I Just Don’t Get It!

Chapter 1: How does my renewal get calculated? 

Authored by Rick Klein, Senior Vice President in Horton’s Employee Benefit Solutions

If there’s one question my fully insured clients have asked the most in the 16-plus years I’ve worked as a benefits consultant, it’s this: “why am I getting this increase and is it justified?”

It is the most frustrating question I receive because most times I can’t answer due to a lack of information. However, I don’t have the same issue with my self-funded clients. In fact, most times they already have a good idea of what the renewal will be due to the consistent delivery of financial information about how their plan is running. Today we will look at two cases:

• A packaged, off the shelf product fully insured risk for a 12-month time frame, (renting a policy for a year)
• Self-insuring the risk either on a standalone basis with a carrier, a third party administrator or through a coalition.

Let’s start with the fully insured “rent a plan model.” In this structure, the monthly premium paid is a blend of fixed costs associated with the plan and variable costs associated with medical claims.  Remember ACA legislated that an insurance company may retain no more than 15% of the premium to pay administrative or fixed costs associated with your plans. Therefore, 85 % or more of the premium is designated to pay claims.

Yet, with most insurance companies, unless you are a large organization (e.g. companies with more than 100 or so on the plan), you will not receive medical claims reporting. And as a result, knowing how much of your premium dollar is spent to pay claims is a complete unknown. In fact, there’s no way to actually know if your claims exceeded 85% of the premium or not. We will see this is not the case (for the most part) in the self-funded example.

In some cases, you may receive “high level” claims experience which is simply a listing of any outlier claims and percentage of dollars used to pay claims in certain general medical and Rx diagnosis. In most cases you will also receive a breakdown of the renewal increase in three broad categories:

• Demographic
• Risk
• Trend

Additionally, until you cross an arbitrary enrollment line designated by the insurance company, your claims experience is blended with the performance of all of the other companies that the carrier insures because your stand-alone experience is not “credible.” In other words, if your claims experience is pristine your renewal will be tainted by those that are not as healthy.  

So to rephrase –a renewal is presented that cannot be adequately explained or defended except for trying to decipher the percentage applied to your demographic, trend and risk parameters.  You have no idea what diagnoses are driving your increase or what conditions are problematic. All you know is that the insurance company wants another eight to ten percent increase in your premium.   

The fully insured “rent a plan” is based on a model that asks for, and receives, year over year increases without any real explanation of what drives the increase.

Now let’s look at the other example, self-insuring risk on a stand-alone basis with a carrier, TPA, or a coalition. Employers can escape the world of fully insured plans and the lack of substantiating data to the world of self-funding whenever they determine it to be appropriate.

Self-funding essentially means taking responsibility for paying claims under a certain threshold on either a level monthly premium or pay claims as they occur method.  It divides funding into two buckets, a variable bucket used to pay claims, and a bucket to pay for the fixed expenses of the plan. In this model, if money is left over in the claims bucket at the end of the year, those funds remain as an asset of the plan. If claims exceed the threshold set for the plan (the attachment point) then the insurance policy that is in place, pays for those claims.

There is certainly evidence of increased efficiency in a self-funding strategy. First, and most importantly, the plan provides transparency – all claim detail is available for every dollar that’s expended by the plan to reimburse doctors and hospitals for their services. In seeing these medical and Rx claims one can understand the cost drivers of the plan and put in strategies to address and help mitigate them. Secondly, it allows for the accurate budgeting of funding required for the subsequent year as a result of the financial transparency that is revealed through monthly reporting. Through the review of the frequency and severity of current claims, the claims that will reoccur, the claims that are ongoing, and lastly, the claims that will not reoccur the benefits consultant can completely explain the renewal factors and why there is an increase of “x%” on fixed costs. It will also allow for the explanation of an increase or decrease in the variable funding needed to pay for projected claims based on factual data and not on guesses, estimates, or assumptions.

What we have just walked through is a basic renewal of a self-funded platform working through a TPA.  If the plan is buying administrative services only (sometimes abbreviated to ASO) through a carrier, the mechanics are much the same, but the transparency and the financial components of the renewal are not as clear.  As a result, the renewal calculation becomes somewhat convoluted and, if not opaque, then extremely foggy.

Bringing it all together, we explained how a medical renewal is arrived at in its simplest form. In the end, it is all about the ratio between claims and the funding that’s used to pay those claims (i.e. loss ratio), plus a margin for profit. The problem is that in the fully insured world, where more than 80% of mid-sized companies lie, this information is hidden whereas in the ASO world, whether in a coalition or stand-alone, the data needed is transparent and available.

So why do companies that can self-insure (there are some that can’t or because of medical conditions shouldn’t) not embrace this path? Why do they continue to accept renewal increases without justification? Why do they continue to tell their consultants to go back “and see what you can do” only to get back a less bad renewal and accept that? I don’t know.  

 I just don’t get it!