Health Benefit Services News

: : Julie Seiden, Managing Director,
Health Benefits Services | 

631.923.1595 ext. 310

G.R. Reid Consulting Services, LLC

What Factors Determine Small Group Health Renewal Rates?

Determining renewal rates for small groups (2-50 employees) is not an arbitrary process. There is definitely a method to the madness. But what exactly comes into play in calculating the rates?  Despite the fact that there are various criteria to consider, generally insurers use the following factors to formulate your renewal rates:

Trends in General Healthcare
This is a baseline factor applied to all group health insurance renewals. The word "trend" refers to two things:  the change in cost of healthcare products and services, and how consumers utilize these products and services. New technologies, procedures, and even facilities encourage more people to seek advanced treatments.  And all these extra goods and services are not available for free.  They are expensive and increasing rapidly! The "prescription drug trend" is another factor that influences healthcare trends.  More and more drugs are being introduced, and the pharmaceutical companies market them aggressively.  The costs of research, development and advertising of these drugs are significant.  These rising expenditures, in combination with increasing utilization, all affect the baseline factor. Another factor in this "trend" has much to do with your group's geographic location.  Similar to housing costs, healthcare costs differ significantly upon location.  Healthcare premiums in some areas reflect the higher cost of more people using state-of-the-art, expensive, treatments and services.

Group-Specific Medical/Health Factor
A carrier may adjust renewal rates based on the overall health of the individuals covered under your health plan, depending on state regulations. The premiums can be adjusted to cover the cost of expected future claims. Based on your state regulations, some rate caps may exist that limit the amount an insurer can raise premiums based on your group's health status alone. More often than not, carriers use a "prospective" system where they look at medical conditions and diagnoses, which may affect the group's amount of claims in the coming year.  Under this system, resolved claims from the past year are not taken into account. The renewal adjustment can also be positively impacted by the overall good health of the group being evaluated.

Group-Specific Characteristic/Demographic Profile
This component includes:

1. Changes in age brackets (For example, an employee or spouse turns 50, moving them from the 45-49 bracket to the 50-54 bracket.)

2. Gender and coverage composition changes (This reflects changes in the percentage of females versus males; or changes in the mix of single and family contracts.)

3. Changes in the group's geographical location (Rates may change if the company moves to a new locale.)

Group-Specific Administrative Expenses
This factor involves the fixed costs that are necessary to administer the plan. The smaller the group, the higher the expense load. To clarify, a three-person group would have a larger expense load, as a percentage of premiums, than a 30-person group.

Given all of these factors, is there anything you can you do to reduce the costs?  
Consider adjusting your plan design and/or premium contribution to support the most efficient utilization of health care options. Also, encourage employees to become smarter healthcare consumers. Communicate with your employees so they understand their benefits, and spend some time promoting prevention and wellness programs.