Medical Cost Ratio (MCR), also known as the medical loss ratio, is a crucial metric in the private health insurance industry. This ratio is derived by dividing the total medical expenses paid by an insurer by the total insurance premiums it collects. A lower MCR indicates higher profitability for the insurer because it means more premiums are left over after paying customer insurance claims.
The Affordable Care Act (ACA) and MCR Standards
Under the Affordable Care Act (ACA), insurers must allocate 80% or more of their insurance premiums towards customer medical expenses or services that enhance healthcare. Insurers failing to meet this requirement must return the extra funds to consumers. For example, rebates under this requirement amounted to nearly $2.46 billion in 2019, highlighting the strict regulations in place to ensure consumer fairness.
Key Insights
- The medical cost ratio (MCR) measures the profitability of medical insurance companies.
- MCR represents the claims paid divided by the premiums collected.
- ACA mandates insurers spend at least 80% of premiums on healthcare, with any excess rebated to consumers.
How the Medical Cost Ratio (MCR) Functions
Medical insurers collect premiums from customers in return for assuming responsibility for future medical insurance claims. The insurer reinvests these premiums to generate returns. To maintain profitability, an insurer must collect premiums and generate investment returns that exceed the claims made against its policies and its fixed costs.
MCR, a critical metric monitored by insurance companies, includes total medical expenses paid divided by total premiums collected, expressed as a percentage. A higher MCR represents lower profitability since a larger portion of premiums is directed towards claims. Conversely, a lower MCR indicates higher profitability, signifying higher leftover premiums after covering all claims.
Major healthcare companies utilize the MCR to ensure adherence to regulations and fiscal health. Insurers selling large plans (generally over 50 insured employees) must maintain an MCR no lower than 85%, while insurers focusing on small employers and individual plans have an 80% threshold. The remaining 15-20% covers administrative, overhead, and marketing costs, known as the 80/20 rule.
If an insurer’s MCR falls below the 80% or 85% threshold, the excess premiums must be returned to customers, a regulation introduced by the ACA in 2010.
An Illustrative Example of the Medical Cost Ratio (MCR)
Consider XYZ Insurance, a fictitious medical insurance company. In the most recent fiscal year, XYZ collected $100 million in premiums and paid out $78 million in claims to customers, resulting in an MCR of 78%. Such figures indicate that XYZ operates profitably compared to other medical insurers.
However, ACA rules dictate that the extra 2 percentage points of premiums exceeding the 80% threshold must be rebated to customers or allocated towards healthcare services. For instance, consumer rebates reached nearly $2.46 billion in 2019, based on data up till October 2020, a significant rise from $706.7 million two years prior.
Related Terms: health insurance, insurance premiums, insurance claims, Affordable Care Act, fixed costs, fiscal year
References
- Centers for Medicare & Medicaid Services. “Medical Loss Ratio”.
- U.S. Centers for Medicare & Medicaid Services. “2019 MLR Rebates by State”, Pages 1-2.
- U.S. Centers for Medicare & Medicaid Services. “Rate Review & the 80/20 Rule”.
- U.S. Centers for Medicare & Medicaid Services. “2017 MLR Rebates by State”, Pages 1-2.
