Coverage Conversations

What do you mean Medical Loss Ratio?

I’m sometimes asked, “What is MLR and why should I care about it?”  Medical/Dental Loss Ratio sounds complicated but is actually not complicated.  It simply measures how well an insurance company operates by comparing the amount they spend on people’s health and the amount they spend on operations.  The higher the number, the better the company is doing at utilizing the dollars they collect.

Most insurance is created to cover rare but catastrophic circumstances resulting from accidents, disease or natural disaster.  It helps us to manage unexpected expenses by paying smaller amounts over time in the form of premiums.  While catastrophic events are not unusual, who the victim will be is more difficult to predict.  Insurance allows us to pool risk to provide a measure of security to all.

Dental insurance works this way too but is much lower risk than other health insurance for three reasons.  First, dental expenses are much more predictable.  Anyone can look at what they have spent on dental care over the last few years and reasonably predict their future expenses.  While they won’t be the same for everyone, a person’s expenses remain pretty consistent over the course of years reflecting that person’s risk factors, habits, and condition.  Second, dental coverage is extremely limited.  There are many exclusions and restrictions that limit the insurance company’s liability.  Finally, dental coverage is almost always capped by an annual maximum in the $1000-$2000 range.  Even in the most unusual year when dental needs are extensive, the company’s protection stops when this dollar amount is reached.  These caps are often so low that they do not fully cover the replacement of a single tooth.

When risks are so predictable, insurance companies don’t need to reserve money for catastrophic expenses and the premium dollars can be expended on the more routine expected needs.  Premiums can be set to cover reasonable operating expenses and the expected levels of care.  Patients and plan purchasers deserve to know that the dollars they are paying are mostly going toward care rather than corporate profits and overly generous salaries.

The Affordable Care Act established limits and penalties for health insurance companies that overcharge on premiums, but this does not apply to dental insurance.  Some states have enacted laws that apply specifically to dental insurance like the one adopted through a ballot initiative in Massachusetts.  This measure approved with more than 70% of the vote established an acceptable loss ratio of 83% or greater and requires companies to rebate premiums if they fail to achieve this level.

Patients and plan purchasers should care about medical/dental loss ratios because they provide a level of oversight to the companies that receive such a large portion of their healthcare spending.  While establishing acceptable limits on loss ratio doesn’t solve all the problems it does create a degree of accountability for these companies while providing an incentive to do better.  Health care expenditures are a significant part of most family’s budgets.  It’s time to reform insurance requirements so that medical loss ratio limits also apply to dental coverage.