Archive for February 14th, 2010

Watch Out For Trend Factors

Sunday, February 14th, 2010

Medical Trend

“Trend” is a fancy name for medical inflation. And, it is a driving force in ever increasing medical insurance rates. Year after year employers are hit with rate increases of 10%, 20%, 35% or more, consistantly. Brokers and insurance consultants point to “trend” as the main culprit.

The sales pitch is that medical inflation (trend) is fueled by ever increasing cost of new and modern technology, an aging population, research costs for new and innovative treatment, R&D for expensive prescription drugs, etc.

But, suspicions abound that trend is primarly driven by secretive PPO – managed care contracts. In every managed care contract we have review, there is invariably an “escalator clause” that insures providers a pay raise as high as 12% per year, compounded year after year.

Recently, we reviewed a renewal from a major insurance carrier. The renewal was early out, six months prior to the anniversary date, based on claims incurred and paid eight months out. Trend was shown as +14%, which produced an effective trend factor for the renewal of +23%.

However, current industry trend factor is about 11%, which if used in this renewal would produce an effective trend factor of about 18%, a 5% differential.

A 5% differential to be loaded as premium, would produce a higher number due to premium tax and reserve requirement. This could be a case where 5% may really be equal to 7-8% premium load, or even higher if commissions need to be factored into the equation. 

Some employers have been successful in reversing trend. Using a 0% trend factor along with sound and common sense logic, is not within the realm of the impossible.