During the month of January, industry experts put their own spin on the possibility of benefits increases in 2006. Headlines predicted increases in cost from as low as 5 percent to a miserable 19 percent. Only by reading the entire article carefully did you find that each article was correct based on what costs were being reported.
When you read that costs are increasing only mid-single digits, you eventually found in the article that the cost being referenced was the employer’s cost. Employers are keeping their increases low, based in part on changes in plan design and increases in employee costs.
Trends for medical and prescriptions combined are still higher than general inflation and range between 8 percent and 17 percent, based on the medical carrier and their delivery system.
Most employers are choosing plan designs that limit increases in their employees’ payroll deductions. Employee surveys consistently indicate that employees are more concerned about their payroll deductions than their copays and out-of-pocket expenses.
With 80 percent of the general population incurring less than $2,000 in medical claims a year, most people realize that what they really need is affordable major medical insurance.
The transition to high deductible plans and, eventually, health savings account plans will be predicated by the renewal increase.
Let’s examine the question, “How much are my medical rates going up in 2006 from my current carrier?”
Assuming your incurred loss ratio (claims / premium) is 80 percent (the target loss ratio) and there are no changes in your demographics (age and gender), your increase would be whatever trend is for the insurance carrier you are with at the time of your renewal. This is one of the reasons why you want to review trends of the health insurance carriers during your annual review.
The other 20 percent (100 percent to 80 percent target loss ratio) is used for the carrier overhead and profit. If your loss ratio is lower than 80 percent, you should receive a reduction in the trend increase from claims.
In other words, if your incurred loss ratio was 75 percent and the medical trend from the carrier 15 percent, then the increase from claims would be 10 percent (5 percent less than trend of 15 percent). If your loss ratio was 85 percent, your increase from trend would be 20 percent (5 percent more than trend of 15 percent).
Depending on the size of your group, underwriters will blend the claims experience increase and the manual rates to yield your actuarial increase. This is called credibility.
The answer to the primary question of predicting a group’s increase is answered with the following four questions.
- What is your current carrier’s health care trend?
- What is your group’s claims experience?
- What changes will you make in your plan design?
- What changes will you make in employee contributions?
The primary culprit is still the inflationary factor of providing medical benefits. This factor referred to as trend is more than double general inflation in the best-managed plan and triple that for most health care plans.
Is there any relief in sight? Fortunately, the answer is yes. When most of the insured population of Americans return to major medical plans, you should see trends actually reverse.
When Americans have $2,000 deductibles with no copays, except for preventive health services, simple economics will step in. If Americans stop buying certain services because they feel they can’t afford it, the cost will have to come down. That’s a simple economic fact.
Also, more than 60 percent of Americans are overweight and a shocking 30 percent are obese, and most experts agree that more than 50 percent of health care expenses can be attributed to lifestyle choices. So the other trend reversal is that people will realize that the best way to avoid health care expenses is to stay healthy.
Bruce Bishop (firstname.lastname@example.org) is director of marketing and managing partner of KYBA Benefits. KYBA Benefits provides consulting and administrative services to moe than 400 corporate accounts, ranging in size from 20 employees to more than 7,000. Reach Bishop at (770) 425-6700 or (800) 874-2244, ext. 205.