Loss ratio = (claims + activities to improve health care quality) / (premiums – total federal income taxes – state premium taxes and assessments + federal income tax on investment income)
The last piece of the denominator is just to reflect that while federal taxes can be deducted from the denominator, taxes paid on invest income cannot. “Activities to improve health care quality” has a fairly strict set of criteria for what can be included, defined in detail in the regulations.
There’s more to AB’s comment but it’s right at this point where he lost me in a sea of jargon and detail I don’t understand. I’m not saying it isn’t important! I just didn’t get the rest because it wasn’t in the equation. So, if you want the rest, see his comment.
UPDATE: A reader wrote in to say there’s a formula on page 185 of this document. So there is! And it’s got more in it than in AB’s formula so maybe it picks up some details AB was getting at. Here’s that formula:
Adjusted MLR = (c)/(p – t – f) + (b*d) + u,where c = incurred claimsp = earned premiumst = Federal and State taxesf = licensing and regulatory feesb = base credibility adjustment factord = deductible credibility adjustment factoru = low, medium, or high assumptions to account for quality improving activities, unknown behavioral changes and data measurement error