This report published by the Robert Woods Johnson Foundation and Health Affairs examines the medical loss ratio standards that will be required of insurers starting in 2012. It also explores the dilemmas with implementing and enforcing these standards.

From the report: 

Beginning in 2011, the Affordable Care Act will require health insurance companies to spend a minimum percentage of the premiums they collect on health care services and quality improvement activities for the people they insure. This percentage is called the medical loss ratio. Insurance companies that sell policies to groups of 100 people or more must spend at least 85 percent of their premiums on health services. Insurers selling policies to individuals or small groups with fewer than 100 people must spend at least 80 percent on health services. Companies that fail to meet these medical loss ratio requirements will have to issue rebates to their customers starting in 2012.

At issue now is how to enforce the mandated medical loss ratios by determining what constitutes health care services. These services have to be separated from administrative expenses, marketing costs, and other insurance company activities to make certain that the law’s requirements are being met. However, it’s sometimes difficult to determine what a health service is and what an administrative expense is. For example, if a health insurer employs nurses to remind chronically ill patients to take their medications, is that a medical cost or an administrative expense?

Full Report: Medical Loss Ratios (PDF | 481 KB) 

Robert Woods Johnson Foundation. (2010). Medical loss ratios.