WHAT IS 'Benefit Expense Ratio'

Benefit expense ratio is a term used in the health insurance industry to describe the percentage of money taken in by the insurance company that is paid out to members in claims. It is a key operating metric used in the health insurance industry, and it is computed by dividing a company's costs associated with providing health services by the revenues from member premiums. Because of the large dollar values involved, a single percentage change in the benefit expense ratio can significantly impact the corporation's net income. Benefit expense ratio is also called medical loss ratio or health benefit ratio.

BREAKING DOWN 'Benefit Expense Ratio'

Benefit expense ratio compares a health insurer's expenses for providing health care with the revenues it receives. General insurance providers would want to minimize this ratio as it would indicate an increase in top line growth relative to expenses. 

In 2010, the Obama administration issued regulations regarding the proportion of premium dollars health insurers spend on patient care relative to administrative expenses. The regulation specified targets of 80% for small business plans and 85% for large-company plans. These benefit expense ratios were not specifically targeted by the Trump administration’s proposed revised health care act in 2017.

Benefit Expense Ratio as an Indicator

In theory, benefit expense ratio could be taken as an indicator of profit level for a company. The lower the benefit expense ratio, the higher the profits for the company. However, this doesn’t take into account the two biggest elements that influence the benefit expense ratio: the size of the group for a given health care policy and whether or not the health insurance company has to pay a broker.

If the company writes policies for very large groups, it is safe for the company to charge premiums based on the past record of claims of this big group. The insurer does not need to know the health status of each of the individuals in the group because the group is so big that health care claims will average out. This means that the insurer could have a high benefit expense ratio and still make a sizable profit simply because the company predicted claims accurately based on past claims.

At the same time, if an insurer can sell to huge groups without having to use a broker, this saves the company a significant amount of money that would otherwise be taken out of its profit, not out of the benefits paid out. A high benefit expense ratio could also indicate lower expenses for selling the policies.

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