Under the PPACA MLR requirements, private insurers must report annually to CMS their MLRs by each state and insurance market in which they operate, as well as the dollar amounts for the components that make up their MLRs, such as premiums. Insurers must pay rebates when their MLRs do not meet or exceed the minimum applicable PPACA MLR standards. Agents and brokers sell insurers’ plans to individuals and employers and assist individuals and employers in various ways. PPACA requires that private insurers offering group or individual health insurance coverage report annually on the various components that are used to calculate their PPACA MLRs, and each of these components must be reported by state and by market. Private insurers first reported this information in 2012, based on their 2011 experience. The markets include large group, small group, and individual. Large and small group employers are defined by the number of their employees. Prior to PPACA, a small employer was defined in federal law as having a maximum of 50 employees. From the time PPACA was passed in 2010 until 2016, PPACA gives states the option of continuing to define a small group employer as having 50 or fewer employees, but starting in 2016, they must define small employers as having from 1 to 100 employees.The individual market includes policies sold by insurers directly to individuals. Insurers report their MLR data to CMS by entering information on a standardized form that includes multiple data fields that make up the MLR and rebate formulas. The MLR data that insurers report to CMS include the following components, as required by law. Medical claims. These include claims paid and incurred for clinical services and supplies provided to enrollees by physicians and other clinical providers. Expenses for quality improvement (QI) activities. These include expenses for activities that are designed to increase the likelihood of desired health outcomes in ways that can be objectively measured. The activities must be primarily designed to (1) improve health outcomes; (2) prevent hospital readmissions; (3) improve patient safety, reduce medical errors, and lower infection and mortality rates; or (4) implement, promote and increase wellness and health activities. Insurers are also allowed to include expenses for health information technology required to accomplish these activities as well as a percentage of their expenses for converting disease classification codes. Premiums. These include the sum of all funds paid by an enrollee and employer, if applicable, as a condition of receiving coverage from the insurer. These also include any fees or other contributions associated with the health plan. Federal and state taxes and licensing or regulatory fees. These include federal income taxes, assessments, state insurance, premium and other taxes, and regulatory authority licenses and fees. Federal income taxes on investment income and capital gains are excluded. Non-claims costs. These include all other insurer expenses—those beyond medical claims, expenses for QI activities, and federal and state taxes and licensing or regulatory fees. CMS defines non-claims costs for the following categories: (1) agents’ and brokers’ fees and commissions; (2) cost containment expenses, which reduce the number of health services provided or the costs of such services, but are not related to an activity to improve health care quality; (3) claims adjustment expenses, such as office maintenance and supplies costs, not classified as cost containment expenses; (4) salaries and benefits that insurers pay to their employees who sell their plans; (5) other taxes that may not be excluded from premium revenue; (6) other general and administrative expenses, such as salaries and advertising; and (7) community benefit expenditures, which include expenses for activities such as health educational campaigns that are available broadly to the public. The remaining amount of premiums that an insurer does not spend on the components of medical claims, QI activities, taxes and fees, and non- claims costs, will be referred to as the insurer’s “premium surplus” in this report. Premium surplus includes profit and other reserved capital. The PPACA MLR is generally calculated by dividing (a) the sum of an insurer’s medical claims and expenses for QI activities (the formula numerator) by (b) the insurer’s premiums, after excluding from them the amount of insurer’s federal and state taxes and licensing or regulatory fees (the formula denominator). (See fig. 1.) Some insurers, such as those with a small number of enrollees, are permitted certain adjustments to their MLRs. These adjustments are referred to as credibility adjustments, and they are added to, and thus Credibility adjustments are provided to increase, the insurer’s MLR.address the unreliability associated with calculating an MLR based on a small number of enrollees. Insurers with a small number of enrollees calculated their MLRs for 2012 based on their 2011 and 2012 experience combined. All insurers will calculate their MLRs for their experience in 2013 and subsequent years based on data from a 3-year period. That is, insurers will add their data for the year for which the MLR is being calculated to their MLR data for the 2 prior years. For each insurer, separate MLRs are calculated for each state and market combination in which it does business and each MLR is used to determine whether an insurer must pay rebates. Insurers must meet a minimum PPACA MLR standard, generally 80 percent for the individual and small group markets and 85 percent for the large group market, with some exceptions. Specifically, the applicable PPACA minimum MLR standard is based on one of the following: 85 percent in the large group market, 80 percent in the small group market, and 80 percent in the individual market; a higher MLR standard if specified by law in the state in which the a Department of Health and Human Services (HHS)-approved, adjusted MLR standard for a particular state’s individual market. When an insurer’s PPACA MLR is lower than the applicable PPACA MLR standard, the insurer must pay a rebate. The rebate amount is based on the PPACA MLR rebate formula, as shown in figure 2. The difference between the applicable PPACA MLR standard and the insurer’s MLR is calculated and this difference is multiplied by the insurer’s premiums, after federal and state taxes and licensing or regulatory fees are removed. There are different ways in which rebates can be paid out by insurers that depend, in part, on whether rebates are associated with individual or group market plans. In general, insurers can choose to provide rebates in the form of a lump-sum payment or as a premium credit for the following MLR year. Insurers in the individual market must provide rebates to their enrollees while insurers in the small and large group markets may meet this obligation by providing rebates to group policyholders, for example, employers. In turn, group policyholders are responsible for allocating the amount of rebate that is proportionate to the total amount of premium paid by enrollees and may retain part of the rebate based on the amount of premium that they contributed. Agents and brokers sell plans for insurers and perform a variety of functions on behalf of individuals and employers. According to the Bureau of Labor Statistics, in 2012 there were approximately 337,000 jobs held by insurance sales agents, which include agents and brokers working independently as well as those who are employed by an insurer. Agents and brokers provide assistance to individuals and employers in choosing and enrolling in plans. For example, they may assess an individual’s insurance needs and describe the characteristics of different plans that best meet those needs. Agents and brokers may also provide assistance after an individual or employee has enrolled in a plan, for example, by helping enrollees communicate with health plans in trying to resolve disputed medical claims or adding a new family member to a current plan. Insurers who use agents and brokers to sell their plans typically pay them based on a percentage of the plan’s premium or as a flat fee, for example, determined by the number of enrollees in the plan. More than three quarters of insurers met or exceeded the minimum PPACA MLR standards in 2011 and in 2012, the median PPACA MLRs for all insurers were about 88 percent in each year, and there was variation across insurance markets. Insurers’ spending on enrollees’ medical claims and non-claims costs as a percentage of premiums varied across insurance markets in 2011 and 2012. Most insurers met or exceeded the PPACA MLR standards established for the markets and state in which they operated, but group market insurers were more likely to meet or exceed the standards than individual In 2011, about 76 percent of insurers met or exceeded market insurers.the minimum PPACA MLR standards and, in 2012, 79 percent of insurers met or exceeded the standards. As an example of variation across the markets, in 2012 about 86 percent of insurers in the large group market and 81 percent of insurers in the small group market met or exceeded the MLR standards, compared to 70 percent of individual market insurers. The median PPACA MLRs in 2011 and in 2012 among all insurers were about 88 percent, and the median for the large group market was higher than that of the small group and individual markets. For example, in 2012 the median PPACA MLR for insurers in the large group market was about 91 percent compared to 86 percent in the individual market and 85 percent in the small group market. (See table 1.) We observed that insurers’ median PPACA MLRs slightly increased from 2011 to 2012 and the percent of all insurers meeting or exceeding the standards increased by about 3 percentage points. However, these 2 years of data may not reflect future patterns in MLRs. (See app. I for a listing of the PPACA MLRs in each state for 2011 and 2012.) In 2011 and 2012, the percentage of net premiums that insurers spent on their enrollees’ medical claims varied across insurance markets.