What Is the Medical Cost Ratio (MCR)?
Let me break down the medical cost ratio (MCR) for you—it's also called the medical loss ratio, and it's a straightforward metric in the private health insurance world. You calculate it by dividing the total medical expenses an insurer pays out by the total premiums they've collected. If the ratio is low, that typically means the insurer is more profitable because more of those premiums are left after covering claims.
Under the Affordable Care Act (ACA), insurers have to direct at least 80% of their premiums toward medical expenses or services that improve healthcare. If they don't hit that mark, they must rebate the extra back to you, the consumer. In 2019, those rebates added up to nearly $2.46 billion, based on data filed through October 16, 2020.
Key Takeaways
- The medical cost ratio (MCR) assesses the profitability of medical insurance companies.
- It consists of the claims they pay divided by the premiums they collect.
- The ACA requires insurers to spend at least 80% of premiums on healthcare, with any excess required to be rebated to consumers.
How the Medical Cost Ratio (MCR) Works
Health insurers collect premiums from customers like you in return for covering potential medical claims. They invest those premiums to generate returns, and to stay profitable, their collections and investments need to exceed both the claims paid and their fixed costs.
That's where the MCR comes in—it's the total claims paid divided by total premiums, expressed as a percentage. A high MCR means lower profitability since most premiums go toward claims, while a low one leaves more for the insurer after payouts.
All major healthcare companies use the MCR to comply with regulations and manage their finances. For large plans—those with more than 50 employees—insurers must spend at least 85% on healthcare, so their MCR can't dip below that. For small employers and individual plans, it's 80%. The remaining 20% covers admin, overhead, and marketing—this is the 80/20 rule.
If the MCR falls below these thresholds, the excess gets rebated to customers, a rule set by the ACA in 2010.
Real World Example of the Medical Cost Ratio (MCR)
Take XYZ Insurance as a hypothetical example. In their latest fiscal year, they collected $100 million in premiums and paid out $78 million in claims, giving them an MCR of 78%. That's profitable compared to many insurers, but under ACA rules, they have to rebate or redirect the 2% over the 80% threshold to customers or healthcare services.
Rebates like these reached nearly $2.46 billion in 2019, up from $706.7 million two years prior, showing how these regulations play out in practice.
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