American Journal of Law & Medicine

Preemption and the MLR Provision of the Affordable Care Act


This Note focuses on the medical loss ratio provision ("MLR Provision") of the Patient Protection and Affordable Care Act (ACA). (1) The MLR Provision states that health insurance companies must spend at least a certain percentage of their premium revenue on "activities that improve healthcare quality" (in other words, meet a minimum threshold medical loss ratio) and comply with reporting requirements determined by the Secretary of the United States Department of Health and Human Services (HHS). (2) Because states have historically had authority over the regulation of health insurance, there is an outstanding question as to whether or not the MLR Provision has legal authority to preempt conflicting state MLR regulations. (3)

Part II of this Note outlines the major requirements in the MLR Provision and discusses the history of MLR regulation in the United States. Part III discusses the likelihood that the courts will soon resolve the question of preemption regarding the MLR Provision. Part IV considers the question of preemption from the perspective of the Health Insurance Portability and Accountability Act (HIPAA) and the Employee Retirement Income Security Act (ERISA). To do so, Part IV begins by showing that ERISA and HIPAA preemption case law is a suitable reference for the issue of preemption under the MLR Provision. Part IV then analyzes case law for both ERISA and HIPAA preemption, then concludes by applying these analyses to preemption in the context of the MLR Provision and showing that, should the courts consider HIPAA and ERISA preemption in deciding the fate of the MLR Provision, state MLR regulation would likely survive preemption. Finally, Part V summarizes the arguments made and show that the evidence available strongly supports the likelihood that state MLR regulation will survive potential preemption challenges by the MLR Provision.


In 2011, the MLR Provision of the ACA began requiring health insurance companies to comply with certain standards regarding MLRs. (4) According to the MLR Provision, health insurance companies must spend a certain percentage of their premium revenue on "activities that improve healthcare quality." (5) This type of spending is distinguished from "administrative expenses and profit, including advertising, marketing, overhead, salaries, and bonuses." (6) For policies insuring 100 or more people (referred to as large group policies), health insurance companies must spend at least 85% of their premium revenues on "activities that improve healthcare quality" (i.e., for large group policies, health insurance companies must maintain an MLR of at least 85%). (7) For policies insuring more than one person but fewer than 100 (referred to small group policies) or policies insuring one person (known as individual policies), health insurance companies must maintain an MLR of at least 80%. (8) Should a health insurance company's MLR for a certain policy group fall below the required threshold for that group, the health insurance company must issue a rebate to the insured persons in that group equal to the additional amount the health insurance company would have needed to spend on "activities that improve healthcare quality" for that group if it had complied with the rates set forth by the MLR Provision. (9)

Congress laid the groundwork for the MLR Provision in these requirements and left it to HHS to fill in the details. (10) In both its interim and final rules, HHS provided additional requirements that health insurance companies need to abide by in order to comply with the MLR Provision. These additional requirements include exceptions to the MLR Provision requirements, reporting requirements, and other additional requirements necessary for effective implementation of the MLR Provision. (11)

HHS's interim and final MLR rules establish policy groups that enjoy less severe requirements than groups subject to the full weight of the MLR Provision. Two of these exceptions are "mini-med" policies and "expatriate" policies. (12) Minimed policies are defined as policies "with total annual benefit limits of $250,000 or less" and enjoy smaller minimum MLR thresholds and fewer reporting requirements. (13) The expatriate policies are defined as "group policies that provide coverage for employees working outside their country of citizenship, employees working outside of their country of citizenship and outside the employer's country of domicile, and non-U.S. citizens working in their home country." (14) Health insurance companies enjoy more relaxed requirements for expatriate policies similar to those enjoyed by mini-med policies (i.e., MLR rate and reporting requirements). (15) These exceptions demonstrate some of the limited flexibility provided for in the MLR Provision.

In addition to the exceptions mentioned above, HHS's interim and final rules create an opportunity for states to alter their respective minimum MLR thresholds. HHS gives states the authority to increase their minimum MLR threshold to any rate above that required by the MLR Provision. (16) Should states wish to lower their respective minimum MLR thresholds below those required by the MLR Provision, however, they must seek permission from HHS. (17) Of the seventeen states that have currently applied for lower minimum MLR thresholds, HHS has granted permission to only seven. (18)

In order to monitor the implementation of the MLR Provision, HHS has instituted reporting requirements with which all health insurance companies must comply. To +ensure that health insurance companies comply with the MLR Provision, HHS requires each health insurance company to submit an annual report summarizing its "aggregated activity within each state for the three market segments: large group, small group, and individual policies." (19) These reports require each health insurance company to include MLR calculations for each policy group demonstrating the health insurance company's compliance with the MLR Provision, calculations showing compliance with any issued rebates, MLR calculations for groups enjoying more lenient requirements (e.g., mini-med policies or expatriate policies) and other information necessary for HHS to confirm that health insurance companies have complied completely with the MLR Provision. (20)

These requirements are only a few of the additions that HHS made to the MLR Provision passed by Congress. Moreover, the MLR Provision is only one of many new provisions under the ACA with which health insurance companies must comply. The next section will show the differences between the requirements mandated by the MLR Provision and those that were in place prior to the ACA. As the next section will demonstrate, the MLR Provision greatly increases the burden on health insurance companies to maintain compliance with MLR regulations.


For modern health insurance companies, the ACA's MLR Provision is a drastic change from the MLR regulations to which companies were accustomed. Since the mid-twentieth century, federal statutes delegated insurance regulation to the states. (21) While Congress has passed several laws that give the federal government jurisdiction over areas affecting insurance, direct authority over the insurance industry has remained in the hands of the states. (22) The ACA changes this in many ways, a number of which are outside the scope of this Note. The ACA, through the MLR Provision, clearly demonstrates a break from traditional state regulation of insurance by having the federal government directly regulate the insurance industry. (23)

This change has fostered strong debate both for and against the MLR Provision. Much of the debate focuses on the substantial effect that the MLR Provision has on health insurance companies, the insured, and the health industry in general. Though it has only been in force for a few years, the MLR Provision already has a demonstrated effect on private health insurance companies' spending and rebate habits. (24) The rest of this Part focuses on the difference between the MLR Provision and MLR regulations prior to the ACA, as well as the various debates regarding the merits of the MLR Provision. Together, these discussions will provide strong evidence that problems regarding preemption under the MLR Provision will likely arise.


Each state elects or appoints an insurance regulator, often called an insurance commissioner, who is responsible for governing the implementation of insurance regulations for each state. (25) Together, these insurance regulators ("Insurance Commissioners") make up the National Association of Insurance Commissioners (NAIC). (26) Prior to the ACA, states regulated health insurance companies in various ways, some choosing to implement MLR regulations. (27) In 1980, as there were no uniformly implemented regulations, the NAIC released guidelines consisting of suggested state regulations for health insurance companies. (28)

Some but not all states adopted these guidelines; as a consequence, the minimum MLR thresholds varied across states. For the policies issued to individual groups, some states required minimum MLR thresholds as low as 55%. (29) As the definition of large and small groups differed from state to state (and for some states, the distinction was non-existent), the minimum MLR thresholds for policies issued to small and large groups ranged from 60%-85%. …

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