What Is the Medical Cost Ratio (MCR)?

The medical cost ratio is a ratio that compares a health insurance company's healthcare-related costs to its revenues. The medical cost ratio is one of several indicators of an insurer's financial standing. It is used by all major healthcare companies to ensure that they are adhering to regulations and meeting their fiscal requirements.

Medical cost ratio is also sometimes known as the medical care ratio, medical loss ratio, and medical benefit ratio.

Key Takeaways

  • The medical cost ratio is a ratio that compares a health insurance company's healthcare-related costs to its revenues.
  • The medical cost ratio is used by all major healthcare companies to ensure that they are adhering to regulations and meeting their fiscal requirements.
  • Under the Affordable Care Act (ACA), health insurance carriers are now mandated to allocate a significant share of the premiums they collect to clinical services and the improvement of healthcare quality.

How the Medical Cost Ratio (MCR) Works

Health insurance companies work by collecting premiums from their customers, or insured parties. Sometimes these premiums come directly from insured individuals, but more often they come from employer-sponsored plans in which an individual employee is only required to pay a portion of the annual health insurance premium.

The healthcare company retains these funds until a medical claim is filed. These claims can arise from visits to doctor offices, hospitals, or other medical care facilities and for reasons varying from illness to elected medical procedures. They also cover prescriptions, and in some instances, telehealth services.

The medical cost ratio should be 85% or less in order to indicate financial health for larger employer plans and 80% for smaller employers and individual plans. This indicates that the health insurer is spending 85% of its earnings paying out on healthcare costs, and putting 15% towards non-medical costs such as profits, overhead expenses and reinvesting into the company for larger plans. For smaller and individual plans, the ratio should be 80% and 20% (sometimes known as the 80/20 rule).

The calculation used to determine the ratio is the cost of the total medical claims paid out, plus adjusted expenses, which are then divided by the total premium collected. These figures are reported annually to the secretary of Health and Human Services.

Any reports indicating the limits are being exceeded must be backed by supporting reports or proof of rebates to the customers. The requirement for rebates is relatively new; it was written into regulations when the Affordable Care Act (ACA) was signed by President Barack Obama.

Special Considerations

Under the Affordable Care Act (ACA), health insurance carriers are now mandated to allocate a significant share of the premiums they collect to clinical services and the improvement of healthcare quality. They are required to divert 80% of the premiums they collect to claims and activities that improve the quality of care and offer more value to the plan's participants.

If an insurer fails to spend the required 80% on healthcare costs, it will have to rebate excess funds back to the consumer. In 2015, ACA carriers distributed rebates totaling $469 million to consumers.