The ACA Rule That Accidentally Made Higher Health Care Costs Profitable

When the Affordable Care Act introduced the Medical Loss Ratio (MLR) rule in 2011, lawmakers believed they'd solved a fundamental problem with health insurance: runaway profits. The rule required insurers to spend at least 80% to 85% of premium revenue on actual medical care, capping their administrative costs and profits at 15% to 20%.

But 14 years later, as Americans see sharp premium increases in 2026 and enhanced ACA subsidies expire, a closer look at the MLR rule reveals an unintended consequence: the very mechanism designed to control costs may be rewarding insurers when health care spending rises. The math shows why.

The MLR rule creates a straightforward mathematical relationship: Insurer Profit = Total Premiums × 0.15 (for the 85% MLR threshold). More generally, profit and overhead combined equal total premiums multiplied by one minus the MLR percentage. This formula shows the paradox.

If this incentive exists, are insurers responding to it? The evidence points in that direction, though the picture is complex.

Weakened cost containment incentives. The MLR rule weakens the financial payoff of marginal investments in care management programs: provider negotiations, utilization review and chronic disease management. Care management programs cost money and directly reduce claims spending. Under the MLR structure, intensive care management eats into the 15% to 20% available for overhead and profit. Accepting higher provider rates doesn't.

Vertical integration and related businesses. Major insurers have bought pharmacy benefit managers, physician practices and other health care services. This matters because payments made to these related companies still count as "medical claims" under the MLR calculation, even though some portion represents profit for the parent company. UnitedHealth's acquisition of Optum, Cigna's purchase of Express Scripts and CVS's acquisition of Aetna show this trend. Claim approval patterns also vary across insurers and states, affecting how much care patients actually receive.

The rebate reality check. The MLR rule generates billions in rebates when insurers miss the 80% to 85% threshold. In 2025, carriers distributed rebates for 2024 performance, ranging from $20 to $164 per enrollee on average, depending on plan type, according to CMS Medical Loss Ratio data. But rebates only trigger when insurers don't spend enough on claims. Rebates are reactive, not preventive.

An early National Bureau of Economic Research (NBER) study examining the 2011 to 2013 period showed insurers increased medical claims costs by an average of 7%, with some rising as much as 11% over two years, though attributing precise causation remains debated given concurrent market changes.

Have insurer profits grown since 2011? Long-term trends show sharp increases:

• UnitedHealth Group: $4.5 billion (2011) to projected $14.9 billion+ (2025), a 231% increase
• Cigna Group: $1.5 billion (2015) to projected $7.6 billion (2025 annualized from Q3), up from $2.96 billion the prior year
• Humana: $1.3 billion (2011) to Q3 2025: $195 million (down 60% year over year due to Medicare Advantage pressures)
• Elevance Health: $2.5 billion (2013) to Q3 2025: $1.2 billion (up 17.8% year over year)

These trends don't imply the MLR rule caused profit growth. Multiple factors contribute, including enrollment increases (Medicare Advantage grew from 32 million enrollees in 2011 to over 90 million in 2025), operational efficiencies and strategic acquisitions. But the MLR rule shapes how profits respond to rising costs. When health care spending increases, the mathematical formula ensures insurers capture a fixed percentage of that growth, reducing the incentive for insurers to fight it.

Health economists cite structural forces that raise costs independent of the MLR rule.

Provider consolidation gives hospital systems stronger negotiating leverage. Hospital prices in concentrated markets run 15% to 30% higher than in competitive ones. Drug prices have increased. Specialty medications represent over 50% of drug spending despite comprising less than 2% of prescriptions. Health care costs rise 2 to 3 percentage points faster than general inflation annually, driven by technological advances, labor costs and administrative complexity. Medicare enrollment will reach 80 million by 2030, and chronic conditions affect over 60% of adults.

Research attributing cost growth to these drivers acknowledges the incentive misalignment in percentage-based ratios. The Center for American Progress found in October 2025 that vertically integrated insurers can skirt MLR rules through related-party transactions. RAND Corporation research found the rule leads to higher premiums in certain market conditions.

The MLR rule doesn't operate in isolation. It amplifies existing cost pressures by removing a countervailing force.

In theory, competition between insurers should prevent them from letting costs spiral. In practice, several factors limit competition's effectiveness.

If the MLR creates perverse incentives, what's the alternative? Health economists have proposed several options, ranked by feasibility:

Most feasible

• Restrict medical claims counted for MLR purposes, especially related-party transactions. Require transparent reporting of payments to subsidiaries at fair market rates. This closes the vertical integration loophole without restructuring the entire rule.
• Increase regulatory oversight of transfer pricing between insurers and their owned entities. Enhanced oversight gives regulators enforcement power without requiring legislation.

Moderate feasibility

• Change the MLR formula from percentage-based to a fixed-dollar amount per enrollee or tie it to health outcomes and cost-efficiency benchmarks. Changing the formula removes the incentive to let total costs grow but requires regulatory rulemaking.
• Strengthen antitrust enforcement against both insurer and provider consolidation to reduce market concentration and make competition work better.

Lower feasibility (structural changes)

• Separate insurance from delivery by preventing insurers from owning providers, PBMs or other health care businesses. This is politically difficult and would require major industry restructuring.

None of these are quick fixes, and all involve political and practical challenges. But they point to the underlying issue: the MLR rule, as currently structured, creates incentives that work against cost control rather than for it.

The Medical Loss Ratio rule aimed to limit insurer profits and direct premiums toward actual care. The rule's percentage-based structure creates an unintended consequence: insurance companies increase absolute profits when health care costs rise, not just when they operate more efficiently.

Insurers aren't behaving illegally. They respond rationally to the incentives the rule creates. The rule's misalignment prevents it from controlling costs as intended.

Evidence since 2011 shows sharp insurer profit growth alongside rising premiums. Isolating the MLR rule's causal impact proves difficult because multiple factors influence these trends. The math is straightforward: a percentage-based profit cap on a growing expense base means absolute profits grow with costs.

This incentive structure explains why health insurance premiums keep climbing relative to family budgets. Premiums rose 26% over the past five years while wages grew 28.6%, but the recent acceleration in premium growth and the absolute level of premiums leave many households feeling squeezed.

MoneyGeek analyzed the Medical Loss Ratio rule's impact on health insurance costs and insurer profitability using publicly available financial data, regulatory filings and peer-reviewed research from 2011 (when the MLR rule took effect) through November 2025.

Scope of Analysis

This article examines financial data from the four largest U.S. health insurers: UnitedHealth Group, Cigna, Humana and Elevance Health, which collectively cover approximately 120 million Americans and represent 40% of the U.S. health insurance market.

Data Sources

Insurer financial data: Profit figures come from SEC filings (10-Q and 10-K reports) for 2011 to 2025, analyzing net income trends, medical loss ratios and enrollment data.

Premium and claims data: Data comes from Kaiser Family Foundation's annual Employer Health Benefits Surveys (2015 to 2025) and CMS Marketplace Open Enrollment files.

MLR compliance data: Rebate information comes from CMS's Medical Loss Ratio Data and System Resources.

Economic data: Wage growth data from the Bureau of Labor Statistics reports; health care spending projections from CMS National Health Expenditure Data.

Market concentration data: Market concentration figures from the American Medical Association's annual Competition in Health Insurance reports.

Calculation Method

Our MLR incentive calculations use the formula: Insurer Profit = Total Premiums × (1 - MLR Percentage). We calculated compound annual growth rates for net income from 2011 through 2025, adjusting for major corporate events. Q3 2025 figures were annualized using company guidance. Premium vs. wage comparisons use cumulative percentage increases over matching time periods (five-year comparisons use 2020 to 2025 data).

Research Framework

Our analysis draws on peer-reviewed economic research, including National Bureau of Economic Research working papers examining post-MLR market behavior (2011 to 2013), RAND Corporation studies on unintended regulatory consequences and Journal of Health Economics analyses of insurer claims management strategies. The interpretation of these market effects remains debated among health economists.

Validation

All figures were cross-checked against KFF benchmark reports, CMS publications, SEC filings and company earnings releases. Data reflect information available as of November 17, 2025.

Limitations

Causation vs. correlation: This analysis documents the mathematical incentive structure and presents empirical evidence of insurer profit growth and premium increases. But isolating the MLR rule's specific causal impact is difficult given multiple concurrent factors (provider consolidation, pharmaceutical prices, demographic changes, utilization patterns and other regulatory changes).

Attribution challenges: Insurer profitability comes from enrollment growth, operational efficiencies and strategic acquisitions, not just the MLR incentive structure.

Market variation: The analysis focuses on national trends and the four largest insurers. Market dynamics vary by state, region and market segment.

Subsidy impact: Premium figures for ACA marketplace plans represent gross (pre-subsidy) rates. Approximately 92% of Marketplace enrollees receive federal premium tax credits that reduce actual out-of-pocket costs.