What is the Medical Cost Ratio (MCR)?
The medical cost ratio (MCR), or the medical loss ratio, is a private health insurance industry metric. The ratio is calculated by dividing an insurer’s medical expenses by the total insurance premiums collected. A lower ratio indicates the insurer is more profitable, indicating that more premiums are left over after paying customer insurance claims.
The Affordable Care Act (ACA) requires insurers to devote 80% or more of their insurance premiums to medical expenses or other services that improve healthcare. 1 Insurers who fail to meet this standard must return any excess funds to customers. Based on data filed through October 16, 2020, these rebates totaled nearly $2.46 billion in 2019.
The Medical Cost Ratio (MCR) in Action
Customers pay premiums to medical insurers in exchange for assuming liability for funding future medical insurance claims. The insurer reinvests the premiums it receives, resulting in a return on investment. To be profitable, the insurer must collect premiums and generate investment returns that exceed both claims on its policies and fixed costs.
The medical cost ratio (MCR) is a critical metric that insurance companies monitor. The formula for calculating this metric is to divide the total amount of premiums collected by the total amount of medical expense claims paid. A higher figure indicates lower profitability when expressed as a percentage because many of the collected premiums are redirected to fund customer claims.
A lower number, on the other hand, indicates higher profitability because it shows that substantial premiums are left over after covering all claims. Insurance companies that sell large plans (typically with more than 50 insured employees) must spend at least 85% of premiums on healthcare. This means that their MCR cannot be less than 85%. Small employer and individual plan insurers must spend at least 80% of premiums on healthcare, implying that their MCR cannot be less than 80%. The remaining 20% can be used for administrative, overhead, and marketing expenses. The 80/20 rule refers to the split between healthcare and non-healthcare spending.
If an insurer’s MCR falls below 80% or 85%, the excess premiums must be rebated to customers. The Affordable Care Act introduced this regulation in 2010.1
Medical Cost Ratio (MCR) in the Real World
Consider the hypothetical medical insurance company, XYZ Insurance. XYZ collected $100 million in premiums and paid out $78 million in claims to customers in its most recent fiscal year, resulting in an MCR of 78%. With those figures, XYZ would be considered a profitable operation compared to most other medical insurers.
However, under ACA regulations, the two percentage points of additional premiums collected by XYZ above the 80% threshold must be rebated to customers or directed toward other healthcare services. 1 Based on data filed through October 16, 2020, these rebates totaled nearly $2.46 billion in 2019, up from $706.7 million the previous year.
Conclusion
- The medical cost ratio (MCR) is a way to figure out how profitable health insurance businesses are.
- It’s the difference between the premiums they gather and the claims they pay.
- The Affordable Care Act (ACA) says that insurance companies must spend at least 80% of their fees on health care and give customers back any extra money.
