As health care premiums continue to rise, business owners are scrambling to keep up with increasing costs.
By understanding the components of your premiums, encouraging your employees to be healthier and working with your broker to identify the best plan for your needs, you could see a significant savings, says Steve Freeman, president of USI in San Francisco.
“There can be a huge savings,” says Freeman. “Employers that implement wellness programs and embrace a culture of health and consumerism, as far as being smart consumers of health care, typically see a savings of 15 to 20 percent. Once you understand how insurance premiums are determined and what the components are, you will be a lot more comfortable taking steps to drive down your premiums.”
Smart Business spoke with Freeman about how health insurance premiums are determined and how you can influence those rates.
How does an insurance company calculate premiums?
The pricing, or rates, are based on the size of the group, industry, the demographics and location of the employees, as well as plan design. Once the insurance company determines these manual rates, they may be adjusted based on prior years’ claims experience, if available.
Next, there are two ways a company is rated. The insurance company has pooled contracts, typically for smaller employers. That means that, regardless of your underlying claims experience, everyone in the pool essentially gets the same rate increase. That pool may not be the best option for you if you have a good claims experience, because you are supporting the groups with bad experience; that is, an employer with employees who make efforts to be healthy is paying the same rates as the employer whose employees are unhealthy.
With a nonpool product, claims experience will influence the rates based on the size of the employer. That experience is more predictable or credible with a group of 500 lives than with a group of 50. That’s because, in a smaller group, you can have drastic peaks and valleys in claims experience. Insurance companies will blend that experience with the manual rates they have identified to level out the peaks and valleys of the premiums.
What are the main factors of premiums?
There are basically three major components that contribute to setting the premium amounts. The largest is claims, which influences premiums dramatically because they are the major element of what insurance companies charge. The second largest is reserves, money held by the insurance company to pay claims filed after a company has terminated its contract. The third is administrative, risk and pooling charges — used to administer claims, print booklets and ID cards, compensate the insurance broker, etc.
What can employers do to help lower costs?
Group plans are now allowing employers to view and analyze their actual claims experience. From there, employers can motivate employees to take care of themselves and, as a result, pay a lower rate.
There is a real emphasis on incentives for people to be more consumer-centric. For example, instead of going to the emergency room, go to an urgent care unit. Instead of brand-name drugs, use generics.
Wellness programs can also help cut costs by encouraging people to eat healthier and exercise. As well, programs can be designed to encourage those with chronic illnesses to take their medications and see their doctor. Screening should also be made available to help identify potential risks, instead of waiting for something as serious as a heart attack or stroke to take action.
More companies are also asking employees to fill out health risk assessments, which gives each individual an overall health score. Many employers offer incentives in exchange for a completed assessment. With those results, the employer can craft a wellness program around the overall health status of its group. For example, if employers have a high prevalence of smokers, or overweight individuals, they can target those areas.
At the end of the day, it’s all about claims management, which drives premiums. If an employer wants to hold costs down, the only way to do that is to get data from its insurance company to understand actual utilization by its employees.
How can a broker assist with the process?
Because every company has different types of products and funding arrangements available to them, a broker can help navigate the different insurance policies available. It’s constantly changing, with new products being rolled out. Unless you are a very large employer who has an in-house risk manager who understands all this, every employer can benefit from a broker to help work through the process.
What would you say to employers who just want to pay their premiums and be done with it?
At the end of the day, your claims costs drive your premiums, regardless of whether you’re fully insured, in a nonpool environment, or in a self-funded plan. If you don’t control your claims utilization via wellness programs and other efforts, you are going to pay more.
The broker adage of, ‘I can get you more benefits at a better rate’ doesn’t work anymore. If you have a group claiming more than average, you’re going to pay a higher rate than the average cost increase because you’re going to have to cover paid claims, reserves and administration, as well as risk charges.
In the end, it’s all about managing risk, with savings as the likely result and reward.
Steve Freeman is president of USI San Francisco. Reach him at (925) 472-6772 or [email protected].
