Healthcare expenditures in the United States are at an all-time high. According to the American Medical Association, health spending in the U.S. increased by 9.7% to $4.1 trillion in 2020, or $12,530 per capita. This is a significant 4.3% growth rate from the prior year.
With outlier insurance plan renewals, many companies are experiencing health insurance renewal increases of more than 20%. While the nationwide industry increase is approximately 8%, companies encountering high medical loss ratios (MRL) for two to three consecutive years are seeing significant increases of 40% to 50% and higher. Rising healthcare costs and an increasing number of large claims are often to blame.
Unfortunately, options are often limited for companies after receiving an outlier increase, as this is seen as a red flag among underwriters for other carriers. When this situation occurs, it is important to seek assistance from an experienced broker who knows how to properly handle negotiations with underwriters and can recommend viable solutions for outlier scenarios.
The Rising Cost of Insurance Plans
Employers in America expect health insurance plan costs per employee to increase 5.6% on average in 2023, according to a National Survey of Employer-Sponsored Health Plans published by Mercer. However, the full effect of price inflation in health plan cost increases has not yet been felt as most health plans come with multiyear contracts with healthcare providers.
Employers have been heavily affected by the rising cost of insurance plans. The latest ValuePenguin survey revealed that 74% of insured Americans are stressed about rising health insurance costs, including those making between $75,000 and $99,999 (82%), baby boomers (80%), parents with adult children (77%), and women (77%).
Hospitals Are Under Pressure as Inflation Has Led to Significant Cost Increases
The country faces ongoing challenges due to the high cost of medical care. According to the 32BJ Health Fund, hospitals receive approximately one dollar out of every three spent on healthcare, resulting in an annual average of $1.3 trillion.
Prices set by hospitals have a significant impact on healthcare spending and are considered one of the top drivers of costs in healthcare. With the cost of healthcare rising, individuals and employers are also finding it more challenging to afford health insurance. Often, increased cost sharing is passed down to employees through high-deductible health plans and higher premiums.
The cost of specialty drugs has continued to grow, totaling $301 billion in 2021, an increase of 43% since 2016. Specialty drugs represented 50% of total drug spending in 2021.
A Group Health Insurance Premium Increase of 20% or More Is Considered an “Outlier Renewal”
While variations in price are common in an industry as complex as healthcare, an outlier renewal for a group health policy is reflected by an increase of at least 20%. Hospital prices are considered just one component of the healthcare system, accounting for approximately 44% of total healthcare spending among the employer-insured population.
Today, nearly half of the total U.S. population receives medical insurance through commercial plans offered by unions and employers, or that are bought by individuals. Per-person spending on hospital services continues to increase at a rapid rate when compared to healthcare spending by federal programs, such as Medicare.
Companies With High MLR Are Seeing 40% to 50% Percent Higher Costs Due to High Outliers
The medical loss ratio refers to the share of total healthcare premiums spent on medical efforts and claims to improve the quality of care. An insurer’s MLR is determined by adding all quality improvement activities and total paid medical service claims together, and then dividing that number by the total premium revenue minus all allowable deductions.
An MLR gives clarity on how a plan is performing. An MLR over 100 could indicate that the health insurer is spending more on claims than they are receiving in premiums. Many companies with high MLRs are now seeing significant increases in cost of 40% to 50% and more. With increases in hospital prices, high-cost claims, and increased pressure from drug prices, many companies are concerned about the ongoing affordability of health plans.
Increase in Red Flags for Other Carriers’ Underwriters
The way that health insurance works is by protecting important assets from the high cost of medical care. Underwriting is a key component of health insurance and involves evaluating the risk of insuring an individual or group to determine if it is profitable for the insurance company to take a risk in providing them insurance.
Underwriters at insurance companies often work with incomplete data but still must make sure that they only insure profitable risks. Due to this limited data, they may see an outlier increase and assume that the business is a bad risk. This can result in the business being priced high or refused completely. When this happens, businesses are often limited when it comes to what health plans they can obtain in the future.
Medical care prices and other health spending continues to outpace growth in the rest of the economy. Inflationary pressures within medical networks are directly affecting healthcare providers, driven heavily by staffing shortages and cost increases in the Consumer Price Index. As hospitals and medical groups negotiate contract renewals with insurance carriers, they have demanded more significant payments to insurance companies, an expense that is being passed to businesses.
Protecting Your Company From Outliers
While there is ample evidence that points to increasing hospital prices to be the leading cause of increased healthcare spending, there are many different strategies that can help to lower these costs. For example, enacting a cap on outlier prices through federal and state policymaking has been shown to be effective in lowering commercial hospital prices.
Many have also found success with pursuing oversight by the Federal Trade Commission (FTC) on anticompetitive practices of hospitals due to vertical and horizontal supply chain consolidation. Other strategies look at various benefit design options to help shift utilization towards high-value providers.
Avoiding the “Death Spiral”
While rare, the ominous “death spiral” has the potential to cause financial destruction within organizations. A death spiral describes a scenario in which health insurance premiums increase so rapidly that many healthy people choose to drop their coverage as they perceive it to be no longer worth the cost. In turn, premiums begin to rise even more, leaving a pool of less healthy people at risk.
The pattern continues as more healthy people drop their coverage as premiums gradually increase until the spiral reaches a point where the market just collapses. This ultimate collapse typically occurs when health insurance coverage becomes too expensive for anyone to afford, resulting in many insurers choosing to opt out of the market altogether. A death spiral is considered the worst-case scenario for the insurance market.
Pressure on health insurers continues to grow as many employers fight to slow the rising healthcare costs. For example, in February, Humana announced that it would be phasing out its commercial business with employer health plans over the next 18 to 24 months, and other insurers are likely to follow suit.
A Customized Health Plan Can Help Start Controlling Claims Now
With healthcare costs continuing to surpass inflation, more organizations are looking for ways to control rising costs. Although there are countless off-the-shelf health insurance options, these plans provide companies with little control over claims. Building a customized health plan has been proven to be one of the best ways to significantly reduce costs while improving employee benefits.
With traditional health plans, vendors and contracts are prepackaged by the insurance carrier, leaving little room for changes. Alternatively, a customized health plan enables organizations to competitively shop vendors, which can result in more affordable pricing and improved benefits for workers.
New City Can Help Negotiate With Underwriters and Manage Outliers
In addition to lowering costs for businesses, building custom health plans also results in a better overall experience for employees. New City Insurance helps organizations create customized health plans that are built on the major national networks, such as Cigna, Humana, Aetna, United, and the Blues. With nearly all of these plans, employees can share in reduced healthcare costs by eliminating co-pays for common health services, such as labs, complex imaging and multiple classes of prescription drugs.
New City Insurance provides organizations with a long-term solution by helping them manage cost claims more efficiently. To take control of your healthcare costs, contact the group health insurance experts at New City Insurance or call us at (888)210-2765.