Medical loss ratio: the share of a plan or broker payment that must go to services

Medical loss ratio measures how much of the money a plan takes in goes back out as care. In the federal Medicaid formula, what a health plan pays providers for covered services counts as care, and what it keeps for overhead and margin does not. So an MLR rule, where one applies, puts a floor under how much of a capitation payment reaches services. How the per-member payment itself works is covered under capitation.

How the ratio is figured

42 CFR 438.8 sets the Medicaid formula. The numerator is incurred claims plus spending on activities that improve health care quality and on fraud prevention. The denominator is premium revenue, mostly the state’s capitation payments, minus taxes and licensing and regulatory fees.

The definitions decide which side a payment lands on:

• Counted as claims. Payments to providers for covered services, including under capitated contracts with network providers, plus approved in lieu of services.
• Counted as overhead. Fees paid to outside vendors for network development, administration, claims processing, or utilization management.
• Split. A payment that is partly one and partly the other is pro-rated between the two.

Plans must report the result to the state within 12 months of the end of each reporting year. Any vendor that adjudicates claims for a plan must hand over the underlying data within 180 days after the year ends, or 30 days after the plan asks, whichever is sooner.

The 85 percent standard in Medicaid

The federal number is 85 percent, and it works in two ways. First, under 42 CFR 438.4(b)(9), capitation rates must be set so a plan could reasonably reach at least 85 percent. Second, a state may impose a minimum, which has to be 85 percent or higher, and may require a plan that misses it to pay a remittance. When that happens, 42 CFR 438.74 has the state return the federal share to CMS.

Small plans get some slack. A plan whose enrollment is too small for its results to be statistically reliable is presumed to meet the standard, and partly reliable plans may add a credibility adjustment.

Why ride-only brokers sit outside it

A broker that provides only NEMT under a state contract and is paid by capitation is a NEMT prepaid ambulatory health plan. Only the rules named in 42 CFR 438.9 reach it. That list includes actuarial soundness but expressly leaves out 438.4(b)(9), and 438.8 is not on it at all. So federal law sets no MLR for these brokers. A full health plan with rides in its benefit package is a different case: its MLR counts payments for covered rides as claims, while administrative fees it pays a ride vendor count as overhead.

States have filled the gap two ways:

• Kentucky, by statute. House Bill 2 (2026) sets MLR floors for the regional brokers: 85 percent for the year that began July 1, 2026, climbing to 87 percent, 89 percent, and finally 90 percent from the year beginning July 1, 2029. A broker below the floor returns the excess capitation. More on that law is in the FTSB broker guide.
• Arkansas, through its broker bid. Section 2.30.L of the state’s June 2025 bid solicitation for broker contracts sets a minimum service cost. A broker whose service spending per member per month comes in under 95 percent of the actuary’s targeted figure owes the state the gap times its member months.

For a subcontractor, either rule means money not spent on service goes to the state instead of staying with the broker. That is a fair point to raise in rate talks with a broker.