees or specified segments (or provide population benefits without additional cost); and be grounded in evidence-based medicine or recognized quality criteria. Examples include case management, care coordination, chronic disease management, HIT supporting these activities, accreditation fees directly related to quality, and outreach to address disparities. Population-directed activities are permissible if targeted to identified enrollee segments and if engagement and outcomes can be measured.
Requirements apply to issuers offering comprehensive major medical coverage in individual and group markets; subparts detail reporting, rebate, and enforcement rules.
Regulatory citationsScope and applicability are specified in §158.101–158.102 of the regulation.
inv-60: MLR reporting year; enrollee; market
MLR reporting year definitionMLR reporting year is defined as the calendar year (reporting on a calendar‑year basis).
Enrollee definition (reporting)'Enrollee' includes any individual covered by group or individual insurance at any time during the MLR reporting year (including dependents).
Market definitionsMarkets referenced are individual, small group, and large group markets as used for separate reporting and MLR calculation per State.
inv-61: NAIC definitions
Adoption of NAIC definitionsHHS certified and adopted the NAIC's uniform definitions and standardized methodologies for activities reported under section 2718(a).
Scope of NAIC definitionsSome terms used only in specific sections (e.g., aggregation, incurred claims, quality improving activities) are defined in those sections rather than the general Definitions section.
PurposeNAIC recommendations guided the definitions and methodologies to ensure consistency across issuers and States for MLR reporting.
inv-62: market attribution
Market attribution rulesIssuers must report experience within a State separately for the individual, small group, and large group markets; an issuer may combine individual and small group for MLR calculation only if the State requires merging for rating purposes.
Situs attributionExperience is attributed to the State of issue (situs) as stated in the contract; reporting is generally by State and market, not nationally aggregated.
Association/trust guidanceCoverage offered through associations or trusts is attributed to the appropriate market depending on whether it is offered in connection with a group health plan.
inv-63: earned premium
Earned premium definitionEarned premium equals all monies paid by a policyholder as a condition of receiving coverage (including fees/contributions) and is reported on a direct basis with adjustments for unearned premium, conversion charges, and certain subsidies.
AdjustmentsExclude premium for periods outside the MLR reporting year, exclude high‑risk pool subsidies, and adjust for experience rating refunds per §158.130.
Denominator roleEarned premium (minus Federal/State taxes and licensing/regulatory fees) is used as the denominator in the MLR calculation (§158.221(c)).
inv-64: incurred claims
Incurred claims definitionIncurred claims include direct paid claims, unpaid claim reserves (based on claims processed within 3 months after year‑end), change in contract reserves, reserves for contingent benefits, claim portions of lawsuits, and experience rating refunds (excluding MLR rebates).
Unpaid reserves timingUnpaid claim reserves must be calculated using claims processed within three months after the end of the MLR reporting year to reduce estimation error.
Numerator inclusionIncurred claims comprise the claims portion of the MLR numerator alongside qualifying quality improvement expenditures per §158.221(b).
inv-65: quality improving activities
Quality-improving activities criteriaQualifying activities must: (1) be designed to improve health quality; (2) be objectively measurable with verifiable results; (3) be directed to enrollees or identified segments (or population‑directed without added costs to non‑enrollees); and (4) be grounded in evidence‑based medicine or recognized standards.
HIT as quality activityHealth Information Technology expenditures that are attributable to improving care and consistent with meaningful use may be counted as quality‑improving activities (§158.151).
Exclusions existCertain administrative or cost‑containment activities (e.g., utilization review, marketing, credentialing, claims adjudication maintenance) are excluded unless they meet the criteria.
inv-69: Health Information Technology (HIT)
Quality‑improving activity (HIT guidance)HIT expenditures that improve care, prevent readmissions, improve patient safety, or promote wellness and that are consistent with meaningful use may be treated as quality‑improving activities per §158.151.
ExamplesEHRs, patient portals, monitoring and reporting clinical effectiveness measures; HIT must be attributable to improving health outcomes for enrollees or identified segments.
NAIC adoptionHHS adopted NAIC's approach recognizing HIT as a separate category when criteria are met.
inv-68: Other non-claims costs
Other non‑claims costs (examples)Includes sales expenses, agents' and brokers' fees and commissions, general administrative expenses, loss adjustment/claims adjustment expenses, cost containment expenses not qualifying as quality improvement, and community benefit expenditures where applicable.
Allocation requirementIssuers must allocate non‑claims and quality‑improving expenses on a State‑by‑State basis and to each line of business; where direct allocation infeasible, use generally accepted accounting methods and disclose basis.
Reporting expectationOther non‑claims costs are reported separately and explained in the issuer's annual MLR submission per §158.160 and §158.170.
inv-69: Taxes and licensing/regulatory fees
Taxes and licensing/regulatory fees treatmentFederal and State taxes and licensing/regulatory fees must be separately identified and are excluded from premium revenue when calculating the MLR denominator as specified in §§158.161–158.162.
Community benefit treatmentMandatory community benefit expenditures by non‑profit issuers required in lieu of taxes may be treated like taxes and excluded from premium revenue to the same extent as State or Federal taxes.
Denominator adjustmentDenominator = premium revenue (earned premium) minus Federal and State taxes and licensing/regulatory fees per §158.221(c).
inv-70: Numerator and Denominator (MLR)
MLR numerator and denominator (core)Numerator = incurred claims + expenditures for activities that improve health care quality; Denominator = earned premium minus Federal and State taxes and licensing/regulatory fees (and adjusted for risk adjustment/risk corridors/reinsurance where applicable).
Rounding ruleAn issuer's MLR shall be rounded to three decimal places (e.g., 0.7988 → 0.799 or 79.9%).
Adjusted MLRAdjusted MLR applies credibility adjustments and adds qualifying quality improvement expenditures to the numerator as appropriate per §§158.221–158.232.
inv-71: Credibility adjustment
Credibility adjustment purposeAdjustment adds percentage points to an issuer's reported MLR to account for statistical unreliability in smaller blocks of business (partially credible issuers), computed as base credibility factor × deductible factor.
Application scopeApplies only to partially credible experience (≥1,000 and <75,000 life‑years); fully credible issuers (≥75,000 life‑years) do not apply it; non‑credible issuers (<1,000 life‑years) are presumed to meet the minimum and owe no rebate.
Computation referencesBase credibility factors are specified in Table 1 (§158.232(b)) and deductible factors in Table 2 (§158.232(c)); linear interpolation used between table values.
inv-72: Allocation of non-claims expenses
State‑by‑State allocation requirementIssuers must allocate non‑claims and quality‑improving expenses on a State‑by‑State basis and to each line of business; disclose allocation methods in the report and retain supporting documentation for audits.
Acceptable methodsIf direct allocation is not feasible, use generally accepted accounting methods producing the most accurate results; allocate attributable expenses directly where possible.
RecordkeepingIssuers must retain records for the current year and six prior years to enable HHS verification and possible acceptance of State audits under conditions.
inv-73: Rebate calculation
Rebate calculation overviewRebate = (Applicable MLR standard − issuer's actual adjusted MLR) × total earned premium (excluding Federal and State taxes and licensing/regulatory fees and after adjustments); distributed pro rata to premium payers/enrollees.
Numerator/denominator linkageRebate uses the same earned premium basis as the MLR denominator (earned premium minus taxes/fees); numerator adjustments and credibility are applied before computing the rebate.
Reporting of rebatesIssuers must report rebate payments to the Secretary and provide rebate notifications to recipients including calculation details per §158.250–158.260.
inv-74: recipient_of_rebate
Rebate recipient definitionRebates are provided pro rata to the person or entity that actually paid the premium on behalf of the enrollee (e.g., employer or subscriber), consistent with §158.242.
Group vs individual treatmentFor group policies the group policyholder may receive the rebate and must ensure distribution to enrollees or retain records if distributing; for individual market the subscriber is the recipient when they paid the premium.
Pro rata basisRebate allocation to each enrollee/payer is proportional to the amount of premium paid minus taxes and allowable adjustments during the MLR reporting year.
inv-75: rebate_notification
Rebate notification contentNotification accompanying a rebate or premium credit must explain what an MLR is, why the enrollee is receiving a rebate, the issuer's reported premium revenue, issuer's adjusted MLR, required MLR threshold, percentage rebated, total amount paid/credited, and form of rebate for current vs former enrollees.
Timing and formNotification must accompany the rebate check or be sent at the same time as a premium credit; form of notification will be established by the Secretary and published in guidance.
PurposeNotification educates enrollees and promotes transparency regarding MLR calculations and rebate distributions per §158.250.
inv-76: MLR reporting elements
Required MLR reporting elementsIssuers must report earned premiums, reimbursement for clinical services (incurred claims), expenditures for quality‑improving activities, other non‑claims costs, and Federal/State taxes and licensing/regulatory fees as part of annual MLR submissions.
Special reporting casesCertain plans (expatriate, mini‑med) require separate reporting and in 2011 may require quarterly submissions where adjustments apply.
Report timingIssuers must submit an MLR report for each MLR reporting year by June 1 of the following year in the form and manner prescribed by the Secretary.
inv-77: Acceptable State audit conditions
State audit acceptance conditionsHHS may accept State audit findings only if State law permits public release of audit findings and the State submits finalized audits within 30 days and preliminary/draft reports within six months of completion of field work.
HHS audit authorityHHS retains discretion to conduct its own audits of issuers regardless of State audits and requires issuers to retain documentation for HHS or its auditors.
Record retentionIssuers must retain supporting documentation for submitted data to enable verification; retention period specified as current year + six prior years.
inv-78: MLR
MLR shorthand definitionMLR (Medical Loss Ratio) measures the share of premium revenue spent on clinical services and qualifying quality activities (numerator) relative to adjusted earned premium (denominator).
Use for rebatesMinimum MLR standards (80%/85%) determine whether rebates are owed; adjusted MLRs (including credibility and quality adjustments) are compared to applicable standards.
Regulatory locationKey MLR provisions are in Subpart B (§158.210–158.270) of Part 158 implementing section 2718 of the PHS Act.
inv-79: Issuer
Issuer definition'Issuer' means an insurance company, insurance service, or insurance organization (including an HMO) required to be licensed to engage in the business of insurance in a State and subject to State insurance law; Part 158 applies to such issuers.'
Applicability notePart 158 applies to issuers offering group or individual health insurance coverage, including grandfathered plans, and sets reporting and rebate obligations.
Reporting unitIssuers report by licensed entity (company/State) and by market so MLRs are calculated at the issuer/market/State level.
inv-80: Licensed Entities
Licensed Entities (reporting unit)Reporting and rebate calculations are performed at the company/State combination level (licensed entities); issuers must report MLR data by licensed entity and by market within each State.
Estimated reporting universeRegulatory impact analysis estimated ~442 issuers and multiple licensed entities (company/State combinations) will submit reports; reporting volume depends on markets and States of operation.
Aggregation and reporting detailLicensed entities aggregate experience by State and market per §158.120; multi‑State reporting and related options are addressed in the regulation.
inv-81: Life years
Life‑years definitionLife‑years equals total member months of coverage divided by 12; used as the enrollment measure to determine credibility of experience for MLR adjustments.
Use in credibilityLife‑years determine non‑credible (<1,000), partially credible (≥1,000 and <75,000), and fully credible (≥75,000) classifications for applying credibility adjustments.
Data sourceLife‑years are calculated from member months included in the MLR reporting aggregation per §158.231 and §158.232.