how the medical cost ratio mcr works
medical insurers collect premiums from customers in exchange for assuming liability for funding future medical insurance claims the insurer reinvests the premiums they collect generating a return on investment in order to be profitable the insurer must collect premiums and generate investment returns greater than both the claims made against its policies and its fixed costs one key metric that insurance companies monitor is medical cost ratio mcr this metric consists of total medical expense claims that were paid divided by total premiums collected expressed as a percentage a higher figure indicates lower profitability as a large portion of collected premiums are redirected to fund customer claims conversely a lower number indicates higher profitability as it shows substantial premiums are left over after covering all claims the mcr is used by all major healthcare companies to ensure that they are adhering to regulations and meeting their fiscal requirements insurance companies selling large plans usually more than 50 insured employees must spend at least 85 of premiums on healthcare this means their mcr can be no lower than 85 insurers that focus on small employers and individual plans must spend at least 80 of premiums on healthcare meaning their mcr is no lower than 80 the other 20 can go toward administrative overhead and marketing costs this split between healthcare and non healthcare related spending is known as the 80 20 rule if an insurer generates an mcr below the 80 or 85 threshold the excess premiums must be rebated to customers this regulation was introduced in 2010 by the affordable care act real world example of the medical cost ratio mcr consider the case of xyz insurance a hypothetical medical insurance company in its most recent fiscal year xyz collected 100 million in premiums and paid out 78 million in claims to customers resulting in an mcr of 78 with those numbers xyz would be considered a profitable operation compared to most other medical insurers under aca rules however the 2 percentage points of extra premiums xyz collected beyond the 80 threshold must be rebated to customers or directed toward other healthcare services these rebates amounted to nearly 2 46 billion in 2019 based on figures filed through october 16 2020 compared with 706 7 million two years earlier 