Medical Cost Ratio

AAA

DEFINITION of 'Medical Cost Ratio'

A comparison of a health insurance company's healthcare costs to its premium revenues. The medical cost ratio is one indicator of the insurer's financial health. Health insurance companies, like other types of insurers, are for-profit companies and must remain profitable to stay in business.

INVESTOPEDIA EXPLAINS 'Medical Cost Ratio'

For most major health insurance companies, a medical cost ratio of 85% or less is desirable. An 85% medical cost ratio means that a health insurer spends 85% of the premium dollars it receives on healthcare, leaving 15% for profit and non-medical costs such as administrative expenses, payroll, overhead and advertising.

RELATED TERMS
  1. Premium Income

    1. In investing, income that is earned through the sale of an ...
  2. Health Insurance Portability And ...

    An act created by the U.S Congress in 1996 that amends both the ...
  3. Actuarial Risk

    The risk that the assumptions that actuaries implement into a ...
  4. Premium

    1. The total cost of an option. 2. The difference between the ...
  5. Healthcare Sector

    A category of stocks relating to medical and healthcare goods ...
  6. Profit Margin

    A ratio of profitability calculated as net income divided by ...
RELATED FAQS
  1. How do insurance companies use a whistleblower?

    Fraudulent claims are among the most prevalent and serious business risks that insurance companies face. Many consumers have ... Read Full Answer >>
  2. Why should value investors consider the insurance sector?

    Insurance companies receive steady cash flows for years with irregular payouts. Following these payouts, insurance companies ... Read Full Answer >>
  3. What demographic trends are creating potential profits for insurance companies?

    Insurance companies can profit from demographic trends by marketing and writing specific policies suited to changes in the ... Read Full Answer >>
  4. What is the usual profit margin for a company in the insurance sector?

    The best estimates of the average insurance company net profit margin are between 3 and 8%, with a likely median average ... Read Full Answer >>
  5. In what ways does government regulation impact the insurance sector?

    Regulation is not consistent among all forms of insurance. The kinds of regulations imposed on AIG for guaranteeing credit ... Read Full Answer >>
  6. What debt/equity ratio is typical for companies in the insurance sector?

    The debt-to-equity ratio is calculated by dividing total liabilities by total equity, and it is used to measure leverage. ... Read Full Answer >>
Related Articles
  1. Insurance

    Health Insurance Tips For College Students

    Why buy for health insurance when your parents' policy can cover you? Read on to avoid paying twice.
  2. Home & Auto

    Concierge Healthcare: The Pros and Cons Of Having A Doctor On Call

    Concierge healthcare can mean extra attention from your doctor when you need it, but it isn't the best substitute for health insurance.
  3. Home & Auto

    How To Avoid Medical Debt

    Find out what you can do to avoid a financial meltdown when there's a medical emergency.
  4. Insurance

    What Does Medicare Cover?

    Don't assume you're insured. Find out what you can expect from this healthcare program.
  5. Insurance

    Why Is Health Care So Expensive In The Us?

    The U.S. is the world leader in only one area of health care: costs. Why is it so hard to rein in these expenses?
  6. Insurance

    Is My Health Insurance Good In Another State?

    Under ACA, is health care insurance something you can take with you state to state?
  7. Insurance

    7 Industries Benefiting From Obamacare

    Though the medical industry fears government intrusion, certain sectors in healthcare will benefit from Obamacare in the long run.
  8. Insurance

    How Obamacare Affected The Insurance Industry

    A look at the past five years shows that far from suffering at the expense of greater health benefits for average Americans, the insurance industry has done extremely well in the new Obamacare ...
  9. Insurance

    How To Avoid Common Health Insurance Scams & Fraud

    A few precautions is all it takes for you to avoid being a victim of – or an unwitting accomplice to – health insurance con artists.
  10. Insurance

    High-Income Benefits From A Health Savings Account

    Health savings accounts are the only tax break offering triple benefits. Here's a look at how they work.

You May Also Like

Hot Definitions
  1. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  2. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  3. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  4. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
  5. International Monetary Fund - IMF

    An international organization created for the purpose of: 1. Promoting global monetary and exchange stability. 2. Facilitating ...
  6. Risk-Return Tradeoff

    The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!