The Medicare Cost Ratio (MCR), also known as the Medicare Loss Ratio, is a metric used in the private health insurance industry. The ratio is calculated by dividing the total medical expenses paid by an insurer by the total insurance premiums collected by him. A lower ratio potentially indicates higher profitability for the insurer, as it shows that a large amount of premium is left after the customer has paid the insurance claims. Under the Affordable Care Act (ACA), insurers are required to allocate 80% or more of their insurance premiums to customer medical expenses or other services that improve health care. Insurers who fail to comply with this standard will have to refund the additional money to the consumer. These exemptions were approximately $2.46 billion in 2019 based on data filed as of October 16, 2020
How the Medical Cost Ratio (MCR) Works
Medical insurers collect premiums from customers in exchange for assuming an obligation to finance future medical insurance claims. The insurer reinvests the premium collected by him, thereby earning a return on investment. To be profitable, the insurer must collect premiums and generate investment returns in excess of both the claims made against its policies and its fixed costs. One key metric that insurance companies keep track of is the medical cost ratio (MCR). This metric includes the total medical expense claims that were paid divided by the total collected premiums. Expressed as a percentage, a higher figure indicates lower profitability, as a large portion of the premium collected is redirected to fund customer claims. Insurance companies selling larger plans (typically more than 50 insured employees) must spend at least 85% of premiums on health care. This means that their MCR cannot be less than 85%. Small employers and insurers focusing on individual plans must spend at least 80% of premiums on health care, meaning their MCR is no less than 80%. The other 20% can go towards administrative, overhead and marketing costs. This division between health care and non-health care spending is known as the 80/20 rule.
