Proper rate setting must be based on one’s own risk not based on someone else’s. That’s simple common sense. To do otherwise is a recipe for disaster.
The age old struggle between marketing and underwriting is never ending and it’s alive and well in the Texas school market.
Shadow Pricing
Shadow pricing is a method used to gain a competitive advantage. For example a competitor’s rate is $500. Underwriting places your risk at $600. You are not competitive. You will never make sales quota.
You bypass underwriting and beg upper management for rate relief. You remind them you’ll only be as successful as your underwriter wants you to be. Upper management knows their year-end bonus is weighted heavily on new business and not so much on profitability. They scream at underwriting for rate relief. Underwriting screams back.
Management decides on the Nuclear Option. “We’ll do it this time and make up for it on renewal” they reason. So in order to remain competitive marketing gets a rate concession of $450. It’s now cross-your-fingers-time. Furious underwriters secretly plot revengeful pay-back on renewal. Marketing doesn’t care.
Shadow Pricing Is Alive & Well In The Texas School Market
The TSHBP health plan for Texas school districts has practiced shadow pricing as a method of gaining a competitive advantage over their chief rival, the TRS ActiveCare government health plan, as evidenced in a TSHBP proposal solicitation to a prospective district:
If TRS‐ActiveCare HD rates for the 2022 – 2023 plan year are lower than the TSHBP Aetna HD plan for the 2022 – 2023 plan year, TSHBP shall lower the Aetna HD plan rate for the 2022 – 2023 plan year to match a comparable TRS ActiveCare HD plan.
If TRS‐ActiveCare Primary or Primary+ rates for the 2022 – 2023 plan year are lower than the TSHBP Aetna Signature plan for the 2022 – 2023 plan year, TSHBP shall lower the Aetna Signature plan rate to match the 2022 – 2023 average plan rates for TRS‐ActiveCare Primary and Primary+ plans.
Alternatively, if a TRS‐ActiveCare plan rate for Employee Only for the 2022‐2023 plan year increase by more than seven percent (7%), the TSHBP may increase the 2022 – 2023 plan rates for the comparable TSHBP Aetna plan but if TSHBP increases the 2022‐2023 plan rate, TSHBP shall not increase more than the comparable TRS‐ActiveCare plan.
If TRS ActiveCare plan rate for dependent tiers (Employee/Child, Employee/Spouse, Employee/Family) for the 2022‐2023 plan year increase by more than nine percent (9%), the TSHBP may increase the 2022 – 2023 plan rates for the comparable TSHBP Aetna plan but if TSHBP increases the 2022‐2023 plan rate, TSHBP shall not increase more than the comparable TRS‐ActiveCare plan.
The problem with this strategy in this instance is the TRS ActiveCare program is underfunded. During the February 2023 TRS ActiveCare board meeting trustees learned:
“TRS premiums are now lower than what TRS spends on health care claims. This means the difference between TRS-ActiveCare suppressed premiums and claims costs must be made up in subsequent years.”
Shadow pricing deficit-based rates incorporating similar or better benefits will inevitably lead to underwriting losses.
The TSHBP is not the only one practicing shadow pricing. The El Paso Independent School District insured through another vendor under the guidance of the district’s consultant arbitrarily lowered rates on a renewal year to remain competitive with the TRS government health plan.
Guess what happened. It’s not hard, come on, try.
RELATED BLOG POSTINGS:
Texas School Districts Experience Underwriting Miracle
Sneaky Underwriting – Who Let The Dogs Out?
School District Experiences Underwriting Miracle Offer They Can’t Refuse
What’s The Final Tally On What Could Be The Biggest Health Insurance Reinsurance Loss In History?
