Medical Cost Ratio

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.

BREAKING DOWN '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.