A good medical loss ratio (MLR) is 80% or higher for individual and small group health plans, and 85% or higher for large group plans. These are the legal minimums set by the Affordable Care Act. In practice, most insurers exceed these floors, with average MLRs ranging from 85% to 91% depending on the market. The higher the ratio, the more of your premium dollar goes toward actual medical care rather than administrative costs and profits.
What the MLR Actually Measures
The medical loss ratio is a straightforward concept: it tells you what percentage of the premiums an insurer collects actually gets spent on medical care. An MLR of 88% means 88 cents of every premium dollar paid for medical claims, and the remaining 12 cents covered administrative expenses and profit.
The formula divides medical spending by premium revenue, with a few adjustments on each side. The numerator includes all paid medical claims plus spending on activities that improve health care quality (more on those below). The denominator starts with total premium revenue, then subtracts federal and state taxes, licensing fees, and regulatory assessments. Removing those government-imposed costs from the calculation gives insurers credit for money they never actually controlled.
Legal Minimums by Market Type
The ACA established firm MLR floors that apply to all health insurers selling coverage in the United States:
- Individual and small group plans: 80% minimum
- Large group plans: 85% minimum
- Medicare Advantage and Part D plans: 85% minimum
These thresholds are sometimes called the “80/20 rule” because insurers in the individual and small group markets can keep no more than 20% of premiums for overhead and profit. Large group and Medicare plans get even less room, capped at 15%.
What Happens When Insurers Fall Short
Insurers that miss the minimum MLR threshold owe money back to their customers. For commercial plans, this comes as a rebate, typically applied as a credit on your next premium or mailed as a check. In 2024, insurers paid out roughly $1.64 billion in rebates to about 8.6 million consumers nationwide. The average rebate was $192 per person, though it varied by market: $233 per person in the individual market, $190 in the small group market, and $91 in the large group market.
For Medicare Advantage plans, the consequences escalate. An insurer that falls below 85% in a given year must remit the difference directly to the federal government. Three consecutive years below 85% triggers a ban on enrolling new members. Five consecutive years below 85% results in contract termination, effectively shutting the plan down.
Where Most Insurers Actually Land
The legal minimums are floors, not targets. Most insurers spend well above them. According to KFF’s analysis of 2024 financial data, average MLRs across the major markets were:
- Individual market: approximately 85%
- Group market (fully insured): 88%
- Medicare Advantage: 90%
- Medicaid managed care: 91%
The individual market consistently runs the lowest ratios, meaning insurers retain a larger share of premiums there compared to other markets. Medicaid managed care runs the highest, which makes sense: Medicaid plans operate on thinner margins because state contracts leave less room for administrative spending. Medicare Advantage MLRs rose to 90% in 2024, reflecting higher utilization among enrollees.
A “good” MLR in practical terms, then, depends on context. For a large group or Medicare plan, anything in the high 80s to low 90s is typical and healthy. For an individual market plan, mid-80s is the norm. An MLR above 95% might actually signal trouble for the insurer, suggesting it underpriced its premiums or faced unexpectedly high claims, which could lead to steep premium increases the following year.
What Counts as Medical Spending
The numerator of the MLR includes more than just claims your doctor submits. Insurers can also count spending on “quality improvement activities,” which broadens the definition of medical spending in ways that matter for the final ratio. Qualifying activities include case management and care coordination programs, chronic disease management, efforts to reduce hospital readmissions through discharge planning, patient education and counseling, prescription drug safety reviews that flag dangerous drug interactions, and health information technology that supports these programs.
To qualify, these activities must be grounded in evidence-based medicine and produce measurable improvements in health outcomes. An insurer can’t simply relabel administrative work as quality improvement. But the inclusion of these programs means two insurers with identical claims costs can report different MLRs if one invests more heavily in care coordination or wellness initiatives.
What Falls Outside the MLR
Everything not classified as medical claims or quality improvement sits on the other side of the ratio: the portion insurers keep. This includes marketing and advertising, sales commissions paid to agents and brokers, executive compensation, general administrative overhead like billing systems and customer service, and profit. The MLR rule doesn’t dictate how insurers divide up this remaining slice. An insurer could spend heavily on executive pay and little on customer service, or vice versa, and still meet the same MLR threshold.
This is worth understanding because a high MLR doesn’t necessarily mean you’re getting a better deal on premiums. An insurer charging $600 per month with a 90% MLR spends $540 on your care. An insurer charging $400 per month with an 85% MLR spends $340 on your care but costs you far less. The ratio measures efficiency, not affordability.
How to Use MLR When Comparing Plans
If you’re shopping for health insurance, MLR is one useful data point but not the whole picture. All plans on the ACA marketplace already meet the 80% floor, so you won’t encounter a plan spending only 60% on care. The differences between plans tend to be modest, often just a few percentage points.
Where MLR becomes more useful is in understanding your rebate. If you receive a rebate check or premium credit, it means your insurer spent less than the required minimum on medical care relative to what it collected. That’s not necessarily a red flag about your coverage quality, but it does tell you the insurer had room to charge you less. Insurers report their MLR data to CMS annually, with reports due each October, so the numbers are public and updated regularly.
For employer-sponsored coverage, your HR department should be able to tell you whether the company’s insurer paid rebates in a given year. Large group rebates are sometimes applied to the overall plan rather than distributed to individual employees, so you may not see the money directly even when it exists.