Navigating the Rising Impact of Medical Loss Ratio and How Payers Can Get Ahead

Health plans are facing mounting pressure to maintain a sustainable Medical Loss Ratio (MLR) — the percentage of premium revenues spent on clinical services and quality improvement. As medical costs outpace premium growth and regulatory requirements evolve, payers must rethink how they manage financial performance without compromising member health outcomes.

For payer executives, the challenge is not only controlling costs but also building the agility to anticipate risk, adapt to regulatory policy changes, and demonstrate value to their clients in an increasingly competitive marketplace.

Top Drivers Increasing MLR

The forces driving MLR higher range from inflationary medical costs to utilization trends, pharmacy spend, and regulatory reforms. Each of these pressures compounds the complexity of managing sustainable margins across lines of business.

Rising Medical Costs

Medical expenses are growing at their fastest rate in more than a decade, with commercial group spending projected to rise 8% and individual market spending 7.5%. Increased utilization in Medicare Advantage and Medicaid - particularly for post-acute and specialty care - continues to drive cost acceleration.

High-Cost Prescription Drugs

The widespread adoption of GLP-1 drugs such as Ozempic and Wegovy for chronic disease management is reshaping pharmacy budgets. While clinically beneficial, their high recurring costs significantly affect payer MLRs. The Inflation Reduction Act’s elimination of coinsurance for catastrophic drug coverage has also led to higher utilization of expensive therapies.

Behavioral Health Utilization

Demand for mental and behavioral health services has grown exponentially since the pandemic, outpacing growth in reimbursement. This increased utilization, combined with behavioral health provider shortages, drives higher claims costs and complicates network management.

Medicaid Redeterminations

The unwinding of pandemic-era continuous enrollment has led to large-scale Medicaid disenrollments, disproportionately affecting lower-risk members. As a result, plans are managing smaller, higher-acuity populations—raising per-member costs and inflating MLRs.

Regulatory Changes

Recent CMS changes—especially the V28 risk adjustment model—have reduced payments to Medicare Advantage plans. Larger payers like UnitedHealthcare have reported significant impacts, reflecting how federal policy shifts can quickly impact financial performance.

Top Drivers Increasing Medical Loss Ratio (MLR) in 2025

Source: Beckers

Major Challenges in Managing MLR

As MLR pressures intensify, payers face several structural and operational challenges that constrain flexibility. Competitive markets, lagging premium rate adjustments, and regulatory complexities make it challenging to align revenue with rising costs.

Premium Deficiency

In many cases, particularly for Medicare Advantage products, collected premiums no longer fully cover growing medical costs. The result is an increasingly thin margin environment, limiting investment in innovation and member programs.

Limited Ability to Raise Premiums

Regulatory constraints and competitive pressure limit how much payers can offset costs through rate increases. Plans must therefore find internal efficiencies and new levers to maintain profitability.

Non-Medical Benefit Expansion

Investments in social determinants of health—like food, housing, and transportation—improve long-term outcomes but add short-term expense without immediate MLR relief.

Policy Uncertainty

Uncertainty around federal programs—such as the potential expiration of ACA premium subsidies and scrutiny of Pharmacy Benefit Managers (PBMs) - makes financial forecasting increasingly complex.

Delayed Rate Adjustments

For Medicaid plans, state rate revalidations often lag behind claims experience, creating a misalignment between capitation payments and member acuity.

Major Challenges in Managing MLR

Source: Beckers

Key Mitigation Strategies

To offset these pressures, payers must embrace a more agile, analytics-driven approach that aligns medical management initiatives with financial strategy and forecasting. The following strategies are helping leading plans manage MLR more effectively in the coming year.

Leveraging Technology to Advance Value-Based Care Models

Payers need to accelerate the transitioning from fee-for-service to value-based care to align financial incentives with outcomes, improving care efficiency and cost predictability. By rewarding providers for quality and prevention rather than volume, payers can influence utilization and drive sustainable improvements in their MLR.

Strengthening Care Management Programs

Payers need to focus their efforts on efficiently evaluating and identifying members ready to engage to help reduce unnecessary hospitalizations and improve adherence among high-risk members. The use of predictive models, along with micro segmentation, intelligent routing, and driving next-best actions, will positively influence MLRs. This is especially the case when using predicitive models that identify members at risk for pre-term birth - preventing costly NICU stays and avoiding the socio-economic costs for these families. 

Controlling Pharmacy Costs

There are several strategies for controlling pharmacy costs. Payers can implement prior authorization strategies utilizing technology solutions that will guide step therapy initiative. They should also consider implementing formulary management, negotiating better rebates, and leveraging biosimilars to offset rising drug costs. Predictive analytics will identify members most likely to require high-cost therapies, supporting earlier intervention and cost containment.

Leveraging Predictive Analytics for Risk Adjustment

Advanced risk scoring and predictive modeling can improve accuracy and ensure appropriate reimbursement - especially important given CMS’s V28 model of the Hierarchical Condition Category (HCC) risk adjustment model. By using AI-driven insights, plans can identify risk gaps sooner and act before revenue is lost.

Enhancing Member Engagement and Retention

Engaged members are healthier, take accountability for their own care, and are less costly to manage. The use of technology strategies such as digital tools, personalized communication, and incentive-based wellness programs drive better engagement, helping to manage MLR by reducing preventable utilization and improving health outcomes.

Key Strategies to Mitigate MLR

Source: Beckers

The Path Forward - How Vital Data Technology Can Help

For payers, the future of MLR management depends on the use of powerful and cutting-edge technology that will enable innovation, moving medical management strategies from inefficient retrospective analyses to targeted real time action. Vital Data Technology makes the difference. Our Affinitē platform delivers AI-powered predictive insights and intelligent automation that help payers identify emerging risks, optimize risk adjustment, and intervene to prevent costs from escalating. By integrating predictive analytics directly into operational workflows, Affinitē enables:

• Earlier identification and prediction of high-cost claimants and at-risk members.
• Proactive care coordination that reduces unnecessary utilization.
• Automated workflows that streamline clinical and administrative processes.
• Continuous regulatory agility that ensures compliance with CMS and state requirements.

In an environment defined by financial pressure and regulatory complexity, actionable intelligence is no longer optional - it’s essential. Vital Data Technology helps health plans transform insight into impact, driving measurable improvements in both member outcomes and financial performance.