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Wednesday, October 19, 2005

A Mid Year Health Insurance Update

September is mid-year for our healthcare plan. We are fully insured with United Health Care (UHC). We moved to a fully-insured plan two years ago after many years of more-or-less paying our own medical claims. In being quasi "self-insured" we saved the cost of insurance, paying only actual claims and administrative fees (about 16% of annual cost). The bad news was that we were on the hook for almost all the medical expense. This program lost us money for years, as an employee group this small cannot spread the risk over a large enough group of people to absorb a catastrophic health claim such as might arise from a terminal cancer, severe auto accident, or heart surgery.

With the move to full insurance, we track financial performance through "claims to premium" ratio. This is short-hand for how much in medical claims UHC pays as a percentage of the monthly premium we pay them. At mid-year, our paid claims were 81% of our premium. Add to that about 16% administrative fees, and UHC is paying 97 cents in claims + salary & overhead costs for every $1 we're paying them. So far, that's good but what does it mean for next year's premiums?

When a company renews health coverage the premiums for the following year are roughly a combination of claims experience (the 81%) plus administrative fees (the 16%) plus the anticipated trend line. Trend line is what the underwriters at the insurance company believe will be the increase in medical claims cost next year. We believe next year's trend line will be about 8 - 9 %.

Last year we were 92% claims to premium, and UHC's initial renewal quote was a 30% increase. We fought that hard and came in at about an 8% increase. UHC's renewal quotes were outrageous, and many of their customers didn't challenge them. As a result, UHC's corporate profits this year are expected to be about $2 billion; an amount so obscene that even they are embarrassed by it, according to some industry insiders. Still, we anticipate UHC will ask for double digit increases and we'll start negotiations downward from there.

In short, the plan seems to be working well, and as-designed should be stable into next year with a good probability of single digit increases again for fiscal '07. We may also have a design change or two that might help keep that in check. More as we know it, but for now it doesn't appear that a major price increase for you and your families is on the horizon at renewal in six months.

Jim

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