Medical Cost Ratio (MCR)

What Is the Medical Cost Ratio (MCR)?

Medical cost ratio (MCR), likewise alluded to as medical loss ratio, is a measurement utilized in the private health insurance industry. The ratio is calculated by partitioning total medical expenses paid by an insurer by the total insurance premiums it collected. A lower ratio probably shows higher profitability for the insurer, as it implies a larger amount of premiums are left over in the wake of paying customer insurance claims.

Under the Affordable Care Act (ACA), insurers are required to designate 80% or a greater amount of their insurance premiums toward customer medical expenses or different services that further develop healthcare. Insurers who fail to submit to this standard must return the excess funds back to consumers. These rebates amounted to almost $2.46 billion of every 2019, in view of figures recorded through October 16, 2020.

How the Medical Cost Ratio (MCR) Works

Medical insurers collect premiums from customers in exchange for expecting liability for funding future medical insurance claims. The insurer reinvests the premiums they collect, generating a return on investment. To be productive, the insurer must collect premiums and create investment returns greater than both the claims made against its policies and its fixed costs.

One key metric that insurance companies monitor is medical cost ratio (MCR). This measurement comprises of total medical expense claims that were paid separated by total premiums collected. Communicated as a percentage, a higher figure shows lower profitability, as a large portion of collected premiums are redirected to fund customer claims. On the other hand, a lower number demonstrates higher profitability, as it shows substantial premiums are left over subsequent to covering all claims.

The MCR is utilized by all major healthcare companies with guarantee that they are complying to regulations and meeting their fiscal requirements.

Insurance companies selling large plans (generally in excess of 50 insured employees) must spend somewhere around 85% of premiums on healthcare. This means their MCR can be no lower than 85%. Insurers that emphasis on small employers and individual plans must spend no less than 80% of premiums on healthcare, meaning their MCR is no lower than 80%. The other 20% can go toward administrative, overhead, and marketing costs. This split among healthcare and non-healthcare related spending is known as the 80/20 rule.

Assuming that an insurer creates a MCR below the 80% or 85% threshold, the excess premiums must be discounted to customers. This regulation was presented in 2010 by the Affordable Care Act.

Real World Example of the Medical Cost Ratio (MCR)

Consider the case of XYZ Insurance, a speculative medical insurance company. In its latest fiscal year, XYZ collected $100 million in premiums and paid out $78 million in claims to customers, bringing about a MCR of 78%. With those numbers, XYZ would be viewed as a productive operation compared to most other medical insurers.

Under ACA rules, notwithstanding, the 2 percentage points of extra premiums XYZ collected past the 80% threshold must be refunded to customers or directed toward other healthcare services. These rebates amounted to almost $2.46 billion out of 2019, in light of figures documented through October 16, 2020, compared with $706.7 million two years sooner.

Features

• The ACA expects insurers to spend somewhere around 80% of premiums on healthcare, with any excess required to be refunded to consumers.
• It comprises of the claims they pay separated by the premiums they collect.
• The medical cost ratio (MCR) is a measurement used to survey the profitability of medical insurance companies.