Is There a Method
To the Madness? |
Have you ever wondered how insurers determine small group (2 to 50 employees) renewal rates? Be assured that it's not an arbitrary process. Yes, there is a method to the madness! Although various formulas are used, insurers generally use the following four factors to calculate your renewal rates:
1. Health Care "Trend"
This is a baseline factor applied to all group health insurance renewals. Basically "trend" refers to the change in cost of health care products and services, and how consumers utilize these products and services. New facilities, technologies, and procedures encourage more people to receive advanced services. The cost of these goods and services is expensive and increasing rapidly.
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The Kaiser Family Foundation reported some moderation in premium prices in 2009, with an overall increase of five percent from a year earlier (premium prices also increased five percent in 2008). The annual cost for family coverage is generally about $13,375, with the employee paying, an average of $3,515 out of their paychecks to cover their share.
For single coverage, employees pay an average of 17 percent of total premiums, and 27 percent for family coverage. These percentages are up slightly from 2008 figures (15.3 percent and 26.4 percent respectively).
Source: kff.org |
This component also includes "prescription drug trend." More drugs are being introduced and aggressively marketed. The expenses involved in advertising and research/development are significant. Rising costs, combined with increased demand, contribute to this baseline factor.
Keep in mind: "Trend" is also influenced by your group's geographic location. Just as home prices differ depending on location, so do health care costs. Premiums in certain areas may reflect the higher cost of more people using state-of-the-art, expensive treatments and services.
2. Group-Specific Medical/Health Factor
When permitted by state regulations, a carrier may adjust renewal rates based on the overall health of the people covered under your health plan. Your premiums may be adjusted to cover expected future claims costs. Depending on your state, certain rate caps might exist which limit the amount an insurer can raise premiums based on your group's health status alone.
Most carriers use a "prospective" system, meaning that they look at medical conditions and diagnoses, which may affect the group's claims experience in the coming year. Claims from the past year, which are resolved or if the risk is no longer present, are not taken into account using a prospective rating system.
Your renewal adjustment can also be positively impacted by good claims experience.
3. Group-Specific Characteristic/Demographic Profile
This includes various modifications such as:
 Age bracket changes. For example, an employee or spouse turns 40, moving him from the 35 to 39 bracket to the 40 to 44 bracket.
Gender and coverage composition changes. For example, the percentage of females and males changes or the mix of single and family contracts changes.
Changes in the group's location. Since claims costs are geographically based, the rates may change if the company moves to a new locale.
4. Group-Specific Administrative Expenses
This includes the fixed costs needed to administer the plan. The larger the group, the lower the expense load. For example, a two-person group would have a larger expense load, as a percentage of premiums, than a 25-person group.
So, what can you do to influence the costs? Here are a few ideas:
Adjust your plan design and/or premium contribution to support more efficient utilization.
Encourage employees to become smarter health care consumers through communication efforts.
Promote prevention and wellness programs.
With health care costs subject to constant change, smart employers do what they can to take back a little control.
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. |
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