When Congress passed the Affordable Care Act, it introduced the Medical Loss Ratio (MLR), mandating that insurers spend 80–85 percent of premium dollars on actual health care or quality improvement. If they failed, they must refund the excess to policyholders. In most sectors of the economy, profit margins are not regulated. We do not mandate that a doctor’s office spend exactly 80 percent of revenue on patient services. We do not require hospitals, drug companies, or imaging centers to rebate customers when their operating margins exceed a political threshold. But for insurers, policymakers imposed precisely that: a fixed operating-margin ceiling, similar to rules used for public utilities.
Fixing a firm’s margins is not a minor tweak. It fundamentally distorts incentives. It signals to insurers that efficiency is not rewarded, that administrative discipline does not matter, and that the best way to increase profit is not to reduce costs but to increase total spending—and therefore premiums. The MLR transforms insurers from cost-managers into cost-inflaters.
This distortion is critical to understanding why the MLR has failed insurers and, more importantly, Americans. Rather than fostering competition that lowers costs for working families, the MLR freezes margins, dulls market pressure, and pushes insurers toward behaviors—vertical integration, internal markups, and strategic self-dealing—that maximize revenue while avoiding accountability.
Why the MLR matters for ordinary Americans
It may sound fussy to worry about whether a firm spends 80–85 percent of premiums on care. But for many Americans, that difference is real money. For a working family paying $10,000 in annual premiums, a five percent “over-spend” could translate into $500 or more that should have been invested in care or rebated back. For those in middle- or lower-income households, every dollar counts. When a rule incentivizes insurers to spend more—not less—those extra dollars come from the pockets of these families.
Many Americans already struggle under health costs. Surveys consistently show that nearly half of U.S. adults say that affording health care is difficult, and up to one-in-four report foregoing needed care because of cost. Meanwhile, deductibles and coinsurance are rising, meaning insurance often feels like a ticket to buy just to pay more later. In lower-income brackets, the burden is disproportionate: some studies suggest that the poorest 20 percent of Americans pay nearly twice the share of income for health care relative to the richest 20 percent. The middle three quintiles fall somewhere in between; even so, many families find health spending constraining.
The MLR was designed to offer a measure of relief. By forcing insurers to maintain a floor on care spending or rebate the rest, it created a mechanism for sending money back to consumers in highly profitable years. Indeed, since 2012, insurers have remitted billions in rebates to both individuals and employer groups, providing some modest counterweight to cost pressures. In 2024, insurers were estimated to issue about $1.1 billion in rebates across markets, bringing the total since 2012 to roughly $13 billion. This number is not trivial, but it is a fraction of the total revenue of commercial insurers (UnitedHealth reported over $400 billion in revenue in 2024 alone.) Rebates are based on a three-year averaging of insurer performance under the MLR rule. In the individual market, average rebates in recent years have hovered near $200 per person, though many enrollees never see them or receive only a pro rata share because of employer arrangements or plan designs.
If the MLR worked as intended, insurers would come close to the spending threshold in normal years and return the rest. But in most years, insurers seem to just skirt the limit, leaving large margins untaxed, unreversed, and invisible. That invisibility is no accident. In genuinely competitive markets, particularly in individual insurance markets featuring many carriers, MLR’s inflationary effect weakens because insurers must compete on price, limiting premium growth. The pro-inflationary pressure is most pronounced in non-competitive settings such as employer-sponsored plans or individual markets with only one dominant carrier, where the MLR allows insurers to raise premiums with little fear of losing enrollment.
The loophole machinery: From vertical integration to self-dealing
Once the MLR distorted the basic economics of insurance, insurers responded rationally. They built structures that allow them to spend more while still retaining profit within the firm. Their toolkit is elegant yet pervasive, and it contains several mechanisms to consider in turn: affiliate payments, vertical ownership, cost relabeling, and strategic shifting of business to exempt lines.
Affiliate accounting and internal transfers
The most straightforward tactic is as follows: insurer owns provider → insurer pays its own affiliate provider inflated prices → insurer books that cost as a claim. Because the payment remains inside the firm, it satisfies the MLR threshold, even though it has not actually increased patient care.
UnitedHealth/Optum is perhaps the flagship example. The parent insurer—UnitedHealthcare—pays what are called intercompany eliminations to its Optum provider arm. The government does not recognize these internal payments as revenue since they cancel out within the group, but the payments do count as medical expenses on the insurer’s books. In recent years, those eliminations have surged, reflecting ever-more aggressive internal pricing strategies. In effect, United’s insurance unit is just passing premium dollars down the chain to its own provider unit, inflating the claim side while preserving profit for the group.
Other integrated players are following suit. When insurers own or tightly affiliate with hospitals, clinics, labs, or physician groups, they essentially become their own counterparty. As analysts at Brookings/USC and CAP note, internal transfers in Medicare Advantage can represent anywhere between 20–70 percent of total spending in some plans. In states’ managed care contracts, non-claims payments—i.e., capitation, lump-sum transfers—have grown sharply, especially among insurers with provider ownership, reflecting the same dynamic.
Crucially, the law does not require adjusting or discounting related-party transfer pricing. The MLR rules permit all payments to “providers” to count without requiring arm’s length pricing tests. That gap allows insurers to choose internal prices that maximize their MLR, not necessarily patient value.
Vertical supply chain: PBMs, pharmacies, and specialty markups
The pharmaceutical arm of the system gives insurers another powerful lever. All the major insurers now own or affiliate with pharmacy benefit managers (PBMs) and specialty or mail-order pharmacies: CVS owns Aetna and its pharmacy network, Cigna owns Express Scripts, UnitedHealth owns OptumRx, and several others blend insurer, PBM, and pharmacy under one roof. In such a structure, the insurer effectively transacts with itself when paying drug claims, enabling dramatic markups that are booked as “medical” even though they stay inside the corporate group.
In one notable complaint in 2023, Senator Elizabeth Warren (D., Mass.) and then-Senator Mike Braun (R., Ind.) cited a Wall Street Journal analysis showing that CVS/Aetna’s affiliate pharmacy was charging generic drugs at 27.4 times the reference generic cost; Cigna’s was marked up 24.2 times; United’s 3.5 times. In one case, a 30-day generic dose of a medication that costs $73 at a baseline reference pharmacy was charged at $4,409 inside a plan’s affiliated specialty pharmacy. That absurd markup gets booked as a claim, improving the reported share of premium spent on “care,” while the actual difference flows to profit within the group.
This double-sided capture undermines the MLR by turning every drug dollar into a lever of self-dealing. The law treats insurer-to-pharmacy payments as ordinary claims, giving no special scrutiny to affiliate relationships. In a competitive market, such extreme markups would be unsustainable. But under an MLR regime that rewards higher medical spending, these inflated internal prices directly increase the dollars insurers are allowed to retain.
As FREOPP’s Avik Roy previously observed as early as 2011, the MLR was sold as a consumer safeguard but designed in a way that paradoxically entrenches large insurers. Because the rule fixes a percentage of premiums rather than a fixed dollar ceiling, insurers can actually increase their profits by allowing premiums to rise and by increasing their vertical integration: a 15 percent margin on a higher premium base yields more profit in absolute terms. Roy predicted “a slow-motion consolidation” of the insurance industry—an outcome vividly realized as today’s “Big Four” wield enormous market power and control more than two-thirds of all commercial lines, PBMs, and even clinical data systems.
Cost relabeling: “Quality improvement” and other creative accounting
The MLR formula allows certain quality improvement (QI) expenditures, if they meet defined criteria, to count toward the medical side. Insurers have increasingly stretched what qualifies as QI, labelling upgrades to IT systems, marketing or outreach, member-engagement programs, or fraud-prevention efforts as quality spending. Because those are still insurer overhead in many respects, this reallocation softens the effective cap on non-care spending.
In one dramatic case, the Department of Justice charged Inland Empire Health Plan, a Medicaid plan in California, with routing administrative costs—i.e., consultants, lawyers, IT contractors—through provider entities and claiming them as provider bonuses. The complaint alleges that some providers then passed money back to the insurer to pay consultants. These disguised payments, backdated to meet MLR thresholds, allegedly allowed the plan to avoid rebates by overstating claims. While that is an extreme example, it highlights how vulnerable the system is to accounting sleight-of-hand and how difficult it is to detect without deep audits or whistleblowers.
Shifting business to exempt or looser lines
Another accounting trick simply moves as much business as possible into lines not subject to the MLR rules. The ACA’s MLR rules apply to fully insured commercial individual and group plans, but not to self-funded employer plans. Because roughly two-thirds of workers in employer-sponsored coverage are in self-funded plans, many insurer profits now stem from managing those plans; profits that do not appear in MLR calculations at all. Insurers move activity into self-funded or lightly regulated lines because in those spaces market incentives operate more normally: profits are not capped, so there is no need to inflate medical spending artificially.
Similarly, MLR enforcement in Medicaid managed care depends on state contracts, and compliance mechanisms vary widely. CMS audits states but has found inconsistent oversight. In Medicare Advantage, the MLR and rebate regime is more robust—and thus failure has real consequences—but many of the same expansion strategies into provider-owned networks reduce the bite of MLR. In short, an insurer can flourish outside the lines the ACA draws.
More data from rebates, margins, and premiums
Government-compiled data show that MLR rebates, while meaningful, remain modest relative to the growth of premiums and insurer revenues. According to a Kaiser Family Foundation (KFF) brief, insurers issued about $1.1 billion in MLR rebates across all commercial markets in 2024. Since the ACA’s MLR rules first required rebates in 2012, over $12 billion in rebates has been issued to consumers. By comparison, the premium dollars flowing through the fully insured commercial market in a single year are in the hundreds of billions. That means the rebates represent a vanishingly small fraction of surplus premiums collected and are critically not growing with overall revenue growth.
As previously written, the MLR has a key mathematical flaw: because allowable administrative percentages are fixed, the only reliable path to higher absolute profit is to grow total premium dollars,not to improve efficiency. Like all publicly traded companies, insurers are driven by profits, which all but guarantees that insurers will seek higher premiums, not lower costs, under the MLR. Trend lines since 2015 confirm this forecast: premiums and gross margins per enrollee have both climbed even as nominal MLR compliance remains high.
In 2024, insurers paid approximately $1.1 billion in rebates across all market segments—translating to about $200 per enrollee—which is similar to the total rebates paid in 2023 ($950 million) and 2022 ($1 billion). Revenues dwarf these values, with UnitedHealth group alone reporting over $400 billion in total revenue. That’s less than half a percentage point of premium revenue going back to plan members in a market where many families’ budgets are already stretched by high premiums and deductibles. If affiliate transfers or inflated internal costs are pushing MLRs up artificially, rebates in that segment could—in principle—be much larger, but current rebate data suggest they are not. Instead, rebate volume remains small because the rule incentivizes insurers to keep medical spending artificially high—mainly through affiliate transfers—so they never breach the margin cap.
Margins tell a related story. A KFF analysis of insurer financial performance reported that gross margins per enrollee—i.e., premium minus claim cost—were highest in the Medicare Advantage market at about $1,982 per enrollee at the end of 2023, compared to $1,048 in the individual market. A high dollar margin per enrollee suggests that insurers have significant latitude in how they apportion premium dollars. Where MLR rules are exploited, that latitude can be captured via internal transfers or pricing between affiliates rather than visible investments in provider care.
Public company filings reveal UnitedHealth intercompany transactions
Publicly available investor disclosures show how big insurers are using internal transfers on a massive scale. UnitedHealth’s 2023 Form 10-Q and 10-K filings report large numbers of “eliminations” between its business segments, chiefly between its insurance arm (UnitedHealthcare) and its provider/services arm (Optum).
For the nine months ending September 30, 2023, UnitedHealthcare had consolidated revenues of $277.2 billion—$217.6 billion from premiums alone—up 15 percent from the prior year. Within that, the companion business Optum—which encompasses provider services, pharmacy benefit management through OptumRx, and other service arms—contributed $167.1 billion in revenue (up roughly 24 percent). Also noted was an “eliminations” line, both in Optum and in the consolidated UnitedHealth numbers, that reflects intercompany transactions which are subtracted to avoid double-counting. For example, Optum eliminations in that period were $2.7 billion, and total eliminations across UnitedHealth’s segments were $100.5 billion for those same nine months.
That $100.5 billion in eliminations represents nearly 36 percent of revenue for those segments over that period. Because these are internal transfers, they don’t generate net new revenue for the group, but when structured correctly they can be recorded by the insurer arm as claims or a medical-expense equivalent while the provider/pharmacy affiliate arm keeps the margin. Segment earnings show that UnitedHealthcare’searnings from operations were about $24.7B in those nine months, up from $21.5B in the previous period, suggesting that growth remains consistent while rebates remain constant.
Every dollar that appears as an internal medical expense to the insurer improves its MLR compliance while remaining within the corporate family. In a normal market, those dollars would be subject to competitive pressure; under MLR, they become tools of regulatory arbitrage.
Cross-market comparison & trends
Comparing across insurance markets reveals important disparities which illuminate how MLR evasion can stratify harm. In Medicaid managed care, insurer gross margins per enrollee are lower (about $753) compared to those in Medicare Advantage ($1,982) or in the individual market ($1,048) as of the end of 2023. That means insurers in Medicare Advantage collect more premium dollars above claims per person than in many other lines.
At the same time, the Medical Loss Ratio in the individual market is often near the minimum 80 percent threshold, sometimes dipping just below or just above, enabling insurers to avoid rebates. Loss ratios are lowest in that market among the ACA-regulated markets, which corresponds with both high premiums and high margins. The combination suggests that insurers in the individual market have more slack to generate internal transfers or cost shifting without triggering rebate obligations.
Another trend is enrollment growth in certain segments: the individual market has recently expanded enrollment by more than 20 percent in some reports. (For example, Mark Farrah Associates notes enrollment in the individual comprehensive segment grew to approximately 21.5 million members in 2024, up roughly 21 percent year over year.) When premiums rise and enrollment increases, the opportunity to extract more premium dollars or inflate internal transactions increases in absolute dollars.
Implications of the data
These numbers collectively strengthen the argument that the MLR, while formally in place, is under-stress: rebates are small relative to premium volume; margins per enrollee are large; internal transactions are massive; and regulatory oversight of affiliate transfer pricing remains thin. For lower- and middle-income workers, the distortion is especially damaging: premiums rise faster than wages and the system generates no pressure to deliver efficiency because higher costs can always be justified as “more care spending.” A free market disciplines firms for overspending whereas the MLR rewards them.
Further, MLR actually suppresses rebates, the explicit benefit that consumers receive when insurers fail to hit the threshold. If insurers inflate their medical spending just enough to stay above the threshold, they avoid having to return money. Because rebates in recent years have often been modest despite continued premium inflation, it suggests that much of the insurer’s upside is quietly retained. Some may complain these criticisms are overly speculative, but insurers could open their books to show exactly how intercompany elimination dollars are being spent in that case.
The misaligned incentives actively shift the cost burden on consumers and the government. Because insurers claim more of their spending is already on care, policymakers may feel less urgency to regulate prices or intervene. That gives insurers leverage in rate review, bargaining, and regulatory negotiations, wielding leverage over states, employers, and federal programs alike. Over time, this dynamic exacerbates inequality: wealth accumulates within large integrated firms, while lower- and middle-income households and small businesses buying health insurance plans absorb rising cost burdens.
Finally, the asymmetry is pernicious: the average consumer cannot tell which dollars are real care and which are internal transfers. They just see rising premiums, narrower networks, more denied care due to prior authorization barriers. Meanwhile, insurers tout compliance with MLR as a defensive shield. In effect, the MLR becomes a marketing ploy, a slogan that gives legitimacy to what is, in many cases, a façade.
Because lower- and middle-income households have less slack in their budgets, the “silent tax” of MLR evasion is disproportionately harmful to them. For a family just scraping by, an extra $100 or $200 in unseen cost is a real burden, whether it shows up as higher premiums, increased cost-sharing, or lower reimbursement in restricted networks.
These costs harm health care providers, too. Physicians have consistently seen decreasing reimbursement rates that do not match inflation. Increasing intercompany eliminations keep money within vertically integrated insurer conglomerates and prevent those dollars from flowing to policy holders and providers trying to provide care to their patients.
Policy reforms: Restoring the MLR’s consumer bite
If the MLR is to recapture its protective purpose, policymakers must proactively close the loopholes. What follows is a mix of incremental fixes and more structural reforms that are ambitious yet necessary:
Constrain affiliate pricing with arm’s length standards: One of the central fixes is to require arm’s length pricing rules for insurer-to-affiliate transfers. In effect, payments from insurers to any provider—including affiliates—should not exceed a benchmark, such as Medicare rates or regional average in-network rates. If a payment goes above that benchmark, the excess should be disallowed in MLR accounting. That would nullify the incentive to inflate internal transfers. Regulators should publish boundaries or safe harbors for these pricing limits.
To enforce this, carriers should be required to disclose related-party payments in granular detail: provider type, service category, transfer price, volume, and affiliate identity. Federal or state auditors should vet outlier payments. Persistent deviation from benchmarks should trigger fines or disallowance of MLR credit.
Tighten quality improvement definitions: CMS should limit what constitutes quality improvement spending more narrowly, reserving it for programs with measurable clinical impact and eliminating the ability to classify generic administrative or marketing line items. CMS should publish a “negative list” of ineligible QI expenditures, such as software upgrades, generic outreach, branding, and claims systems. Insurers should be required to justify each QI expense with metrics and verifiable outcomes, and regulators should audit those claims.
By shrinking what counts as a medical cost, more expenses are forced into the administrative bucket, triggering rebates or signaling to consumers and regulators when overhead is bloated.
Extend MLR-type rules to self-funded/administrative services: A major gap is the exemption of self-funded employer plans from MLR. One reform would apply a variant of MLR to administrative services only (ASO) contracts. If an insurer’s fee for administering a self-funded plan rises above a threshold—say, 15–20 percent of the total funding pool—the excess should be disclosed or remitted. Doing so would reintegrate a large share of insurer profits currently hidden from MLR oversight. For example, ASO contracts above a fee threshold could require rebates to the plan sponsor or reductions in administrative fees in future years.
Alternatively, Congress could require that fully insured and self-funded plans be evaluated on a unified total cost basis, including administrative fees and payments across provider ownership, so that insurers cannot “opt out” of oversight by shifting business.
Prohibit or limit vertical ownership: A bolder structural reform would restrict insurer ownership of care providers, PBMs, or pharmacies. Just as financial law sometimes separates commercial and investment banking, health policy law could separate insurance and care delivery to eliminate inherent conflicts. Under such a rule, insurer payments to provider entities would always be arm’s length, removing the easiest pathway for self-dealing.
Where outright prohibition is impractical, stricter antitrust enforcement should scrutinize mergers in the vertical chain. Regulators should block any acquisition that increases the share of insurer-controlled provider capacity beyond a threshold or that would materially increase affiliate payment flows or significantly decrease market competition.
Strengthen enforcement and penalties: Regulators must allocate resources for auditing and enforcement. The Department of Health & Human Services Office of Inspector General should prioritize audits of MLR compliance, especially for plans with integrated entities or high non-claims payments. Whistleblower rewards should be expanded to encourage insiders to report accounting abuse. States should partner with federal oversight in audit reciprocity.
More importantly, failure to comply with true MLR norms should carry real penalties beyond rebates. Persistent underperformance or evidence of self-dealing should lead to losing plan licenses, suspension of enrollment, or even fines tied to the amount of overreporting. In the Medicare Advantage context, insurers failing MLR repeatedly already face sanctions; analogous enforcement could be adapted for the commercial market.
Tiered or graduated MLR floors: Given the variation in insurer structure and market conditions, policymakers might consider graduated MLR floors that rise with level of integration. For example, insurers owning significant provider capacity might be required to meet an effective MLR of 88–90 percent, to compensate for their additional ability to internalize costs. Insurers without integration could remain at 80–85 percent. This would create a counter-incentive to consolidation: vertical insurers would have less room to hide overhead.
Public reporting transparency: To empower regulators, researchers, and consumers, insurers should publish detailed, line-item MLR reports that include how much went to provider payments broken out by affiliate vs non-affiliate, quality improvement, administrative overhead, marketing, and consolidated versus local costs. These reports should be standardized and machine-readable. Transparency alone won’t fix the incentives, but it makes abusive structures harder to conceal.
Rebate reform and consumer rescue funds: Given that rebates are modest and often diffuse, Congress could consider raising the rebate rate or converting it into a consumer-rescue fund. Alternatively, rebate checks could go straight to consumers—not employers—in group markets, preventing dilution or absorption by employers. And any rebates in future years should be required to target lower-income enrollees preferentially.
Counterarguments and risks…and why they don’t hold water
Some might argue that tightening MLR oversight will discourage insurer innovation or blunt the incentives to improve care delivery. Others may caution that vertical integration offers real efficiencies in areas like care coordination, shared IT systems, and population health. But true free markets require transparency and aligned incentives. The current system offers neither. Efficiency cannot be achieved when firms profit by increasing costs. Correcting this misalignment is not an intrusion into markets: it is a prerequisite for them to function.
Some integration yields value, including better coordination, reduced duplication, and shared data systems. But each integration must be tested, not assumed. The presence of affiliate transfers should not be presumed benign. That’s why policies must distinguish legitimate value-adding transfers from inflated self-dealing.
Others might claim that if the government forces insurers to reduce internal margins, premiums will rise or insurers will collapse. But this is unlikely at scale; most insurers already operate with substantial margins. Tightening the MLR would shift more burden back to care or to consumers in the form of rebates.
Finally, skeptics may warn that enforcement is too costly: audits, transfer-price review, and affiliate disclosures increase administrative burden. But in many regulated industries, such arm’s length accounting oversight is routine. Health insurers are no less deserving of scrutiny than banks, utilities or multinational corporations. The cost of oversight is a fraction of the dollars flowing through these systems, and the recuperation of billions for consumers is well worth it.
Reframing the debate: MLR as a regulatory safeguard, not a consumer right
Insurers today like to frame the MLR as a constraint on innovation, a nuisance that prevents them from investing in advanced care models. At the same time, many politicians like to frame it as a consumer right. But these framings are inverted. While some advocates describe the MLR as a right, it is more accurate to view it as a regulatory safeguard designed to prevent the misuse of captive premium dollars. The MLR is not the enemy; it’s the only real consumer check in an industry drowning in upward transfers and opaque consolidation.
Accepting insurers’ arguments implies that every internal markup is a legitimate investment in better care, but that is not reality. Insurers raise executive salaries, buy unrelated business lines, bankroll political influence, and hide profits behind affiliate accounting to improve their shareholders’ return. In such a world, the MLR is one of the last legal guardrails available. If policymakers allow insurance companies to neutralize MLR’s effectiveness, they effectively surrender the field to the most consolidated, financially powerful firms.
If these reforms were adopted, some integrated firms would likely see margins shrink. But that’s not necessarily a bad thing. If previous margins were built on internal arbitrage rather than improved care, then trimming them is correcting distortion, not penalizing innovation. Insurers should compete in truly open markets, driving better prices, better service, and more consumer surplus.
Conclusion
The Medical Loss Ratio was supposed to safeguard consumers. In theory, it would curb overhead and force insurers to channel premium dollars towards care or refunds. In practice, a small set of powerful, vertically integrated insurers have converted the MLR into a paper compliance instrument. Through internal transfers, affiliate pricing, cost reclassification, and shifting business into exempt lines, they’ve hollowed out the regulation’s meaning, all while touting compliance.
The consequence is subtle but real: particularly for households with limited income, these hidden profits erode affordability, suppress rebates, and redirect resources from care into corporate margins. The middle class pays for these corporate profits quietly, never aware of the transfers.
The lesson is not that regulation is always harmful, nor that insurers are uniquely villainous. It is that when policymakers attempt to fix margins, they often warp incentives while working families pay the price. True reform must restore competitive pressure, transparency, and accountability, so that the insurance market once again serves consumers rather than subsidiaries.