What is 'Medical Cost Ratio - MCR'

The medical cost ratio is a comparison of 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.

BREAKING DOWN 'Medical Cost Ratio - MCR'

The medical cost ratio should be 85 percent or less in order to indicate financial health for larger employer plans and 80 percent for smaller employer and individual plans. This indicates that the health insurer is spending 85 percent of its earnings paying out on health care costs, and putting 15 percent 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 percent and 20 percent.

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 and was written into regulations when the Affordable Care Act was signed by President Barak Obama in 2010.

The medical cost ratio is also known as a medical loss ratio, medical benefit ratio, and medical cost ratio. It is used by all major health care companies to determine that they are adhering to regulations and meeting their fiscal requirements.

What is health insurance

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 where an individual employee is only required to pay a portion of the annual health insurance premium.

The health care 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.

Normally a health insurance company will cover the bulk of the insurers medical claim, while requiring them to pay a smaller portion such as a deductible or co-pay. There are many different types of plans available across the health care industry that can cover anywhere from the majority of an insured individual’s medical expenses to solely the most basic or emergency costs. These plans all come at varying price points.

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