Medical care ratio
The medical care ratio, also called a medical loss ratio or medical benefit ratio, measures a health insurance company’s financial health. It’s the ratio of the company’s medical costs to its premium revenues. Lower medical care ratios indicate that a health insurer has efficient operations.
Despite a decline in Humana’s (HUM) medical care ratio from 85.8% in the fourth quarter of 2013 to 83.4% in the fourth quarter of 2014, you can see that the company’s ratio exceeded the ratios of Aetna (AET) and UnitedHealth Group (UNH) but was lower than Cigna’s (CI).
To honor its future claim obligations, a health insurance company sets aside funds, called “claim reserves.” Humana had to set aside $243 million in fourth-quarter 2013 for future obligations arising from some of the company’s long-term care insurance policies. This was a one-time expense, as the policies were no longer sold to clients and had been phased out. As the company didn’t incur these expenses in fourth-quarter 2014, Humana’s medical care ratio improved year-over-year by 240 basis points in fourth-quarter 2014.
Humana’s retail segment, which mainly comprises Medicare beneficiaries, witnessed a 60 basis point rise in the medical care ratio from 82.7% in fourth-quarter 2013 to 83.3% in fourth-quarter 2014. An unexpected rise in the number of older people suffering from influenza in the US in the quarter led to increased spending on flu-related costs. Costly prescription drugs, especially for Hepatitis C, also added to the company’s medical expenses.
Health insurance fee
Effective 2014, the ACA (Affordable Care Act) has imposed an annual “health insurance fee” on private health insurance companies (XLV). The fees levied on a company are proportional to the share of the company’s premiums among the total premiums the health insurance industry earns.
For commercial enrollments, Humana and other managed care organizations have passed on this insurance fee to consumers in the form of higher premiums. However, for MA (Medicare Advantage) enrollments, which form about 70% of the company’s enrollments, Humana has to bear this cost. MA payment rates are predetermined by the CMS (Center for Medicare and Medicaid Services). This has further led to an increase in Humana’s expenses for Medicare beneficiaries.