The Hidden Loophole in the Medical Loss Ratio

By Dr. Esther Smith

Editor’s Note:This article is part of the Hawai‘i Provider Shortage Crisis Task Force’s ongoing series examining policies that influence healthcare access and equity across the islands. Dr. Esther Smith analyzes how federal spending regulations, initially intended to protect patients, may inadvertently contribute to Hawai‘i’s worsening provider shortage.

Ensuring Care, Not Overhead

The Affordable Care Act established the Medical Loss Ratio (MLR), mandating that health insurers allocate at least 85% of each premium dollar to medical care and quality improvement, with no more than 15% permitted for administration and profit.This policy was designed to ensure that healthcare spending prioritized patient care over administrative costs.

However, insurers have identified methods to comply with the regulation superficially by outsourcing substantial administrative functions to mainland vendors and categorizing these payments as “medical expenses.”Consequently, these expenditures are excluded from the 15% administrative cap, transforming an intended safeguard into a significant regulatory loophole.

How the Loophole Works

The MLR was intended to protect patients by restricting insurer expenditures on overhead. Yet, federal regulations permit insurers to categorize “medical management” and “quality improvement” activities as medical spending.

When insurers contract with companies to review prior authorizations, manage imaging services, or process prescription rebates, these expenses are classified as “medical care.” As a result, they are not subject to the 15% administrative limit, despite the fact that these entities do not deliver direct patient care.

Although financial reports indicate that insurers allocate 85% of their revenue to patient care, in practice, a substantial portion of these funds is redirected to mainland corporations that determine whether Hawaiʻi providers may deliver specific treatments.

Where the Money Goes

Numerous companies now receive a share of Hawaiʻi’s healthcare expenditures:

• Prior Authorization & Utilization Management Vendors such as Evolent Health, AIM Specialty Health, eviCore, and Magellan Health, which determine whether a patient may receive imaging, procedures, or specialty care.

• Pharmacy Benefit Managers (PBMs) including CVS Caremark, OptumRx, and Express Scripts, who set drug formularies and retain billions in manufacturer rebates, booked as medical spending rather than profit.

• Specialty Benefit Managers such as Avalon, RadMD, and New Century Health, which manage laboratory, oncology, or radiology services.

• “Value-Based Care” Companies like Agilon, Aledade, and Signify Health, which insert new layers of performance contracts and analytics while collecting management fees categorized as “clinical improvement.”

Each of these organizations receives revenue from the 85% of premium dollars that were originally designated for physicians, hospitals, and direct patient care.

The Cost to Hawaiʻi

Funds allocated to out-of-state contractors represent resources that are not invested in Hawaiʻi’s healthcare infrastructure, which remains fragile.

While rural hospitals struggle to hire physicians and local clinics close under the weight of uncompensated care, millions of dollars leave the islands each year to pay for “management” services headquartered thousands of miles away.

This structure results in a significant economic outflow, as funds intended to support local care providers are instead directed to national corporations whose business models rely on denying or delaying care.

As a result, Hawaiʻi’s healthcare funds are effectively exported and converted into administrative revenue for mainland corporations, while local physicians experience burnout and patients face extended wait times for treatment.

Charting a Path Forward

If Hawaiʻi hopes to achieve sustainable access to care, it must:

1. Require transparency in how insurer expenditures are classified, distinguishing direct care from administrative outsourcing.

2. Re-evaluate “medical management” definitions so mainland vendors’ contracts cannot be counted as medical spending.

3. Reinvest locally, directing savings toward provider pay equity, rural recruitment, and the care infrastructure that sustains communities.

4. Prioritize in-state decision-making, ensuring that utilization review, prior authorization, and quality programs are designed by those who understand Hawaiʻi’s people and culture.

Restoring the Spirit of the Law

The Medical Loss Ratio was intended to ensure that healthcare dollars are spent on patient care. Instead, it has become a mask for an administrative economy that drains resources from the system it was meant to protect.

To fulfill the law’s promise, Hawaiʻi must redefine “medical spending” to mean actual care, not the layers of review, denial, and delay that masquerade as quality improvement.

Only then can we ensure that the money Hawaiʻi residents pay for healthcare stays in Hawaiʻi, strengthening the physicians, hospitals, and communities that care for them.