Loot bags? Is that new? It used to be only treasure chests.
For the chests, it basically bumps up the quality of items found by one level. White become green, green become blue, blue become purple, you get the idea. It also seems to give more items per chest and a better chance to get set items.
It doesn't say loot bags anywhere. It will bump up chests a tier but I don't think it affects loot bags at all unless something has changed this update.