Have you ever wondered how insurers determine small group (2-50 employees) renewal rates? Be assured that it’s not an arbitrary process. Yes, there is a method to this madness! Although there are various formulas used, generally insurers use the following factors to calculate your renewal rates:
General 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 costs of these goods and services are expensive and increasing rapidly.
This component also includes “prescription drug trend.” More drugs are being introduced into the market and aggressively marketed. The costs of advertising and research/development of these drugs are significant. These rising costs, in combination with increasing utilization, all contribute to this baseline factor.
Keep in mind this “trend” also has much to do with your group’s geographic location. Just as home prices differ upon location, so do health care costs. Premiums in certain areas might reflect the higher cost of more people using state-of-the-art, yet expensive, treatments and services.
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.
Group-Specific Characteristic/Demographic Profile
This component includes:
- Age bracket changes (An employee or spouse turns 40, for example, moving them from the 35-39 bracket to the 40-44 bracket.)
- Gender and coverage composition changes (The percentage of females and males changes or the mix of single and family contracts changes.)
- Changes in the group’s location (Claims costs are geographically-based, so the rates may change if the company moves to a new locale.)
Group-Specific Administrative Expenses
This factor 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? Ideas include adjusting your plan design and/or premium contribution to support more efficient utilization, encouraging employees to become smarter health care consumers through communication efforts, and promoting prevention and wellness programs. It’s a start at least.
