Ah, yes, administrative costs within the medical organizations are presumably paid by passing those costs on to (payers including) insurance companies as "medical costs" and that is presumably counted in the M in the MLR (I could imagine a system that avoids it - at, ironically, the cost of some more paperwork - but I don't expect it's what we do).

It is true that the MLR cap does nothing to motivate insurance companies to avoid increasing hospital paperwork. I don't see that it produces incentive to create it - yes, increasing payments to hospitals increases allowable profit, but in order to make that profit you need sufficient revenues and customers aren't paying because they want hospitals to do paperwork. I'm of a mind that (at the margin) increasing legitimate (or nearly legitimate) medical spending is typically pretty easy so there is no need to find alternative ways of paying hospitals more; if I'm mistaken about that then you raise an important point that probably deserves attention (if it hasn't got it in some way I'm unaware of).