This last year has been a very costly one for health insurance carriers.

As a result, the HMO’s and insurance companies are proposing significant renewal rate increases. When you combine that with the current economic condition, it creates a difficult problem for employers.

However, it is possible to mitigate the increases by doing some planning at least two to three months in advance of the renewal date of the group policy.

The process involves a thorough analysis of the three key aspects of your group benefits plan:

1. the current plan design (including the benefit structure, amount of costs shared by the employee, and the selection of employees who are eligible);

2. the appropriate carrier (including the negotiation of a fair premium rate which will allow the carrier to cover its anticipated costs while still keeping the rate within your budget); and

3. the servicing of the plan by the carrier, your broker or an independent third party of your choice.

Here is a discussion of the way group insurance premiums are calculated. It also includes a suggested approach to the renewal process.
A. Calculation of Premium Rates

Generally, the insurance company or health maintenance organization determines the premium rates for group medical plans by adding its estimate of the following pieces as they relate to the group policyholder:

1. The claim costs (the costs of the medical benefits).

2. The carrier’s administrative expenses (for claims adjudication, premium or gross receipts tax, general overhead, production of booklets and promotional material);

3. The carrier’s charge for risk, or profit or “contribution to surplus”; and

4. The agent’s or broker’s commissions.

Item 1. Claim Costs

A plan’s design and the way the carrier handles claims determines the claim costs.

For example, if you provide employees with a medical benefit plan which pays for every item of medical expense, it will increase costs beyond the average for two reasons.

First, employees will tend to use more services and supplies than are really needed. This increases the costs beyond the normal.

Secondly, it costs the carrier anywhere from $25 to $50 to process a claim. If it is handling a large number of small claims, the overhead per claim will be very high and will mean a much higher premium charge.

The changes in plan design can be subtle or obvious. In either event, the savings will be reflected in lower premium rates over a long period of time.

A subtle change would involve an increase in co-payments for newer, expensive drugs where older and cheaper drugs are just as effective.

Increasing the employee’s share of the costs (by increasing the deductible or co-payments) is a more direct change.

The way a carrier administers claims can have a dramatic effect upon the costs of the plan to the employer. Tight, but fair and reasonable, claims administration can yield a 10-20% savings in claim costs. This is especially true when combined with a good network of physicians, hospitals and other suppliers of medical care or supplies,. which has agreed to appropriate treatment procedures and favorable fee charges.

Item 2. Carrier’s Retention

(Items 2, 3 and 4 above)

a. Administrative Expenses Charge

The carrier will determine its allocation of expenses according to its own basis – generally with a formula which uses a combination of fixed dollar amount per group, plus a percentage of claims costs for claims administration plus a charge per participant/insured person, plus any taxes which may be imposed upon the premium.

When you design a plan which reduces the carrier’s cost of administration, the premium rate will reflect this decrease.

b. Risk Charge

The charge for profit or risk or contribution to surplus will vary by carrier and by type of coverage. Some benefits are riskier than others; some carriers demand a higher risk charge than others.

The risk charge serves two major purposes – since no one can predict the future perfectly (not even I!), the carrier expects some of its groups will end the year in a deficit position while others will be in a surplus position with respect to their experience. The risk charge made to those in the surplus position helps to offset the losses incurred by the groups which produced a deficit.

The risk charge also is intended to produce the addition to surplus for the company.

The risk charge will vary by the size of the group. It might be 5 to 10% for small group and as little as 1% for larger groups.

c. Commission

The agent’s or broker’s commission is determined by a contract between the carrier and the agent/broker. The commission is the amount of premium the employer pays which compensates the broker for the sale of the plan and for providing the servicing the account.

As a result of some nasty criminal cases back in the 1950’s and 1960’s) the commission rate invariably is a graded one. For most group cases, it is the same for first and renewal years. Sometimes the commission will be higher the first year than in renewal years.

The commission rate is graded so that the larger the group, the lower the rate of commission – getting to less than 1/2% for the portion of premium in excess of $1,000,000 annually.

Items a, b and c are the major factors which go into the carrier’s “retention” – or charge for servicing the group’s medical plan.

With groups of over 200 employees, this retention charge can and should be negotiated between carrier and employer.

Further, when the carrier recognizes the group will not leave or move to another carrier after only one or two years, it will generally reduce the risk and retention charges.

Bear in mind, group insurance is a commodity being sold to you by the carrier. The relationship between you, as buyer, and carrier, as seller, is not much different than any other commercial enterprise. Long-term relationships yield concessions.

B. Suggested Approach to Your Group Policy’s Renewal

At least three months prior to your group policy’s renewal date, you should engage an independent group actuarial consultant to work with you in reviewing your current plan, determining your objectives and developing a program for the negotiation of a renewal package with your current carrier or, through proposals, with other carriers.

Larry Mitchell