Understanding How Carriers Calculate Renewals

Insurance carriers typically start with a high quote to provide room for negotiation……………….

Understanding How Carriers Calculate Renewals Improves Rates for Employers

Published on Published onFebruary 12, 2018

By Lee Arledge Employee Benefits Consultant at USI Insurance Services

Despite the  regulatory turmoil in Washington, D.C. over health insurance policies, the health insurance industry is booming.

Stocks and earnings for the big carriers like Anthem  (ANTM +202%), Aetna (AET +423%), United Health Care (UHC +481%) and Cigna (CI +416%) are up over 350% since 2010. Judging by recent  investor  earnings  calls, the fully insured employer market is a significant growth driver. Where exactly is that profit coming from?

Insurance carriers typically start with a high quote to provide room for negotiation. Rates for fully insured renewals start with a seemingly transparent formula:

Cost  of Claims + Cost  of Insurance & Administration + Taxes  and ACA fees = Premium

Oftentimes  renewal rates are first quoted at 17% to 19% but somehow the signed renewal agreement has rates that settle closer to 10%. How are these deep rate cuts possible when there is no line item for profit in the renewal calculation?

How much profit is hidden in that seemingly transparent renewal formula?

Cost of Claims

Most people have the following basic understanding of claims; the carrier pays the doctor and hospital, and ultimately an employer bears the cost of the claims through increased premiums. Larger employers are more credible or predictable, and their renewal calculation reflects actual claims experience.

What many don’t realize is that there is a long list of items buried within claims that generate profit for the carrier, including inflated trend, inconsistent creditability weighting, and inflated claims reserves. Capitation  fees for disease management, care coordination and out-of-network shared savings that are often paid to another division within the carrier are frequently hidden. The numbers can vary but the higher utilizers—companies that spend more on claims—generate significant profit for the carriers, driving the 350% stock price growth over the past seven-years.

Pharmacy Claims

Pharmacy costs are unique in that the distributor, either the PBM or carrier, specifically discloses in the contract that the cost of the drug is marked up from the manufacturer. This is known as spread pricing, and the spread tends to vary from day to day and employer to employer. The drug manufacturers also provide rebates and other bonus incentives to the distributors based on sales quotas.  Spread pricing, rebates, and bonus incentives are large sources of profit for carriers that are concealed from employers within the claims line item on the renewal.

Insurance and Administration

The insurance and administration line items cover everything from provider contracting, to actual claims processing, and payment to customer service. Given the breadth of services covered, the administration charge seems quite fair, maybe even low, for all that is provided.

Some carriers inflate their administrative fees by using both Per Member Per Month (PMPM) and Per Employee Per Month (PEPM) formulas to calculate costs. That seemingly minor change can add thousands of dollars to rates, as there can be two to three times as many members versus employees on a plan.

Uncovering Carrier Profits

A key component  of the USI ONE Advantage® is the Network of local resources and technical experts, which include teams of underwriters and analysts. These individuals have worked for insurance carriers and can uncover hidden profit generators in the renewal formula.

Unlike other brokers whose strategy to lower renewal rates includes demanding that carriers lower rates or lose the case, USI’s underwriters proactively build renewal estimations from the ground up to create rational projections for future cost. The USI team uses the estimations to negotiate directly with the carrier’s underwriters for a fair renewal rate for the employer. The net result to clients is a competitively priced renewal without all the inflated charges and no need to switch carriers every other year.

Negotiating an insurance renewal can be perplexing. Working with an experienced consultant and underwriter alleviates much of the confusion and stress of the renewal process.

To learn more about how USI can negotiate a lower renewal rate for your employee benefits plan, please call me at 470-428-9746 or email me at lee.arledge@usi.com.