Some of your clients may be concerned about the current inflation challenge, but to what extent does it impact their employee healthcare costs?
Let’s look at an actual scenario: We have a small client (10 employees enrolled) that has a $21,000 surplus in their claims fund for 2021. Per the rules of the insurer, who’s a national carrier, $10,500 of this will be returned to the client after the plan year ends. The remainder of those extra dollars will be banked by the carrier.
And yet, this client incurred an 8.7% increase in premiums for 2022.
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How is that even possible? Let’s break this brow-raising question into two parts: How is inflation affecting healthcare costs; and how is inflation affecting health insurance costs?
The distinction is significant.
Healthcare costs
We’re all well-acquainted with the “wild west” of healthcare: out-of-control pharmacy costs, nonprofits behaving like for-profit entities and the high-cost structures of maintaining large hospital systems.
Add to this mix the rapid acquisition by private equity firms of physician practices, independent imaging groups and wellness companies, and you end up with a system wholly designed to maximize stakeholder profit. Unfortunately, those stakeholders are not patients or employers, even physicians.
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Healthcare costs are a component of the Consumer Price Index (CPI) and are, thus, included in the 5% annual inflation rate.
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Some of the factors contributing to this lack of inflation are network contracts that only can be renegotiated on a periodic basis, and fixed reimbursements from government programs like Medicare, Medicaid and Tri-Care.
Do medical providers face the same pressures as the rest of us? Of course, they do — and I believe inflation will creep up a bit more in 2022.
However, actual increases in the cost of care don’t appear to be driven by inflation. In my opinion, the real drivers of healthcare cost increases are the radical decrease in the number of independent providers — hospitals, imaging, laboratories, physicians — and the systematization of healthcare.
Health insurance costs
Now, let’s take a closer look at my client’s 8.7% premium increase.
Their renewal letter stated that “rating factors include, but are not limited to: trend, demographic changes and risk projection.”
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Yes, the insured group is only 10 people, a size at which risk is not creditable, and thus, in underwriting speak, they are “hard to price effectively.” However, this particular client has no ongoing claim issues, no demographic changes among its personnel and no claims that indicate increased risk.
For this employer with 10 employees enrolled, the annual premium was $79,056 in 2021. The funds were allocated as follows:
Just to be clear on definitions, the claims fund involves dollars allocated to pay claims, and stop loss is the insurance premium that will cover claims once the claims fund has been depleted. In addition, admin involves administrative fees to run the plan, including adviser compensation, and TRO is terminal liability in case the employer goes bankrupt or needs to terminate its plan mid-year for another reason.
Take a closer look at the claims fund. In 2021, it was fully funded at $36,000, and the client spent approximately $14,000 in healthcare costs (claims). There is about $21,000 remaining in the fund, of which the client will receive only 50% at the close of the plan.
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Upon reviewing this client’s renewal, I noted a small rise in administrative and reinsurance costs, while the bulk of the increase was in the claims fund – the same fund currently sitting with a $21,000 surplus!
This makes absolutely no sense to the employer, or to me.
But now look at it from a different perspective: that of the insurer. This particular insurer is a for-profit entity that owes its shareholders a return on investment. It has revenue goals, just like the rest of us in our respective organizations.
So what happens if you’re a 10-life employer with a similar premium and claims situation as that described above, but you are fully insured?
What most employers don’t realize is that a fully-insured plan works the same way as a level-funded or self-funded plan; the employer just doesn’t get to see the details. Nor do they recoup any unspent premium dollars, and they’ve probably had the dreaded “this is the lowest increase we can negotiate for you” conversation.
Does this seem fair? Not to me.
Is it related to inflation? Definitely not.
Inflationary fears serve as a reminder that despite these challenging times, employers still have the power to dispense with unnecessary middlemen and wrest control of their biggest P&L expense other than payroll. Let this be your New Year’s resolution on behalf of all your clients.
