Here’s how premium increases are calculated (and how to avoid them)
Employer-sponsored health insurance costs are rising again in 2018. You might’ve read that they are up 4% to 6%, but that’s likely what the increases are after implementing reduction strategies, and after passing on payroll deduction increases on to employees. Initial rate increases from carriers for many employers are in the high single digits, often in the mid- to high teens, and in some cases over 20%.
Let’s review the basic factors influencing premium increases, and then talk about what employers can do to avoid them.
Rating: Employer size matters
For fully insured employers, the number of employees and dependents covered by the plan determines whether they will be community rated or experience rated.
If you are under 100 covered employees you’re probably community rated, and your premium will be based on the claims experience of all of the insurance carrier’s, not just yours. The carrier will likely make some adjustments to consider varying benefit plan designs, and for the demographic make-up of your covered members.
If you are 100+ covered employees you’re probably experience rated. Experience rated means an insurance carrier bases its rates to some degree on your claims data. The more covered lives on your plan, the more your claims data is relied upon when setting the premium.
(It’s important to note, however, that each insurance carrier is a little different; the group size threshold may vary. Working closely with an employee benefits broker who’s familiar with carriers, and who speaks their language, can help you figure out which carrier is best for you based on your size.)
Premium calculation: Getting from Point A to Point B
Getting from point A (your recent claims experience) to point B (your rate for the coming year) is not that complicated. Here’s a look at how a premium is calculated:
Variable costs are anticipated healthcare provider claims (for example: inpatient and outpatient hospital costs, physician and lab costs, pharmacy costs, etc.) for the upcoming policy year.
Credibility: This is how much your claims are blended with an insurance company’s book of business claims. As we mentioned, smaller plans may not be credible at all—that is, their rates are based solely on all of the carrier’s claims—while a larger company may be fully credible, and projections are based solely on their own claims. For mid-sized companies, the reality lies somewhere in between.
Pooling/stop-loss feature: Stop-loss features protect plans from the impact of catastrophic claims. One or two catastrophic claims factored into renewals could skew premiums high, even if the reality is that the claims were for one-time incidents—such as a complication during childbirth or a major surgery — that likely won’t happen again. Insurance carriers don’t punish plan sponsors by including the entire catastrophic claim. Instead, amounts over a specific dollar level are “carved out” through pooling/stop-loss. Plan sponsors then pay a pooling charge for this non-optional feature, whether or not they had a catastrophic claim that year.
Trend: Carriers will take historical claims and adjust them for the anticipated increase due to healthcare cost inflation and increased frequency to determine the future policy period value of those experience period claims. The projected claims may also be adjusted for changes to the population’s demographics and benefit changes, including new state mandates.
Fixed costs include carrier administration and risk charges, taxes, broker fees and Affordable Care Act fees.
The projected variable costs for upcoming policy period, plus the fixed costs, results in the required premium. Sometimes these amounts will be shown in gross annualized dollars; sometimes they are on a per employee per month basis or per member per month (members are the combined covered employees and covered dependents). Comparing the new required premium to the current premium determines the proposed rate change percentage.
Let’s analyze the various parts of a plan to see how they impact the premium.
· Analyzing variable costs can help the plan sponsor make educated changes that will lower the expense. For example, a small to mid-size company’s historical claim performance year over year, as well as their performance compared to the carrier’s book-of-business claims, may indicate alignment with a carrier who provides the most credibility towards the company’s own claims. It may even provide the justification to implement alternative funding strategies like minimum premium or self-funded medical contracts.
· A close review of high claims over a couple of past years can help prepare an employer prepare for what lies ahead. Understanding if high claimants were one-time issues, such as a premature birth, or long-term expenses, such as hemophilia, can help plan sponsors make educated projections on future costs for the renewal year ahead. Pooling/stop-loss charges will always apply, but making sure those charges are within normal ranges given your own claims history becomes a negotiation factor with the carrier.
· Ongoing, high claims that result from plan members with long-term health issues may make the plan less marketable to other carriers. In this case, it may not be possible to shop carriers for the best deal, allowing the employer to narrow focus on other methods of cost control like wellness and plan design changes.
By understanding what goes into premium prices, it’s possible to have leverage at the negotiation table with the insurance carrier. It also leads to better decisions about the benefit plan and greater control over healthcare costs.