There are numerous differences for health insurance plan sponsors resulting from their plan size: the implications of various state laws, Affordable Care Act requirements (e.g. ESRP), compliance obligations (e.g. COBRA), DOL obligations (e.g. Form 5500 reporting), and whether Medicare pays as primary vs secondary are all driven by different standards of size. Another important difference between larger and smaller health insurance plans impacts how rates are developed: an employer’s own claims are included in the renewal development methodology for larger employers.
Large plans, often defined as employers with more than 100 employees enrolled on the plan, are different from smaller plans because they explicitly develop future rates based upon past claims experience. In other words, insurers review past claims during some period (i.e. the “Base Experience Period” or “BEP”) and project (using trend factors) a future anticipated claim value for the future renewal period; Groups with worse claims during a given BEP (compared to groups with preferable claims) are expected to again have worse claims during the renewal period (compared with groups with preferable claims.)
Illustration of timing of BEP -> renewal for experience rated insured renewal
The way this development is calculated involves important assumptions and has variation across insurers. These assumptions and conventions include, but are not limited to, which BEP is used, factors utilized in adjusting claims from paid to incurred, pooling for high claimants, credibility assigned to the claims, assignment of a “manual rate” for employers not deemed fully credible, and trend factors utilized for medical and pharmacy claims. Finally, and arguably least important, is the assumption about administrative expense charged by the insurer. You can imagine that an insurer can demonstrate a very aggressive (e.g. 6.5% of premium) administrative fee and be positioned for great profitability if they are able to agree upon conservative assumptions about claim trend, pooling, and completion.
Snippet of output from experience-rated insured renewal simulation script Jens wrote in Python
In our experience, more sophisticated brokers that proactively and independently model renewals can improve client results by 5-10% compared to brokers focused on a simple bid model, where competition is used as the primary means of negotiation.
Best Practices
There are a number of ways plan sponsors and insurance agencies should manage employee benefit renewals. These should be segmented by market size, state of client domicile, and client goals. Then, some considerations:
- Large Group
- Review assumptions behind renewal. At a minimum:
- BEP used
- Trend factor applied (and months applied)
- Completion factors included
- Assumptions behind PBM rebates
- Risk charges and administrative fees incurred
- Adjustments to claims based upon network utilization and discounts available
- Pooling charges assessed and claims pooled
- Compare pros/cons of an ICHRA solution leveraging the individual market
- While this tends to get more traction amongst smaller groups, this has been increasingly a strategy, for carve-out as well as full-replacement, in the larger group space in certain states.
- Consider level-funded and self-funded solutions in the marketplace
- Understanding the risks and benefits
- Also, understanding state-specific limitations (e.g. NY vs Pennsylvania) and other implications (e.g. possible implications to ACA reporting)
- When reviewing true self-funded solutions:
- Potentially consider captive strategies for medical stop-loss
- Review solutions for improving costs for pharmacy claims
- Review assumptions behind renewal. At a minimum:
Some of our favorite consulting and client work involves analyzing the cost structure underlying a given financing strategy for health and welfare benefits and then contrasting the approach against another model, while stress testing the model against future scenarios.
Reach out to Stuart or Jens to discuss your own needs, questions, and thoughts further!