This elementary course in underwriting offers an easy way to estimate your renewal with enough certainty that you can set your accrual rates and proceed with open enrollment. Underwriting is not rocket science. But it takes experience.
Calculating Your Stop-loss Renewal Quote Before Open Enrollment
MyHealthGuide Source: ParetoHealth, 9/27/2022
The latest post of The Contrarian blog discusses a common mistake of many employers: allowing their stop loss quote to drive their open enrollment period. (See excerpt below titled, How to Calculate Your Renewal Quote before Open Enrollment)
In the coming weeks, The Contrarian blog will offer straight-talk advice about open enrollment. In this featured post, ParetoHealth Senior Vice President Kristen McKenna discusses why it’s a mistake for employers to waste weeks (or longer) waiting on renewal quotes when they could spend the time strategizing and planning. With this elementary course in underwriting, she offers an easy way to estimate your renewal with enough certainty that you can set your accrual rates and proceed with open enrollment. Follow her advice and you’ll reduce the stress of the season and free yourself to focus on strategic planning instead.
Read her post here and subscribe to The Contrarian for more insight to come.
ParetoHealth is the largest health benefits captive manager in the country, with over $3B in healthcare benefits at hand, $800M in stop-loss premium under management, and over 600,000 covered lives. Contact Catharine Thurston at firstname.lastname@example.org and visit paretohealth.com.
How to Calculate Your Renewal Quote before Open Enrollment
MyHealthGuide Source: Kristen McKenna, Senior Vice President, ParetoHealth, The Contrarian blog (full text), 9/27/2022
In this blog post, I will be going over the process you can use to make this estimation, as well as examining the various factors that go toward making it up.
To calculate accrual rates, start with the biggest component, the aggregate claims. The industry would have you believe that calculating aggregate claims is as complicated as going to the moon, but that’s just not true. It is very easy to produce an estimate that is directionally correct.
At the core of most calculations, you take the monthly aggregate claims (meaning you cap all claims at the level of the specific deductible) over the last 24 months. Next, convert to a PEPM to eliminate fluctuations in enrollment, average them, and then add a factor for medical inflation from the midpoint of the data. You then apply this figure to your anticipated enrollment. I’d suggest assuming an overall medical trend of about 6-8% (this number might go higher in future years given all the pressure on medical wages).
Let’s use some numbers to make this a bit more concrete. These are purely hypothetical, but I’ll assume that the 24-month average claims on a PEPM basis were $490. If we take the $490 and multiply it by 1.08, we get a $530 PEPM rate for expected aggregate claims. We multiple that by 200 employees and by 12 and get an annual estimate of $1.270m. This is the first part of our renewal estimate.
Remember that the stop loss carrier’s aggregate factors don’t determine your claims – your population and their health conditions determine your claims – so don’t fall into the trap of assuming that 80% of their renewal aggregate factors is some magic number.
Our hypothetical expiring premium is $400,000 for a $50,000 specific stop loss. Stop loss premiums increase faster than the underlying medical inflation rate due to leveraged trend. The industry average for levered trend for a $50,000 specific stop loss is probably 15-17% – but we’ll use 15% to make for easier math. Our employer can therefore assume a 15% increase and calculate a renewal stop loss premium of $460,000. This is the second part of our renewal estimate.
If you’re self-insured, you’re paying a TPA (and maybe your consultant) on a PEPM basis. Let’s assume this is $50 PEPM, or a total $120,000. You can probably assume TPA expenses will increase about 3% a year, giving a renewal cost of $124,000. This is the third and final part of our renewal estimate.
We now add all three parts together – aggregate claims (not aggregate factors), specific premium, and expenses – and get a total $1.854m. This can be used to set accrual rates and you can hold open enrollment without waiting for your stop loss renewal.
When I explain this to people, the first reaction I typically get is, “But what happens if the specific increase is a lot higher than 15%”? The answer is “not much.” If the stop loss increase had been 25% instead of 15%, the premium would have been $40,000 higher. The overall cost only increases by 2.2% – not enough to worry about (and the same thing is obviously true with a lower increase).
The one caveat I’d put here is that I’m assuming you’re in one of our captives, meaning that your maximum stop loss increase is 30%. If you aren’t in one of our captives, it’s possible you could have a massive increase in your stop loss premium – either directly or using lasers – but that just highlights why you want to be in our captives.
The bulk of the estimate is in the aggregate claims, so that is where the variance is likely to come from, not the specific premium. If you have anything unexpected going on with your aggregate claims, ask for help – from your broker, an actuary, or someone at Pareto.
But remember that no matter where you set your estimate losses, aggregate factors, and accrual rates, they are all just estimates. They will be tested over the next 12-18 months, and it is very unlikely you’ll be spot on – some years you’ll overshoot and some years you’ll undershoot – but the amounts are small and easily adjusted in your financial statements.
So yes, open enrollment sucks – but if you’re in one of our captives, it doesn’t have to be a last second mad dash. It can be scheduled months in advance, and you can spend your time worrying about what is driving costs and what do to about it – not the small variability in a stop loss renewal.