Medical Loss Ratio Rules Limit Insurer Profits. Here’s How They Work.

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The nation’s largest health insurer spent more than 92 cents of every premium dollar on medical claims in the fourth quarter of 2025. UnitedHealth Group’s 92.4 percent care ratio—how much of your premium money goes to actual medical care—is approaching the legal maximum that could trigger penalties under federal law established more than a decade ago, limits designed to prevent insurers from pocketing too much of your premium money.

The Centers for Medicare & Medicaid Services proposed flat payment rates for Medicare Advantage plans in 2027. This collision of rising costs and stagnant payments raises a practical question: What happens when the rules limiting profits meet an environment where profits are already squeezed?

The 80/85 Rule: How It Works

The rule requiring insurers to spend a minimum amount on care emerged from a specific frustration. Before the Affordable Care Act, insurers could spend premium dollars however they wanted—on marketing, executive compensation, broker commissions, shareholder dividends—with minimal constraint.

An insurer collecting $1 billion in premiums and spending $850 million on claims and quality improvements hits exactly 85 percent—the minimum for Medicare Advantage. Spend only $800 million, and you owe $50 million back to enrollees.

The regulation calculates compliance using an average of the last three years combined, not annual snapshots. An insurer can have a terrible claims year—say, 90 percent of premiums going to costs—and still avoid rebates if the prior two years were better. This smoothing mechanism recognizes that spending lurches unpredictably, especially for smaller insurers where a few expensive cases can swing the numbers dramatically.

What counts as “care” has been the subject of extensive regulatory definition. Direct claims payments obviously qualify. So do certain quality improvement activities: care coordination programs that reduce hospital readmissions, patient safety initiatives, information technology that improves care transparency, evidence-based disease management. What doesn’t count: fraud detection, general cost containment, broker commissions. The regulations prevent insurers from inflating their spending ratios through questionable methods.

UnitedHealth’s Numbers Tell a Larger Story

For the full year 2025, UnitedHealth’s care ratio, after adjustments, hit 88.9 percent, up from 85.5 percent in 2024. That’s a 3.4 percentage point increase in a single year.

The company attributed this to higher healthcare service utilization throughout 2025 across multiple service categories. The Inflation Reduction Act’s prescription drug provisions—allowing Medicare to negotiate prices and capping beneficiary out-of-pocket costs—created new cost pressures on Part D benefits.

None of these factors appears temporary. This is the new baseline.

The Medicare Advantage Squeeze

The CMS rate announcement creates pressure for UnitedHealth. Medicare Advantage operates on fixed monthly payments per person—CMS pays plans a set amount per enrollee, adjusted for status. When that amount stays flat while costs rise, profits disappear.

CMS justified the minimal increase by pointing to changes to how CMS adjusts payments based on patient health. More significantly, CMS wants to exclude diagnosis codes that don’t match what patients actually came in for from calculations starting in 2027.

This change targets what critics call manipulating billing codes to get higher payments: sophisticated insurers mining records for diagnosis codes that increase their scores and payments, regardless of whether those diagnoses affect current care. Industry analysts identified UnitedHealth, with its large Medicare Advantage network and advanced data analytics, as potentially the most affected.

For seniors in markets where UnitedHealth exits, this means fewer plan choices.

What’s Driving Costs Across the Industry

UnitedHealth isn’t alone in reporting elevated care ratios. These figures consistently exceed the levels that had become standard over the prior five years.

Mental health and substance abuse treatment use has surged. This reflects genuine increases in mental health needs and substance use disorders, particularly post-pandemic, but the scale has caught insurers off-guard.

Pharmaceutical spending presents another pressure point. Drugs like Ozempic and Wegovy have exploded from relative obscurity to comprising a significant portion of pharmacy spending. These medications cost substantially more than traditional diabetes treatments, and their expanding use from diabetes to obesity and other conditions means utilization continues accelerating. For Medicare Advantage plans where the insurance plan also handles prescription drugs, this creates massive exposure.

Hospital and ambulatory utilization has risen broadly. Inpatient admissions are up, with higher severity and complexity of admitted cases. Total volume across all settings remains elevated—not moving procedures from hospitals to other facilities, but genuine utilization growth.

Insurers could negotiate lower prices with doctors and hospitals to address price-driven inflation. Utilization-driven inflation requires making it harder for people to get care through approval requirements, deciding which doctors and hospitals are in the plan—tools that directly affect patient access to care.

Does the MLR Protect Consumers?

The Medical Loss Ratio has existed long enough now—since 2011—that we can evaluate whether it works as intended. The answer is genuinely mixed.

Critics argue the MLR has fundamentally distorted insurers’ economic incentives. Because the rule fixes a percentage rather than an absolute dollar limit on profits, an insurer can increase its total profit by allowing premiums to rise faster than costs—maintaining the ratio while earning higher dollar profits.

This creates a perverse incentive structure. Efficiency isn’t rewarded. Cost reduction isn’t prioritized. Raising overall premium levels increases the profit base while maintaining regulatory compliance.

Insurance companies that also own hospitals, pharmacies, or doctors can exploit this further. When an insurer owns a pharmacy, it can pay itself inflated prices, counting these payments as medical spending while keeping the profit within the corporate family. This satisfies the MLR mathematically even though it inflates total costs without improving patient care.

Despite nominally spending 85 percent on care in Medicare Advantage, plans retain 15 percent for administrative costs and profit. In a market exceeding $350 billion in annual premiums, that 15 percent represents over $50 billion.

Defenders counter that an insurer maintaining exactly 85 percent MLR is retaining 15 percent for legitimate administrative expenses and reasonable profit—which may be economically justified given the capital, risk management, technology infrastructure, and expertise required to operate effectively. From this perspective, the MLR functions as designed: preventing excessive profit extraction while preserving incentives for competitive markets to operate.

How These Pressures Affect Patient Access and Benefits

The intersection of elevated costs, constrained payment growth, and regulatory pressure on margins creates specific risks for consumers.

When insurers respond to margin pressure through benefit reductions or access restrictions, Medicare Advantage members could face higher cost-sharing, narrower networks, or reduced supplemental benefits like dental and vision coverage. Some analysts flag the possibility that insurers might implement monthly charges on top of what Medicare pays for the first time on a significant scale, despite plans historically emphasizing zero-premium offerings.

For individuals in commercial markets, the experience may differ by market power. Large employers with substantial bargaining leverage can demand service quality and broad networks; they won’t easily accept benefit reductions or access restrictions. Small groups and individuals in the non-group market face less leverage. When insurers seek to improve margins by restricting access or limiting networks in these segments, smaller purchasers bear the consequences while larger employers remain protected.

The MLR requirement provides some protection here. Reducing spending too aggressively and allowing it to fall below the threshold triggers rebates. This creates a floor below which cost-shifting can’t proceed without triggering refunds.

But the floor is set at the regulatory threshold—80 to 85 percent depending on market—rather than at some optimal level for consumer protection. Averaging spending over three years instead of looking at each year alone means aggressive cost-shifting in any single year might not trigger rebates if prior years’ high spending creates sufficient cushion.

The Regulatory Environment Is Shifting

CMS’s 2027 rate proposal, with its emphasis on modernizing the system that adjusts payments based on how sick patients are and eliminating diagnosis codes not connected to actual patient visits, represents a significant policy statement about agency priorities: improving payment accuracy, preventing manipulating billing codes to get higher payments without improving care, ensuring program sustainability.

The comment period on these proposed changes extends through February 25, 2026, with final rate announcement due no later than April 6, 2026.

The Trump administration, which took office in January 2026, has signaled different priorities regarding Medicare Advantage regulation. Early signs suggest the administration favors insurers more than the prior administration, raising possibilities of delays or modifications to some CMS-proposed adjustments.

However, the fundamental arithmetic of flat payment growth combined with rising costs will persist regardless of which specific coding practices are permitted. The margin pressure continues.

Beyond Medicare Advantage, discussion of the broader MLR requirement itself appears limited in current policy debates. Insurers haven’t aggressively lobbied for threshold reductions—likely recognizing this would generate substantial political opposition. Consumer advocates have focused more on separate issues: requiring insurance approval before getting care, surprise billing, how middlemen control drug prices.

Why Costs Keep Rising

The United States spends twice as much per person on care as comparable developed nations, with too many middlemen taking cuts and prices that are too high representing substantial portions of the differential.

Doctors and hospitals face higher labor costs, equipment costs, and operational expenses. They have sought and obtained higher reimbursement rates. Mental health and substance abuse treatment use has increased as awareness and access improve but also as underlying challenges intensify. Drug companies have created new, much more expensive treatments, many addressing conditions for which treatment was previously unavailable or limited.

The aging population means the percentage of Americans over 80 will increase from 3.8 percent in 2017 to an estimated 5.2 percent by 2029, naturally driving more healthcare use and higher costs.

These structural forces are largely beyond any individual insurer’s ability to control. UnitedHealth, CVS Health, Cigna, Elevance, and other major companies can manage costs through deciding which doctors and hospitals are in the plan, provider contracting, care management, and benefit design, but they can’t fundamentally alter the underlying cost environment.

The elevated care ratios observed across the industry in 2024 and 2025 reflect external cost pressures as much as any insurer-specific management challenges.

The Coming Months Will Reveal Whether Margins Can Hold

UnitedHealth has committed to reducing its care ratio by approximately 0.3 percentage points in 2026 through cutting costs and tightening operations. Achieving this target will likely require some combination of shrinking the list of doctors and hospitals covered, expanding requirements for insurance approval before getting care, changing what the insurance plan covers, and programs to discourage people from seeking care.

Analysts divide on whether such improvements are achievable given underlying cost trends. Some project that utilization will naturally moderate from pandemic-elevated levels as things settle into a new normal. Others argue the utilization elevation reflects structural changes—expanded behavioral access, more people with chronic diseases, new types of treatment—that will persist indefinitely rather than reverting to prior patterns.

For Medicare Advantage specifically, the key uncertainty is whether the Trump administration’s apparent friendliness toward insurer interests will translate into policy changes reducing the impact of CMS’s proposed modifications. Should the proposed changes proceed as announced, insurers like UnitedHealth face real margin pressure beyond what current earnings guidance reflects. Should modifications occur—through administrative action or Congressional intervention—insurers would face a somewhat more favorable operating environment.

The broader question for policymakers is whether the MLR requirement, as currently structured, adequately protects consumers and constrains insurer excess in an environment where costs grow faster than payment growth and premium increases. When insurers respond to margin pressure through benefit reductions, access restrictions, or member cost-shifting, are the regulatory protections sufficient?

Alternatively, permitting reasonable insurer margins may be necessary to maintain a viable market and ensure product availability and stability. From this perspective, the current framework may be functioning appropriately.

These involve value judgments about the balance between insurer profitability, patient access, provider compensation, and overall system sustainability.

UnitedHealth’s fourth-quarter earnings and the industry-wide pattern they reflect have reopened these questions in concrete terms. The conversation about how much insurers should profit, and what regulatory tools best constrain excess, is playing out in real time through corporate decisions about membership reductions, benefit design, and cost management that affect millions of Americans’ access and affordability.

The Medical Loss Ratio was designed to ensure that at least 80 to 85 cents of every premium dollar goes to care. The rule lets insurers keep 15-20 cents per dollar. That’s tens of billions annually. Is that too much? One that will be answered not by regulators in Washington, but by the experiences of ordinary Americans trying to get care.

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