Medical Insurance Renewal Update: Ugly Numbers...
Insurance renewal negotiations are on-going and I thought it might be wise to give everyone an update on our activities and likely outcomes. Like everything else in this economic climate, the news isn't pretty. Here's the latest, and the timetable for a final decision and announcement.
Claims Experience
For the last five years our claims have run 84 - 86% of premiums paid. That leads to a flat or slightly increased renewal, as underwriting typically involves taking the last 12 months and trending those costs 15 months looking forward. This is done because the broker uses claims and census data after 9 months of the current plan year, at which point it is 15 months before the end of next plan year. Medical costs typically increase from 9 -15% per year, and average about 12% annually, or 1% per month. So, when we run around 84 - 86% of claims-to-premiums, we usually end up with a 0 - 2% increase.
This year our actual claims have been between 100 - 104% of premiums. We've had one or two large claims, but we've also had generally high utilization. This is typical in years when you have staff reductions; people get concerned about having insurance going forward and go to the doctor rather than putting things off. The combination of large claims and higher overall utilization have driven our claims up 15 - 20% over our typical trend at this time of year.
COBRA
Another important fact to consider is the number of COBRA participants on our insurance plan. This is important because underwriters believe that the only people willing to pay COBRA premiums are sick and therefore will be high-cost participants. Also, proposed legislation from Congress and the new administration are scaring underwriters regarding COBRA participants.
In a typical year we have 10 - 14 people on COBRA at renewal time. This comes from the normal ebb and flow of hiring and terminations. This year, due to staff reductions and the slow job market, we have 70. The company is paying the premiums for a certain number of weeks depending upon each person's length of service, but the plan pays for the claims and they count against our experience. The COBRA law has always limited this participation to 18 months, but Congress has other ideas.
New proposed legislation, as part of the economic stimulus legislation, would extend COBRA for possibly as much as 10 years. Legislation before Congress would allow terminated employees age 55 and over to remain on COBRA until Medicare eligibility at age 65. Also, terminated employees who lose their jobs between September 1, 2007 and December 31, 2009 would be eligible to keep COBRA until age 65 regardless of their current age. Its important to stress that this is proposed legislation, but I believe it is having an impact on our renewal.
Underwriters assess risk, and when risk is not reasonably predictable the underwriting becomes more conservative. By conservative I mean that the underwriters assess a higher premium as a hedge against the worst case scenario because the risk is not predictable. The combination of 70 people on COBRA and the potential for COBRA to last for years, rather than months, is inhibiting our ability to get a competitive rate.
How We're Going to Market
Because of our higher claims-to-premium ratios we instructed our broker on the Wednesday before Thanksgiving to market our health plan to a variety of carriers. What we've found since then is that consolidation in the insurance industry only gives us four or five carriers from which to choose. We've gotten three quotes back so far, and all are in the 20% increase range. We've also gone to market on what's called a "self-insured" model, where the company funds the claims and pays a Third Party Administrator to pay the claims, manage the network, and do all the things you normally associate with an insurance company.
The main issue with this approach, in my opinion, is managing cash flow. Our insurance premiums are typically around $360,000 per month; with a fully insured plan we know that it won't vary much from month-to-month and so cash management is simpler. In a self-insured plan that number might average $360,000 or so, but could be $100,000 one month and $700,000 the next. Still, if our choice is between significantly higher premiums, reduced benefits, both, or taking a cash management risk then self-insurance might be a reasonable option.
Timeline
We will have the final fully-insured quotes this week (altough that's what the broker's been telling me for two weeks). We will have self-insured quotes about 10 days after that. Meanwhile, we're running models on what different reductions in benefits would do to overall costs. This doesn't necessarily mean that benefit reductions are inevitable, but they are possible. It also doesn't mean that a large cost increase is inevitable, but it is possible. We're looking for one favorable quote that we can either accept or use as negotiating leverage with the other carriers. We've yet to see it, but not all quotes are in.
We must have a senior leadership decision by around February 20th in order to conduct Open Enrollment March 1 - 31 as required by law. I'll update you if/when there's news to report; otherwise we'll make a formal announcement of your FY '10 benefits sometime around the last week of this month. I'm not happy about where we are and we're working on this literally every day. Still, it is what it is and I wanted everyone to know the status of this effort.
Claims Experience
For the last five years our claims have run 84 - 86% of premiums paid. That leads to a flat or slightly increased renewal, as underwriting typically involves taking the last 12 months and trending those costs 15 months looking forward. This is done because the broker uses claims and census data after 9 months of the current plan year, at which point it is 15 months before the end of next plan year. Medical costs typically increase from 9 -15% per year, and average about 12% annually, or 1% per month. So, when we run around 84 - 86% of claims-to-premiums, we usually end up with a 0 - 2% increase.
This year our actual claims have been between 100 - 104% of premiums. We've had one or two large claims, but we've also had generally high utilization. This is typical in years when you have staff reductions; people get concerned about having insurance going forward and go to the doctor rather than putting things off. The combination of large claims and higher overall utilization have driven our claims up 15 - 20% over our typical trend at this time of year.
COBRA
Another important fact to consider is the number of COBRA participants on our insurance plan. This is important because underwriters believe that the only people willing to pay COBRA premiums are sick and therefore will be high-cost participants. Also, proposed legislation from Congress and the new administration are scaring underwriters regarding COBRA participants.
In a typical year we have 10 - 14 people on COBRA at renewal time. This comes from the normal ebb and flow of hiring and terminations. This year, due to staff reductions and the slow job market, we have 70. The company is paying the premiums for a certain number of weeks depending upon each person's length of service, but the plan pays for the claims and they count against our experience. The COBRA law has always limited this participation to 18 months, but Congress has other ideas.
New proposed legislation, as part of the economic stimulus legislation, would extend COBRA for possibly as much as 10 years. Legislation before Congress would allow terminated employees age 55 and over to remain on COBRA until Medicare eligibility at age 65. Also, terminated employees who lose their jobs between September 1, 2007 and December 31, 2009 would be eligible to keep COBRA until age 65 regardless of their current age. Its important to stress that this is proposed legislation, but I believe it is having an impact on our renewal.
Underwriters assess risk, and when risk is not reasonably predictable the underwriting becomes more conservative. By conservative I mean that the underwriters assess a higher premium as a hedge against the worst case scenario because the risk is not predictable. The combination of 70 people on COBRA and the potential for COBRA to last for years, rather than months, is inhibiting our ability to get a competitive rate.
How We're Going to Market
Because of our higher claims-to-premium ratios we instructed our broker on the Wednesday before Thanksgiving to market our health plan to a variety of carriers. What we've found since then is that consolidation in the insurance industry only gives us four or five carriers from which to choose. We've gotten three quotes back so far, and all are in the 20% increase range. We've also gone to market on what's called a "self-insured" model, where the company funds the claims and pays a Third Party Administrator to pay the claims, manage the network, and do all the things you normally associate with an insurance company.
The main issue with this approach, in my opinion, is managing cash flow. Our insurance premiums are typically around $360,000 per month; with a fully insured plan we know that it won't vary much from month-to-month and so cash management is simpler. In a self-insured plan that number might average $360,000 or so, but could be $100,000 one month and $700,000 the next. Still, if our choice is between significantly higher premiums, reduced benefits, both, or taking a cash management risk then self-insurance might be a reasonable option.
Timeline
We will have the final fully-insured quotes this week (altough that's what the broker's been telling me for two weeks). We will have self-insured quotes about 10 days after that. Meanwhile, we're running models on what different reductions in benefits would do to overall costs. This doesn't necessarily mean that benefit reductions are inevitable, but they are possible. It also doesn't mean that a large cost increase is inevitable, but it is possible. We're looking for one favorable quote that we can either accept or use as negotiating leverage with the other carriers. We've yet to see it, but not all quotes are in.
We must have a senior leadership decision by around February 20th in order to conduct Open Enrollment March 1 - 31 as required by law. I'll update you if/when there's news to report; otherwise we'll make a formal announcement of your FY '10 benefits sometime around the last week of this month. I'm not happy about where we are and we're working on this literally every day. Still, it is what it is and I wanted everyone to know the status of this effort.
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