Medical Loss Ratio’s Role in the Large Group Insurer Market

ABSTRACT

Objectives: To assess trends in the medical loss ratio (MLR) and understand how health insurance premiums in the large group market are driven by medical claims spending and insurer margins.

Study Design: Study of approximately 500 insurers covering more than 40 million lives annually in the large group market that submitted an MLR submission form (2014-2022).

Methods: We assessed trends in the MLR, premiums, medical claims spending, administrative costs, quality improvement spending, and margins among all insurers in the large group market.

Results: The mean MLR was 90.0% (2014-2020), which increased to 91.8% in 2021 before declining in 2022. Spending on both administrative costs and quality improvement was small and stable during this period. In contrast, premiums and medical claims spending grew between 2014 and 2020, with claims spending increasing 9.4% between 2020 and 2021 compared with just 3.9% for premiums. This mirrored the observed trend in insurer margins, which increased from 2014 to 2020 before experiencing a temporary decline in 2021.

Conclusions: Medical spending is the primary driver of premiums in the large group market. Efforts to address growing health insurance premiums in the US will require consideration of how medical spending contributes to this growth.

Am J Manag Care. 2025;31(1):In Press

Takeaway Points

• In this study using publicly available medical loss ratio (MLR) submission forms completed by insurers in the large group market, we observed rising health insurance premiums, which are likely driven by increased medical spending.
• Between 2014 and 2020, the average MLR in the large group market was stable, as premiums and medical claims spending increased at similar rates.
• We observed an increase in the MLR in 2021, as net claims spending grew faster than premium revenue.

Rising health care spending costs and the growing unaffordability of health insurance have drawn increasing attention to the role of insurer premiums and spending. In fact, annual family premiums for employer-sponsored insurance grew 7% in 2023 and 22% since 2018.¹

A large volume of literature highlights the high level of health care spending in the US relative to other high-income countries.^2-4 Drivers of higher US spending include population-level factors⁵; price and utilization components, such as higher prices for labor, medical devices, and prescription drugs^2,3,6; and innovation and the growth of new technologies.^7,8 Additionally, administrative complexity is a main contributor,⁹ accounting for 8% of US national health care spending compared with 1% to 2% in other high-income countries.³

In an effort to contain costs, improve quality, and promote transparency, consumer value, and greater efficiency among health insurers, the Affordable Care Act (ACA) established a medical loss ratio (MLR) standard in 2011.¹⁰ The MLR measures the proportion of an insurer’s premium revenue spent on clinical services or quality improvement.¹⁰ Health insurers that fail to meet minimum MLR standards (80% in the individual and small group markets; 85% in the large group market) are required to pay out a share of their premium revenue. Such a requirement may benefit consumers if they receive the difference between an insurer’s actual MLR and MLR standard as rebates or if they experience minimal premium increases as insurers reduce their profits and costs to avoid paying rebates.

Insurers may respond to the MLR standard and increase their claims costs by providing more generous coverage and engaging in fewer efforts to reduce costs, including cost-containment strategies such as provider negotiation or utilization management.¹¹ Although insurers may also lower their premiums and administrative expenses, there could be negative consequences if insurers utilized less aggressive medical management, dropped product lines that contributed to a lower MLR, or in an extreme case, exited the market completely.¹² Such behavior may lead to increased consolidation and market concentration, thereby limiting consumer choice and lowering innovation to align consumer, provider, and insurer incentives.¹⁰

In this study, we focused on the large group market where insurers sell plans to large groups (ie, > 50 employees). We contribute to the existing literature by leveraging underutilized data on insurer financial filings and a longer time series that allows us to include data on post–COVID-19 pandemic trends. We aimed to decompose what may be driving observed increases in health insurance premiums over time in the large group market (2014-2022) by understanding the growth in individual inputs to the MLR, including spending on medical claims, administrative costs, and quality improvement, and by assessing insurer margins.

METHODS

Data and Sample Construction

This study used the CMS Center for Consumer Information and Insurance Oversight (CCIIO) MLR Public Use File, which contains data submitted by insurance companies in each reporting year (2014-2022).¹³ As part of the ACA, all insurers are required to disclose the amount spent on health care and administrative costs and report their MLR. The unit of analysis was the insurer year, with each observation represented by an MLR submission form submitted by an insurer for each state the company operates in. The sample was limited to insurers in each of the 50 states and the District of Columbia operating in the large group market.

In supplemental analyses, we compared overall market results with those for the top 5 largest insurers in the market (UnitedHealthcare, Kaiser Permanente, Cigna, Aetna, Blue Cross Blue Shield) based on the mean number of covered lives enrolled. We attributed MLR submission forms to these large insurers using manual web searches and the group affiliation code variable in the CCIIO data. We aggregated across all Blue Cross Blue Shield companies for this measure.

Study Outcomes

We looked at several measures of insurers’ financial health. The MLR captures the share of total health care premiums (denominator) spent on medical claims and administrative costs (numerator), including efforts to improve quality of care, with insurers failing to meet the 85% standard refunding the portion of premiums that exceeded this limit. To better understand how individual inputs to the MLR calculation trend over time, we followed prior work to create measures capturing an insurer’s premium revenue, medical claims costs, and administrative costs (descriptions in eAppendix Table 1 [eAppendix available at ajmc.com]).¹⁴ Because quality improvement activities are counted as medical claims for calculating the MLR,¹¹ we also decomposed insurer spending on efforts to improve health outcomes into spending components based on MLR submission form fields related to improving health outcomes, preventing hospital readmissions, improving patient safety and reducing medical errors, promoting wellness and health, and supporting the use of health information technology. Finally, we captured the amount of MLR rebates paid, based on an average of the insurer’s prior 3 years of MLR submissions,¹⁵ and the insurers’ margin, based on premium revenue net of spending on medical claims, administrative costs, taxes and fees, and rebates.

Analysis

First, we compared summary characteristics among insurers at 3 points in time (reporting years 2014, 2018, and 2022) to assess trends in the number of insurers, covered lives, and geographic variation in the large group market. In supplementary analyses, we also assessed the market share of covered lives among the 5 largest insurers to understand whether there were differential trends.

Next, we compared average trends in the reported MLR across all insurers in the market and among the 5 largest insurers. We then decomposed these trends into premium revenue, administrative costs, and medical claims by reporting year. Finally, we assessed trends in insurer margins across all insurers in the market and among the 5 largest insurers.

To account for potential extreme values reported in MLR submission forms, we winsorized all measures at the 1% and 99% level. We calculated the median value of each measure as a sensitivity analysis. All measures were summarized on a per-member per-month (PMPM) basis. Measures comparing trends in the overall market with the 5 largest insurers were weighted by the number of covered lives. All analyses were conducted in Stata/MP 17.0 (StataCorp LLC).

RESULTS

Sample Characteristics

In 2014, we observed 569 insurers that covered 43,510,288 lives (eAppendix Table 2). These numbers declined slightly between 2014 and 2022, with 487 insurers and 40,240,856 covered lives in 2022. The geographic distribution of covered lives remained stable, with most enrollees located in the West region (36.5%). The market share among the top 5 insurers grew from 73.0% of total large group enrollment in 2014 to 78.7% in 2022.

Trends in the MLR, Premiums, and Spending

The overall mean MLR was relatively stable from 2014 to 2020, with a mean MLR of 90.0%, increasing to 91.8% in 2021 before declining in 2022 (Figure 1). Levels and trends among the 5 largest insurers were similar to the overall market (eAppendix Figure 1). Administrative costs were relatively stable during this period, averaging $43.2 PMPM (Figure 2). However, both premium revenue and medical claims spending PMPM increased, with premium revenue increasing from $397.5 to $481.0 (21.2% change) and medical claims increasing from $335.6 to $409.9 (22.5% change) from 2014 to 2021. In 2021, there was a trend break because medical claims spending increased faster than premium revenue (9.4% vs 3.9% in 2020 vs 2021). In 2022, spending slowed with increases of 3.7% for premium revenue and 1.2% for medical claims relative to the prior year. Trends for each measure were similar when comparing median values against our main analysis (eAppendix Table 3). Relative to premium and medical claims spending PMPM, mean quality spending PMPM was small ($3.3), with spending on improving health outcomes comprising the largest share (eAppendix Figure 2).

Trends in Insurer Margins and Rebates

The overall mean margin PMPM increased slightly from 2014 ($9.0) to 2020 ($10.2) before falling to $1.7 in 2021 and rebounding to $5.6 in 2022 (Figure 1). The mean margin was consistently greater among the 5 largest insurers compared with the overall market (eAppendix Figure 1). Across the study sample, we found that a mean of 68 insurers, covering approximately 7% of all covered lives in the market, paid out a mean of $153 million in rebates per year (eAppendix Table 4).

DISCUSSION

The MLR provision of the ACA limits the amount of premium income that insurers can retain for administration, marketing, and profits because insurers in the large group market must spend at least 85% of this income on health care claims and quality improvement efforts. If not, insurers are required to pay out the difference between their actual MLR and the MLR standard in the form of rebates to consumers.

When the MLR provision was first introduced, there were concerns about the insurer response and the potential for adverse consequences if insurers responded to the provision by exiting the marketplace.¹² This study, which included data 10 years after the ACA, found that the number of covered lives has remained stable despite a decline in the number of insurers operating in the market. Additionally, the total rebate amount received by consumers due to the MLR has more than doubled, from $73.6 million in 2014 to $223.1 million in 2021. However, because rebates are shared between employers and employees or are used to offset subsequent premiums, benefits to the consumer may often be indirect.

We leveraged the most recently available CMS data on insurer financials and found that insurer premiums increased throughout our study period. These findings are consistent with those of prior research that have identified similar increases in premiums,^1,16 which have outpaced both the growth in inflation and wages.¹⁷ Although the MLR aims to improve insurer efficiency by lowering overhead and cutting administrative costs, we found that rising premiums were likely due to increased medical spending, as administrative costs were modest and stable during this study period. Indeed, one study’s findings suggest that the MLR provision itself may have contributed to increased medical spending.¹¹

We found the mean MLR was relatively stable from 2014 to 2020. This is because premium revenue (denominator in the MLR calculation) and medical claims (numerator in the MLR calculation) increased at similar rates while administrative costs remained stable. However, as we previously noted, medical claims spending appeared to grow faster than premium revenue in 2021, contributing to the observed increase in MLR. This may be the result of claims spending growing faster than insurers’ predictions for how to price premiums in that year, particularly given the COVID-19 pandemic,¹⁸ because we observed slower spending growth in 2022.

Limitations

This study had a few limitations. First, we focused exclusively on the large group market, so there are differences between our findings and trends in the small group or individual market.¹⁸ Second, this analysis characterized national trends across all insurers. Thus, individual insurers may have had different experiences, including larger or smaller shocks to their spending and margins. Third, we were unable to directly observe whether medical claims spending increased because of unit prices or volume of services. Fourth, our data did not include information about third-party administrator and administrative services–only contracts, which account for a large share of self-funded employment-related health insurance. Fifth, we did not assess differences in outcomes by insurer characteristics, such as being vertically integrated, although these characteristics may affect insurer performance and warrant further study. Finally, the measures were constructed based on insurers’ self-reported information from MLR submission forms. As a result, there may be some discretion in how insurers attributed dollars. Additionally, our measure of the insurer’s margin did not include investment earnings and may differ based on the method of calculation.

CONCLUSIONS

Insurers in the large group market provide health insurance coverage for more than 40 million individuals in the US. Because fluctuations in the insured population are expected over the next several years,^19,20 it is important to understand drivers of US health care spending and the factors that may contribute to trends in insurance premiums more broadly. Our results suggest that efforts to curb the growth of US health care spending must consider medical spending as the primary driver of insurer premiums.

Author Affiliations: Kenneth C. Griffin Graduate School of Arts and Sciences, Harvard University (ACC), Cambridge, MA; Department of Health Care Policy, Harvard Medical School (ACC, DCG), Boston, MA; Leonard D. Schaeffer Center for Health Policy & Economics, University of Southern California (ET), Los Angeles, CA; Department of Pharmaceutical and Health Economics, Alfred E. Mann School of Pharmacy and Pharmaceutical Sciences, University of Southern California (ET), Los Angeles, CA.

Source of Funding: This work was supported by the University of Southern California Schaeffer Center for Health Policy & Economics, including a grant from Blue Cross Blue Shield of Arizona.

Author Disclosures: Dr Trish has received grants from Arnold Ventures and The Commonwealth Fund, is a member of the editorial boards of The American Journal of Managed Care and Medical Care Research and Review, and has provided expert testimony on matters in the hospital, health insurance, health information technology, and life sciences sectors. The funding sources of the Schaeffer Center are available in its annual report. The remaining authors report no relationship or financial interest with any entity that would pose a conflict of interest with the subject matter of this article.

Authorship Information: Analysis and interpretation of data (ACC, DCG, ET); drafting of the manuscript (ACC); critical revision of the manuscript for important intellectual content (DCG, ET); statistical analysis (ACC); obtaining funding (ET); and supervision (DCG, ET).

Address Correspondence to: Erin Trish, PhD, Schaeffer Center for Health Policy & Economics, University of Southern California, 635 Downey Way, Verna & Peter Dauterive Hall, Los Angeles, CA 90089. Email: etrish@usc.edu.

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