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United States

Office of 

Personnel Management

The Federal Government’s Human Resources Agency

Benefits Administration Letter

Number: 12-205 Date: 8/21/2012

Subject: Medical Loss Ratio Rebates under the Affordable Care Act

The purpose of this letter is to clarify the Medical Loss Ratio requirement under the 

Affordable Care of 2010 and its impact on selected enrollees in the Federal Employees 

Health Benefits (FEHB) Program. This information may be shared with your employees.

What is a Medical Loss Ratio?

A medical loss ratio (MLR) is the proportion of health insurance premiums collected by a 

health insurer that is spent on clinical services and quality improvement. The MLR for

each insurer is calculated by dividing the amount of health insurance premiums spent on 

clinical services and quality improvement by the total amount of health insurance 

premiums collected. The MLR is important because it requires health insurers to provide 

consumers with value for their premium payments.

What is the MLR requirement under the ACA?

Starting with 2011, the ACA requires each large group health insurer to spend at least 85

percent of collected health insurance premiums on clinical services and quality 

improvement each year. This is often explained as a plan spending a minimum of $0.85 

of every $1.00 paid in health insurance premiums on clinical services and quality 

improvement, and a maximum of $0.15 of every $1.00 on administrative costs. Health 

insurers that do not meet this requirement must pay a rebate. 

Will every FEHB plan issue a rebate?

No. Only health insurers failing to meet the minimum MLR will issue annual rebates to 

the policyholder. Although administrative costs in the FEHB Program are generally 

lower than other plans in the large group market, some insurers offering FEHB Plans will 

owe a rebate because the MLR for an insurer is calculated based on all of the insurer’s 

business in each market within a state. Health insurers for FEHB Plans that have met the 

MLR standard do not need to issue rebates.
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Who receives the rebate?

The Office of Personnel Management (OPM) administers the FEHB Program and is the 

policyholder for all plans within the FEHB Program. Consistent with the Federal 

Acquisition Regulation Section 31.201, any FEHB Program health insurer failing to meet 

the minimum MLR will issue rebates directly to OPM. These rebates will be used to 

reduce the cost of health insurance premiums for that insurer’s FEHB Plan in the next 

plan year.

How will rebates be used?

Any rebates issued by health insurers participating in the FEHB Program will be sent to 

OPM and will be deposited into the contingency reserve of the health plan offered by the 

insurer that paid the rebate and will be used to directly reduce the cost of the next year’s

health insurance premiums for that insurer’s FEHB Plan. 

How will enrollees know if their health insurer has issued a rebate?

Health insurers are required to mail notices to their enrollees notifying them if the insurer

did or did not meet the MLR standard.

How much is the FEHB rebate?

The amount of the annual rebate depends on each health insurer’s MLR. Each FEHB 

Plan insurer is required to reimburse OPM the difference between the MLR and the 85% 

minimum expenditure. For example, the insurer for a large group plan that spent 80% of 

health insurance premiums on clinical services and quality improvement would reimburse 

each large group policyholder (i.e., OPM, for FEHB Plans) the 5% difference between 

actual expenses (80%) and the minimum requirement (85%). The total dollar amount 

varies by insurer.

Additional Information

If employees have further questions about the MLR and the annual rebate, please refer 

them to their specific FEHB Plan.

Sincerely,

John O’Brien 

Director

Healthcare and Insurance