Here is what you’ll find in this week’s newsletter!

1. Important links 🔗 - the best articles we found this week about the Medicare Market along with links to Jared’s recent LinkedIn posts.

2. Deep Dive 📚 - This week we look at one of the most important Medicare Carrier KPIs. The Medical Loss Ratio (MLR).

3. Data Visual of the week 📊 - Data Visual highlighting MA Supplemental benefits.

It’s only a 5 minute read, but it will make you 10x smarter.

Deep Dive 📚

Medical Loss Ratio (MLR) - The Best Medicare Carrier KPI

For Medicare focused insurance carriers, one of the most important metrics is the Medical Loss Ratio (“MLR”).

If the MLR gets too high, the insurance company is likely in financial stress and possibly losing money. If the MLR gets too low, the insurance company may be required to pay a refund. Additionally, a small change in the MLR results in a large change in profit/loss.

Medicare MLRs are analyzed by actuaries, product developers, CFOs, and regulators. They are reported by publicly traded companies each quarter and are submitted to regulatory bodies each year.

The importance of MLRs was highlighted recently when both UHC and Humana released statements about an increase in their loss ratios due to increased outpatient utilization during the first half of 2023.

If you are a leader in the Medicare space, understanding what a loss ratio is, and wrapping your arms around recent market and carrier results will put you one step ahead.

Okay, here we go.

What is a Medical Loss Ratio (MLR)?

In short, the MLR is the percentage ratio of Medical Claims Expense divided by Premium Revenues.

Medical Loss Ratio = Medical Claims Expense / Premium Revenues

Why is it important?

MLRs for Medicare insurance products are usually between 75 - 90%.

This means there is only 10-25% of the Premium Revenues left to pay other expenses associated with acquiring customers and managing the products.

Once an insurance company pays commissions, administrative and claims expenses, and other overhead expenses, there is typically only 3 - 6% left for profits.

Because of this, a small change in MLR results in a large change in profit.

For Example, if a carrier achieves a 3% profit margin with an 85% MLR, and their MLR drops to 84%, their profit margin increases to 4%. That’s a 33% increase in profit margin based on a 1% drop in MLR!

What impacts the MLR?

Simply, Premiums and Claims.

On the Premium side:

Bidding (Medicare Advantage), initial premium rates charged (Medicare Supplement), rate increases (Medicare Supplement), risk score adjustments (Medicare Advantage), and more, all change the premium levels which impact the MLR.

On the Claims side:

Health of block of business, age of the block, utilization, wear-off of underwriting, medical trend, networks, managed care, large claims, and more all cause the claim amounts to differ from year to year.

Minimum Required Loss Ratios in Medicare

Both Medicare Advantage and Medicare Supplement plans have a minimum required loss ratio. If MLRs drop lower than the minimum, plans may be required to pay a refund.

(Note: an explanation of the full rules around minimum loss ratios and calculating refunds would require a separate deep dive 🙂 )

The minimum required loss ratio for Medicare Advantage is 85%.

The minimum required loss ratio for Medicare Supplement is 65% for individual plans and 75% for group plans.

Medicare Advantage plans tend to run their blocks near the minimum requirement of 85%, while Medicare Supplement blocks tend to run well above the minimum requirements of 65/75% due to competitive pressure.

Recent Results

Overall MLRs in the Medicare market were 85% for Medicare Advantage and 80% for Medicare Supplement during 2022, both up from 2021 and 2020 levels.

The MLRs for both Medicare Advantage and Medicare Supplement saw significant drops during 2020 when the entire country shut down during the COVID-19 pandemic. 2022 was back up to pre-pandemic levels, but as previously mentioned, there is some indication that 2023 is seeing even higher MLRs attributed to pent up demand from the pandemic.

You may wonder why actual MLRs for Medicare Supplement are lower than Medicare Advantage. Here are a few reasons.

1) The minimum required loss ratio is lower for Medicare Supplement than Medicare Advantage.

2) The average Premium Revenues for Medicare Advantage is nearly 10x that of Medicare Supplement. Therefore, the expenses associated with acquiring customers and administering the products are higher (as a percentage of premium) for Medicare Supplement necessitating the need for lower loss ratios to make a profit.

Results by Carrier

Medicare Advantage MLRs vary by carrier. The chart below displays the top 7 carriers (based on Premium Revenue according to NAIC A&H Experience Exhibits).

The clear outlier in the data is Kaiser. There is analysis here that suggests this is due to the fact that Kaiser is vertically integrated. While the MLR is reported as ~100%, that medical expense is going to provider groups who they own as revenues.

Medicare Supplement MLRs also vary by carrier. The chart below displays the top 7 carriers (based on Premium Revenue according to NAIC Medicare Supplement Experience Exhibits).

CVS stands out as having higher MLRs compared to the overall market while Elevance stands out as having lower MLRs.

Closing Thoughts

That’s it for this week’s Deep Dive. Don’t forget:

1) MLR = Medical Claims Expense / Premium Revenues

2) A small change in MLR results in a large change in profit

Data Visual of the Week 📊

This week’s Data Visual of the week comes from HealthScape Advisor’s article on MA Supplemental Benefits. Highlighting “Table Stakes”, “Emerging Table Stakes”, and others.

That’s it for this week. Let us know what you think.

• Too much detail?

• Not enough detail?

• Just the right amount of detail?