During carrier negotiations, employers naturally seek the lowest rate increase, while carriers typically propose a high increase — while the “fair and reasonable” rate increase lies somewhere in between.
Understanding what fair and reasonable is, and achieving that rate on an ongoing basis, can help benefits professionals protect and maintain their organization’s financial health over the years, while being able to offer your employees a consistent benefits plan.
So what is a fair and reasonable rate? Each employer’s rate increase is unique to the utilization, plan design, claims history, current experience and other specific factors. There is no one fair and reasonable rate. Rather, it’s a rate that allows you to continue to offer the same or equivalent benefits to your employees without experiencing a bigger-than-normal increase from year to year.
The problem with negotiating too low
Faced with a steep rate increase, it’s tempting to work with your broker and underwriter to negotiate aggressively to achieve a very low increase — or no increase at all — for your next plan year. But that could backfire when you’re offered a higher-than-normal increase the following year. What looks like a positive move turns out to be temporary because your plan is underpriced forcing a carrier to make up for the shortfall.
Even worse, if the plan is underpriced, the future year’s negotiations could stall, creating a situation where the best and final offer is not as low as past years. This will force you to look at other carriers for benefits, with no guarantee they will be competitive. If a move to another carrier is needed, it creates work for your HR team and could disrupt your employees’ care if the network changes drastically.
On the other hand, a long-term carrier relationship yields benefits for you and your employees. One benefit to building a good carrier relationship is a better understanding of what’s normal and what’s not when it comes to claims utilization. A carrier that can view data over a number of years and confirm how your plan usually performs is more likely to be forgiving when you have a year with high claims. And no matter how healthy your employees are or how well your plan typically runs, every employer will suffer catastrophic claims from time to time.
How to get to fair and reasonable
Getting to a fair and reasonable rate starts several months before the end of your plan year. Roughly six months before your plan renews, work with your broker and underwriter to conduct a pre-renewal analysis. Claims data can be used to predict the upcoming plan year costs. This analysis gives employers a chance to discuss plan design adjustments to meet your budget goals and ensure your plans meet the needs of your employees. It also can help you in offering a data-backed counter rate increase, which is fair and reasonable for you and your carrier.
