Defining and Explaining Medical Benefits Ratio (MBR)
When working with my healthcare clients, I frequently get asked about the MBR, or Medical Benefits Ratio. And of course, just like about every other metric, there are a multitude of other names for it: Medical Loss Ratio (MLR), Medical Cost Ratio (MCR), and even just the Benefits Ratio.
Before we start, here are some basics about the MBR. First, this metric has been regulated for the health insurance industry through the Affordable Care Act. According to the Centers for Medicare & Medicaid Services (or CMS – not sure where the other M went):
“The Affordable Care Act requires insurance companies to spend at least 80% or 85% of premium dollars on medical care, with the rate review provisions imposing tighter limits on health insurance rate increases. If an issuer fails to meet the applicable MLR standard in any given year, as of 2012, the issuer is required to provide a rebate to its customers.” (See the whole article here.)
Before we get to the two limits mentioned above, let’s talk about how to determine the MLR. To calculate the MLR we divide the benefits (or claims) cost by the premiums earned. This will tell us for every dollar in premiums an insurance company earns, it pays $x in claims. For example, if a company earned $100 in premiums and had an MLR of 80%, it means the company paid $80 in claims (or X / 100 = .8, so 100 * .8 = 80).
We must be aware of the two limits that the ACA has created.
· 80% - Companies that have plans for individuals and small groups, must pay at least $80 in claims for every $100 in premiums earned from those plans.
· 85% - Companies that have plans for large groups or government (Medicaid and/or Medicare) plans must pay at least $85 in claims for every $100 in premiums earned from those plans.
It’s important to remember that these are minimum thresholds. Companies can pay more than the minimum thresholds if they choose.
Let’s look at a real example using an excerpt of CVS Health’s 2020 Consolidated Results:
The two-line items we’re looking for are the “Premiums” and “Benefit Costs”.
You can see premiums listed here at $69,364 and benefit costs at $55,679 for 2020. Doing the math (Benefits Costs / Premium or $55,679 / $69,364) we calculate an 80.3% MLR. That means CVS Health paid about $80.30 in claims for members for every $100 in premiums earned.
1) Since they have an 80.3% MLR do they need to rebate the 0.3% back to customers? No. Remember that MLR is a minimum threshold. In fact, we would have expected them to pay at LEAST $55,491 in claims (80% * $69,364). They paid $55,679 in claims.
2) What does this all mean?
Well, that requires a little bit of a longer answer.
Is CVS Health complying with regulations? At the surface, it looks like they are. In reality… we can’t really tell because MLR is reported at a much more granular level than what we see here.
But here’s something else to think about. When we look at the 80.3%, we may think that they have more individual and small group plans because it’s closer to the 80% minimum threshold. However, that assumption may not be true. In the industry, government plan membership is what is fueling most of the growth across large insurers. That means we would expect the MLR to be trending up closer to the 85% threshold (Government MLR should be at least 85%).
Why is it so low then? Short answer: COVID, just like everything else in 2020. COVID had a positive financial impact for most insurers as they saw less utilization of benefits as consumers postponed elective procedures. As a result, insurers paid less in claims costs.
That’s all well and good, but why should we care?
To start, let’s look at the implications of the MLR limits. Remember, that these companies have a lot of costs involved in their operations outside of claims, and companies are generally set up to make a profit (even not-for-profit companies). Those costs aren’t just to pay bean counters, marketers, and lobbyists. Those costs also include development of new plans that help us improve our health or educate us how to use our benefits better.
But the MLR limits put pressure on those additional operating costs. Those limits mean there is only 15-20% of every dollar in premiums to pay for those costs. If you work at an insurer, that means there are going to be enormous pressure on your budgets, and limitations on the resources that can be invested.
So, whether you’re an investor, a leader, a partner, competitor, or customer the MLR can be a critical indicator of not just how an insurance company is doing, but it may also give you insight into how a company is growing, what strategies a company is employing or how it may pivot, and how that performance might impact the work you do on a daily basis.
Ryan Hunt, Senior Consultant - Acumen Learning