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 revenue.
Aetna’s (AET) medical care ratio declined from 83.9% in 4Q13 to 83% in 4Q14. Currently, it’s lower than the medical care ratio of other companies in the industry—like Anthem (ANTM) and Cigna (CI). However, it’s greater than UnitedHealth Group’s (UNH) medical care ratio.
The decline in Aetna’s medical care ratio was mainly due to the health insurance fee levied by CMS (Centers for Medicare and Medicaid Services) on the health insurance industry (XLV).
The company’s favorable enrollment mix, with 58% of the revenue earned from the commercial business, enabled it to pass the majority of the fee to its commercial members through increased premiums. In addition, about 67% of Aetna’s commercial enrollments are self-insured. They’re exempt from the health insurance fee. This reduces the company’s liability. To learn more about self-insured enrollments, read Shift to self-insurance plans affects health insurance stocks.
Government medical care ratio
In 2014, Aetna’s medical care ratio for its commercial business was 80.2%. The medical care ratio for its government-sponsored business was 84.9%. This resulted in a combined ratio of 82.2%. Medicare and Medicaid enrollees can’t absorb the health insurance fee in their premiums. CMS determines the premium levels for these programs through a prospective payment system. The system doesn’t include reimbursement for the health insurance fee.
Also, effective in 2014, the Affordable Care Act requires health insurance companies to maintain a medical care ratio of at least 85% of the MA (Medicare Advantage) enrollees. This restricts the margins earned from Medicare beneficiaries. This resulted in higher medical care ratios for Aetna’s government-sponsored business.
Medical cost trend
The medical cost trend indicates future costs. It’s based on the combined impact of cost changes for medical products or services and the consumption rate for the products or services. In 2014, Aetna’s medical cost trend for its stand-alone commercial business was about 6%–7%. It’s expected to be around 8.5% in 2015. This is mainly due to increased prescription drug prices, especially drugs that treat Hepatitis C.