- Posted by Chris Elvidge
- On September 15, 2020
Health insurance premiums and ‘Medical Trend’ tend to surprise and confuse those who are responsible for managing medical insurance benefits. Many customers have a hard time comprehending how the Consumer Price Index for goods and services is considerably lower than medical trend and there isn’t a closer gap in the two.
Insurance carriers renewing customers always include one consistent component—trend. But what do you know about trend and how it affects your renewal? It is a good time to go “back to school” for a refresher as many employers prepare to receive their medical plan premium renewals in the coming months.
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 (for self-insured businesses). Each year, carriers set and file with the state 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.
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.
There are many factors that affect or influence trend but the primary components are:
- 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
Depending on the size of your organization and funding arrangement of your specific plan premium can vary based on the carrier and their filed rating methodology, but trend is certainly always a major factor in projecting rates.
Now there is a new element to renewals that the industry is trying to sort out and that is the associated impact of the COVID-19 pandemic. It is still yet to be determined how premium renewals are going to be affected but there are early indications that many carriers will begin to add these unforeseen costs to their trend values in the future anywhere from 2 to 5 percent.
Health care trend is often looked at in two different ways—prospective and retrospective. Prospective health care trend is the prediction of trend. Retrospective health care trend is a measure of the actual change in health care costs experienced. It is important for an employer group to understand both outlooks of trend, but when predicting what types of renewal increases that an employer might be facing, the prospective health care trend is more important to a carrier because it is considered a better indicator of an upcoming renewal. An employer’s actual renewal increase may differ from the regional or national trend predictions due to plan design differences, demographics, size of the group, regional cost variations, and health care taxes. In addition, groups with over 100 employees enrolled also need to contend with an element of group experience in their renewal. There is a credibility factor applied to the experience based on the size, but utilization of the group also plays a role for those cases.
Over the last five plus years, prescription drugs have been an increasingly large component of the overall spend. For years, prescription drug trend remained relatively flat at mid to high single digits but we have seen prescription trends jump back to high single digits into low double digits. The market has always seen new patented drugs offered at a high price, yet these new drugs were offset by other drugs coming off patent and becoming available in generic form. In the last four to five years, the number of drugs coming off patent has not been sufficient to stabilize the rise in cost due to new specialty drugs.
While there is not one standard definition of specialty drugs, specialty drugs are typically defined as drugs that are both costly to make and complex to manufacture. Historically, they have been prescribed to treat complex conditions such as cancer, HIV, and inflammatory diseases. Specialty drugs have a high cost per unit because in addition to being costly to manufacture there was a limited market for them. Typically specialty drugs were developed to treat a specific component of a disease or to treat rare conditions with very small populations. The specialty drugs hitting the market in the last few years were created to treat more complex diseases with large populations such as cancer, multiple sclerosis, and hepatitis C. Because many of the specialty drugs on the market today have had significant success in treating and curing diseases that affect millions of people, future health care costs might be dramatically lowered by these specialty drug treatments. However, employers today are faced with having to manage the quickly escalating drug costs. Specialty drugs now can represent 35% of total prescription drug costs and roughly 7% of the total health care spend. Some of the recommended strategies for controlling prescription costs are ensuring that plans have prior authorization and step therapy programs; limiting the network of specialty pharmacies; and identifying preferred treatments within disease categories. More employers are also adapting 4 or 5 tier prescription drug structures with added employee cost sharing for specialty, biotech, or lifestyle drugs.
Trend is a complex concept that takes into account many interacting factors. Its influence on determining medical plan costs makes it an important concept to know and understand. Kistler Tiffany Benefits/OneDigital works with carriers in determining even greater detail on its trend determinants, as they can vary widely by plan design type and location.