Medical Cost Ratio (MCR)

Medical Cost Ratio (MCR)

Medical Cost Ratio (MCR), also called the medical loss ratio, measures how much of an insurer’s collected premiums is paid out as medical claims and related healthcare services. It is calculated as:

MCR = (Total medical claims paid ÷ Total premiums collected) × 100%

A higher MCR means a larger share of premiums is used for claims (lower insurer profitability); a lower MCR means more premiums remain for administrative costs, overhead, marketing, and profit.

How MCR works

• Insurers collect premiums to cover future claims and to fund operating costs and profits. They may also earn investment returns on premium funds.
• MCR focuses specifically on the portion spent on medical care and quality-improving activities versus total premiums.
• Insurers monitor MCR to assess financial performance and regulatory compliance.

Regulatory thresholds (the 80/20 rule)

Under U.S. federal requirements:
– Insurers offering individual and small-group plans must spend at least 80% of premiums on medical care and quality improvements (MCR ≥ 80%).
– Insurers offering large-group plans (typically >50 employees) must spend at least 85% of premiums on medical care and quality improvements (MCR ≥ 85%).

When an insurer’s MCR falls below the applicable threshold, the excess premiums must be returned to policyholders as rebates.

Example

If an insurer collects $100 million in premiums and pays $78 million in medical claims, MCR = ($78M ÷ $100M) × 100% = 78%.
Because 78% is below the 80% threshold for individual/small-group plans, the insurer must refund the excess premiums or apply them to healthcare-related services.

Rebates under the MCR rules have totaled billions of dollars in aggregate in recent years, reflecting enforcement of these thresholds.

Key takeaways

• MCR = medical claims paid ÷ premiums collected; expressed as a percentage.
• A higher MCR indicates more premium dollars are used for care (less profit); a lower MCR indicates more retained for non-care expenses.
• U.S. regulations require at least 80% (individual/small group) or 85% (large group) of premiums be spent on medical care and quality improvements; shortfalls are rebated to consumers.

Sources

• Centers for Medicare & Medicaid Services — Medical Loss Ratio (MLR) guidance and rebate data