- Posted by Chris Elvidge
- On August 10, 2017
As we head down the home stretch of summer, now is a great time to review what goes into a medical renewal and makes up a premium.
Insurance carriers that deliver renewals have one consistent component of a renewal that is lobbed out often—TREND. But what do you know about trend and how it affects your renewal? Let’s go “back to school” a little early for a refresher as many employers prepare to receive their medical plan renewals in the coming months.
What is Trend?
One of the factors in calculating any future increase is called trend.
Trend is a prediction of how much health care costs will rise over the next policy year. It is one of the factors used to calculate renewal rates for health plans and stop-loss insurance. Each year, carriers set their own trend level based on various factors, including the current health care inflation rate, analyst forecasts, and their own experiences. It is important to note that the trend rate is not the same as the actual renewal rate, though trend does play a role in how the carrier determines the annual plan cost.
Carriers typically determine trend by taking into account the “experience period” (the known claims experience) and the “projection period.” Claims are trended using the midpoint of the experience period (six months of claims) to the midpoint of the projection period (six months of projected claims). For example, if the policy period is January 2017 to December 2017 and the renewal projection is utilizing claims experience from October 2015 to September 2016, you need to account for the additional months of claims in 2014 that are not included in the renewal projection.
There are four main components of trend. These elements are common across the risk spectrum, although you will see that the impact of any given component will vary widely depending on which level of risk is being evaluated (e.g., first-dollar coverage, consumer-driven options or catastrophic risk). Each element of trend needs to be viewed on a stand-alone basis.
- Inflation: The price per unit of service (medical supplies, equipment, staffing, etc.) will likely increase over time, and must be accounted for in projecting plan costs.
- Cost shifting: Medical care providers can shift costs from discounted payers (such as government programs and the uninsured) to those whose charges are based on what is considered reasonable and customary.
- Utilization of new technology: Use of medical care can be impacted by plan design, local and regional conditions, and new technologies, drugs and therapies.
- Deductible leveraging: If fixed plan benefits such as copays, deductibles and other plan limits remain the same over time, there is a greater claim cost to the plan because the cost of services increases. For example:
- Year 1: $2,500 claim minus $250 plan deductible = $2,250 paid claim
- Year 2: $2,850 claim (increased by 14 percent trend) minus $250 plan deductible = $2,600 paid claim
Trend is a complex concept that takes into account many interacting factors, including historical experience and future estimates. Its influence on determining medical plan costs makes it an important concept to know and understand. KTB works with carriers in determining even greater detail on its trend determinants, as they can vary widely by plan design type and location.
Depending on the size of your organization and funding arrangements, your specific premium calculation can vary based on carrier, but trend is certainly always a major factor in projecting rates.