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.

  1. Loss Ratio

    Loss ratio is the ratio of losses to gains such as the ratio ...
  2. Health Insurance

    Health insurance is a type of insurance coverage that pays for ...
  3. Health Insurance Marketplace

    Organizations that facilitate structured and competitive markets ...
  4. Policyholder Dividend Ratio

    The policyholder dividend ratio is a measurement of the profitability ...
  5. Group Health Insurance Plan

    An insurance plan that provides healthcare coverage to a select ...
  6. Universal Health Care Coverage

    Universal health care coverage are systems in which all legal ...
Related Articles
  1. Insurance

    Investing In Health Insurance Companies

    Health insurance companies work a little differently than most companies. Here's what you need to know as an investor.
  2. Investing

    Key Financial Ratios to Analyze The Healthcare Industry

    Examine the health care sector and learn about significant financial ratios used by investors and analysts to evaluate health care companies.
  3. Insurance

    Why Health Insurance Premiums Will Rise in 2017

    To battle the costs and challenges of the Affordable Care Act, many health insurances are raising their premiums in 2017.
  4. Insurance

    Defined Contribution Health Plans: A Primer

    A look at defined contribution health plans and how they work for both employees and employers.
  5. Financial Advisor

    Pay Attention To Your Fund’s Expense Ratio

    Despite trends indicating an overall decrease in fees across many fund categories, investors should still pay attention to expense ratios: even small differences in fees can have a significant ...
  6. Investing

    ETF Flows: Health Care ETFs Are Shedding Assets in 2016 (FXH, XLV)

    Learn about five exchange-traded funds (ETFs) that invest in the health care sector and experienced large year-to-date (YTD) capital outflows as of March 4, 2016.
  7. Insurance

    What You Need To Know About Student Health Insurance

    Before heading off to college, read up on health insurance plans.
  8. Investing

    Financial Ratios to Spot Companies Headed for Bankruptcy

    Obtain information about specific financial ratios investors should monitor to get early warnings about companies potentially headed for bankruptcy.
  1. Loss Ratio vs Combined Ratio

    Learn about the loss ratio and combined ratio, what the two ratios measure and the main difference between the two. Read Answer >>
  2. How do I calculate the combined ratio?

    Learn about the combined ratio and how it is calculated under a financial basis and a trade basis using the loss ratio and ... Read Answer >>
Hot Definitions
  1. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  2. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  3. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  4. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  5. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  6. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
Trading Center