Understanding Trend for Health Plan Renewals

Currently, healthcare costs in the United States are high and rising, outpacing inflation and wage increases. While many employers had relatively lower claim costs during the COVID-19 pandemic, medical plan costs are approaching pre-pandemic levels as healthcare utilization rebounds. Other factors like inflation, specialty and novel prescription drugs, new medical technology, catastrophic claims, and consolidation among hospitals and providers have contributed to healthcare cost increases.

Healthcare costs are expected to grow 7% in 2024 due to rising pharmaceutical expenses and increasing premium rates, according to an annual report from PricewaterhouseCoopers. The 2024 projection is higher than for 2022 and 2023, which were 5.5% and 6%, respectively. As a result, employers face the difficult task of addressing rising healthcare costs while trying to keep employee benefits coverage affordable, especially as employers renew their health plans. However, many employers’ budgets are limited, forcing them to find new ways to balance their spending.

With healthcare costs rising for the foreseeable future, savvy employers are implementing strategies to ensure their benefits plans are both sustainable and valued by their employees. By understanding medical trends and their impact on health plan renewal rates, employers can implement effective strategies to mitigate rising healthcare costs. This article explains medical trends and their impact on employers’ renewal rates.

What is a Trend?

One of the factors used in calculating future cost increases is called medical trend or simply trend. A trend is a prediction of how much healthcare costs will rise over the next policy year, assuming benefits remain the same. It’s 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 healthcare inflation rate, analysts’ forecasts, and their own experience. It is important to note that the trend rate is not the same as the actual renewal rate, although trend does play a role in how the carrier determines the annual plan cost.

What Factors Help Determine Trend?

There are four main components of trend. These elements are common across the risk spectrum, although 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 the trend needs to be viewed on a stand- alone basis.

1. Inflation—The price per unit of service (e.g., medical supplies, equipment, staffing) will likely increase over time and must be accounted for in projecting plan costs.
2. 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.
3. Utilization of New Technology—Use of medical care can be impacted by plan design, local and regional conditions, and new technologies, drugs, and therapies.
4. Deductible Leverage—If fixed plan benefits—such as copays, deductibles, and other plan limits—remain the same over time, there’s 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% trend) minus $250 plan deductible = $2,600 paid claim

Trend is a complex concept that considers many interacting factors, including historical experience and future estimates. Its influence on determining medical plan costs makes it essential to know and understand. Medical carriers should be able to provide employers with even greater detail on their trend determinants, as they can vary widely by plan design type and location.

Summary

Tackling affordability and rising healthcare costs will continue to be top challenges for employers for the foreseeable future. Employers may need to find new strategies, rework existing business models, and take advantage of transformational opportunities to lessen the impact of rising healthcare costs.  Understanding medical cost trend can help employers examine their plan designs and take steps to protect themselves against increasing healthcare costs.

For more health care resources, contact us today at 239-298-8210 or [email protected].

This article is not intended to be exhaustive, nor should any discussion or opinions be construed as professional advice. © 2023 Zywave, Inc. All rights reserved.