A medical loss ratio (MLR) rebate is a refund that health insurance companies are required to provide to policyholders when they do not spend a certain percentage of premium dollars on medical care and quality improvement activities. The Affordable Care Act (ACA) set minimum MLR standards for health insurance in the US, requiring health insurance carriers to spend the bulk of the premiums they collect on medical expenses for their insureds. Individual and small-group carriers must spend at least 80% of premiums on medical expenses, and for large-group plans, the requirement is 85% . If an insurer spends less than the required percentage of premium dollars on medical care and quality improvement activities, they must provide a rebate to policyholders.
MLR rebates are based on a 3-year average, meaning that rebates issued in a given year will be calculated using insurers financial data from the previous three years. For example, rebates issued in 2023 are based on insurers' financial data from 2020, 2021, and 2022. The rebate amount is calculated as the difference between the insurer's actual MLR and the minimum MLR required by the ACA, multiplied by the premium amount paid by the policyholder.
It is important to note that not all policyholders are eligible for MLR rebates. The ACA requires that rebates be provided to policyholders in the individual and small-group markets, but not to policyholders in the large-group market. Additionally, rebates are not provided if the amount owed to an individual policyholder is less than $5.
