"What Happened To Our Health Insurance?": An Employer's View
Employers are struggling with the costs of healthcare. Can something be done?
Dear American Employer,
Your question is something that we hear often from businesses of all sizes. Across the board, companies are feeling the pressure to manage costs while attracting and retaining top talent.
Maybe you are familiar with an old saying that “change is inevitable, but growth is optional,” and when it comes to insurance companies and the brokers that are selling the plans, growth has been nearly non-existent even though a lot has changed in the past 20 years.
Whenever this conversation comes up, I am reminded of the story of Kodak and how they had a ten-year window to adapt to the evolution of the digital camera and ultimately refused to accept the change that was sure to come. When they finally transitioned away from photo film, it was too late. There were already numerous players that had established themselves as the new experts in the industry. A short time later, Kodak filed for bankruptcy.
The irony of this story is that Kodak invented the digital camera years before it became a mainstream product, but internal decisions were made to stick with what the company was most familiar with. Similarly, insurance carriers and traditional brokers have known for years that there are alternative plans that can generate significant savings for companies and their employees, but they too have decided to stick with what they are most comfortable with. One can argue that the results of this decision have been downright criminal.
How Do Rates Actually Get Set?
According to a report by Society for Human Resource Management, (SHRM) small and large businesses can expect another average increase in group health insurance premiums to be between 5-7% for 2023. And for some, the increase will climb by as much as 20-30%.
To help you gain an understanding of why group health insurance costs almost always see annual increases, let’s look at some specifics regarding rate increases in group health insurance. The reality is that most folks are not aware of the differences in how a group health carrier sets premium increases depending on whether you have a small or a large group health plan.
A small group health plan, as defined by the Affordable Care Act, is group health insurance for a company with 50 employees or less. Small group health increases are standardized, which means that insurance companies determine how much they will increase premium rates across the pool of small group companies. Each insurance company has autonomy in determining how much they will increase rates, but they must apply the same increases to all small group health plans.
Small group premiums depend on four key areas:
· The age of the employees
· Employee zip code
· Type of health plan
· Increases in the cost of healthcare
Unfortunately, people get older every year and so this is a factor that will always signal a higher risk. Group health costs are dependent on where employees live relative to access to providers and a history of chronic medical conditions. If you live in an area that is known for heart disease, there is a good chance you are going to pay more.
Insurance companies will also increase the rates of certain types of plans. For instance, a copay plan may receive a 7% increase while an HSA plan may see a 22% increase. Lastly, health insurance companies raise their rates to account for increases in healthcare costs, aka, “medical trend.” Healthcare costs rise due to innovations in technology, new prescription drug options, and high-tech procedures to name a few.
As with your company, any business that employs more than 50 employees is considered a large group health plan. While there are some similarities to small group health premium increases, large group health increases are determined more heavily by factors related to each individual business. Health insurance companies will look at data for each large company and determine what rates they will offer to those customers.
There are five key areas that large groups will be assessing:
· Employee demographics
· Employee zip code
· Healthcare costs
· Healthcare utilization
· “Shock claims”
Employee demographics include the ages of your employees as well as their gender. For example, insurance companies will look at how many women of childbearing age are employed, or they may take into consideration different risks assigned to men of a certain age group. Just like with small groups, group health insurance companies charge a higher rate for employees with greater access to specialty healthcare and higher numbers of providers in their area. Unfortunately, healthcare inflation is outpacing general economic inflation and because of the rapid increases in medical advancements, healthcare costs seem to always be rising.
Group health carriers will look at your employees’ previous use of their healthcare plan and they will look at the number and types of visits your employees had with medical providers. A “shock claim” is a very high, unexpected health insurance claim that an individual files. For instance, if one of your employees delivers a premature baby – taking care of the baby could be between $50,000 and $1,000,000. This would be a “shock claim.”
Typical brokers that work with either small group or large group clients tend to focus on “shopping” premium rates to find a carrier that wants to “underbid” on a company for that year. Unfortunately, this is not a sustainable long-term solution as seen with consistently increasing premiums. And, just like Kodak, they are missing a key component to the change that has already occurred.
Is There Anything That Can Help Control Your Costs?
Yes. There are vendors and plans already in place that will help to control the actual cost of the claim.
Let’s use a knee replacement surgery as an example. The cost for this procedure can range anywhere from $16,000 to north of $200,000. And if you are saying to yourself the more expensive price must be associated with a higher quality doctor/facility, there are numerous studies that have been done to prove that the facilities with the highest reinfection rates and the lowest quality scores often charge the most. Typically, the highest quality facilities charge the least because they are so efficient at what they do - they don’t need to overinflate their prices. Have you ever wondered why you don’t see a quality score posted on a hospital like what you find in every restaurant?
If that wasn’t complicated enough, then you must consider if a group is fully insured or using some type of self-funded model because information about your rate increases will vary depending on the way you fund your group health program.
If you are fully insured and rely on an insurance carrier to provide coverage for your employees, you will have significantly less opportunity to influence your group health premium. Fully insured employers have placed all their health insurance risk with an insurance company and as a fully insured plan, you will have little information on what is driving your healthcare costs. Your insurance company will likely give you little to no information regarding why you are seeing an increase in your group health renewal with the exception being if you employ over 100 employees. In this scenario, the insurance company may give you limited information about your increase by providing you with aggregate reports detailing how often your employees used their group health plan and for what purpose they used it along with any general reports on high-cost claims that your employees filed over the past year.
In contrast to fully insured group health plans, self-funded programs have a better understanding of what is driving their group health costs.
Keep in mind that there are many self-funded models and picking the right vendor lineup is extremely important to ensure that both employees and the company can take advantage of all the benefits that are available. With the right vendor line-up, there comes a greater ability to positively influence outcomes. Overall, though, a self-funded model will provide more details about high-cost claims. Including, how many, what kind, and how often these occur.
Having the right Third-Party Administrator (TPA) to help coordinate your health plan can make a huge difference, along with having a stop-loss partner that will provide decrements for implementing cost containment strategies. Self-funded programs rely on stop-loss insurance to cover any catastrophic claims that their employees need to file, and you may see an increase in your stop-loss premiums due to high-cost claims if you don’t have the proper strategies in place.
Ultimately, self-funded employers can predict and plan for upcoming costs because having access to the right information regarding claims can eliminate big surprises.
Steps For Moving Forward
Companies face a lot of pressure to select not only the right strategy for the organization but for their people as well, and having the appropriate plan design is certainly the first step. My suggestion to you is to make sure that you are partnered with folks that have your best interest in mind. If you are dealing with a vendor whose fiduciary responsibility is to their shareholders, I hate to say it, but you are going to probably lose in that situation. If you are dealing with a broker that only brings you the same basic options year after year, or who are paid on a percentage of your premium and who profit substantially from renewal bonuses, you are probably not going to benefit in the long term from that relationship either.
Technology and innovation are happening faster than ever and the companies that are having the greatest success are the ones that are being proactive about their options. I would encourage you to be open-minded about learning what you may not already know - as they are out there and the right partner can help you uncover them.
American Employer, as you move forward and make plans for your next renewal, I hope this information helps you so that you may lessen any increases, or maybe finally experience a decrease in the costs of your health insurance program. I wish you all the best.
An advisor that is trying to make a difference