Season 2 of “80/20 with ParetoHealth” launches with a discussion on the state of medical literacy and care navigation (aka care coordination) today. Justin Holland and Doug Morse-Schindler of HealthJoy explain how technology can build bridges in the massive healthcare ecosystem and where it falls short. We also rant about the pitfalls of self-diagnosing on Google and the immense potential of a revenue stream tied to sleepless nights caused by WebMD. Finally, we learn that building appropriate and valuable tech solutions requires layers of thought, partnerships, and room for customization. Simply put, we confirm that healthcare is never one-size-fits-all, not even in the digital space.
When was your last bad dream?
You might not realize it, but you’re living in one today: Healthcare costs in the U.S. currently make up more than 40% of global healthcare spending.1 It’s a growing problem – one that can’t be solved by doing what’s always been done.
Let’s take a deep dive into why and what we can do to fix it.
Prescription drug costs are a major, but unsurprising, contributor to this problem.
On average, each American spends $1,443 on prescription drugs, compared to $749 per person in other countries.2 In Europe, drugs are priced by the government based on the benefit the drug will have for patients, but that’s not the case here.
For American manufacturers, the cost of making a drug is often much less than the price they charge patients – and the reason why is two-fold: to make a profit and cover the high cost of testing and releasing the drug.3
Healthcare services play a big role in this nightmare, too.
For example, an MRI in the UK costs approximately $4502. In the U.S., the cost of healthcare services can vary wildly based on location. The average patient doesn’t know how much a service costs – that is, until they get the bill from their insurance company.
Public and private insurers in the U.S. have various out-of-pocket costs, funding sources, and rules, so it takes a variety of billing professionals to process claims. These billers must be trained and paid, and that’s reflected in premium prices.3
This leads to a bigger problem.
According to Harvard Magazine,4 nearly half of all Americans have delayed healthcare due to its high cost. Patients end up paying more in the long run, as their conditions advance and become harder to treat and cure. If preventive care were more affordable and accessible, patients could save their money and their lives.1
It’s a vicious cycle.
Americans underspend on primary care but overspend on prescription and hospital costs. Due to these two factors, employers’ costs rise year over year. So, what happens? Employers start reducing benefits and shifting costs to their employees, of course.
Combined with inflation, this is crushing middle America: Roughly 100 million Americans have racked up nearly $200 billion in medical debt. What’s more, this debt drives around half a million people to declare bankruptcy each year.5
No, this isn’t just a bad dream. It’s the reality too many Americans are living today.
Traditional plans only multiply the problem.
Under a fully-insured healthcare plan, employers have little control over plan design. These off-the-shelf plans are inflexible and leave few options for employers to personalize their benefits to meet the specific needs of their employees.
The whole point of insurance is clear-cut in theory, but complex in reality: paying to shift risk from one party to another. But this risk largely falls onto the employer – partly due to the fact that health insurance isn’t really insurance.
In a fully-insured plan, you pre-pay for any claims that occur during a particular year. If you overpay at the beginning, then the carrier pockets the difference. If you underpay, you get a huge renewal. We refer to this as deferred, not insured: This plan involves you transferring all your costs (but no savings) forward by twelve months.
Traditional self-insured plans don’t fare much better.
Simply put, these plans are too risky for the smaller employer. Even if you’ve purchased stop-loss insurance to protect yourself, a large, multi-year claim can lead to a laser and/or huge premium increases.
ParetoHealth’s mission is to make self-insurance affordable, accessible, and less risky for small and mid-sized businesses. We also believe in patients getting the care they need when they need it – at the right price.
When a small or mid-sized business chooses ParetoHealth’s employee benefits captive program, they join a community of like-minded employers committed to offering better employee benefits, reducing waste, and innovating healthcare on their own terms.
We refer to this as a coalition of the willing – a group of employers that grew tired of the status quo. They stopped doing the same thing and expecting different results. They grabbed the bull by the horns because changing healthcare for your organization means peeling back the onion and proactively managing claims.
Members own the captive.
The captive operates on a large scale with a large volume of stop-loss insurance, and so, can offer true multi-year protection from large and ongoing claims. Due to the program’s size and scale, it can offer superior terms such as rate caps and no new lasers, which are unavailable to most smaller employers purchasing stop-loss. For the first time, self-insurance becomes a viable option for these employers.
Members are in control of their plan, and they have the power to:
In this way, we can align the incentives of employees to get the best possible care with the incentives of the employers to provide cost-effective options.
ParetoHealth’s Members have access to the strongest stop-loss structure in the industry.
This means that they’re protected against large, ongoing claims and pay small claims as they happen without overspending or deferring costs.
But that’s not all: There is strength in numbers in the community, which creates a long-term buffer against stop-loss premium increases. Thousands of employers have access to their own data, they’re proactively engaged in cost-containment solutions, and they’re providing their employees with cost-effective, quality care.
Here, positive results aren’t difficult to come by.
Managing healthcare costs is central to what we do.
ParetoHealth’s Integrated Cost Management (ICM) platform makes that happen.
ParetoHealth analyzes Members’ claims data to identify savings opportunities:
Pharmacy benefits can represent 20-25% of a program’s costs. With pharmacy prices on the rise, we continuously look for ways our Members can save – and they do: Members have potential annual savings of 25-30%.
The nightmare price of American healthcare isn’t going to change anytime soon.
The good news is this: ParetoHealth can help you wake up, break out of the 12-month insurance cycle, and gain true control of your plan. Each day, we work hard to help small and mid-sized employers reduce the costs – not the quality – of their employee healthcare benefits.
Ready to get on the path to better benefits? Contact us to see what you can save.
1. World Health Organization. (2021). Global expenditure on health: Public spending on the rise? Retrieved from https://apps.who.int/iris/bitstream/handle/10665/350560/9789240041219-eng.pdf#page=11
2. Investopedia. (2022). 6 reasons why healthcare is so expensive in the U.S. Retrieved from https://www.investopedia.com/articles/personal-finance/080615/6-reasons-healthcare-so-expensive-us.asp
3. Porretta, A. (2022). Why is health insurance so expensive? eHealth. Retrieved from https://www.ehealthinsurance.com/resources/affordable-care-act/obamacare-premiums-unaffordable-for-many-middle-income-people-in-2019
4. Cutler, D. (2020). The world’s costliest health care and what America might do about it. Harvard Magazine. Retrieved from https://www.harvardmagazine.com/2020/05/feature-forum-costliest-health-care
5. Bedayn, J. (2023). States confront medical debt that’s bankrupting millions. Washington Post. Retrieved from https://www.washingtonpost.com/politics/2023/04/12/medical-debt-legislation/0198c70e-d995-11ed-aebd-3fd2ac4c460a_story.html
My role at ParetoHealth is to help employers and brokers find the most valuable benefits packages for their company and clients. Simple enough, right?
The reality is a bit more complex. A key function of my success hinges on educating people. However, before I can talk about ParetoHealth’s advantages, I need to establish my credibility. I understand that my affable disposition lends itself to your run-of-the-mill sales guy, but I assure you, I’m not out there to smash my quota and get a bonus. I can’t sell something I don’t truly believe in myself.
I believe there’s a better way to obtain the quality benefits that employees deserve, and it doesn’t have to come at a cost that shortchanges the future of mid-sized businesses.
That’s why I’m taking this opportunity to address one of the most common misconceptions: transitioning to a self-insured model is too difficult. Many think it’s an endeavor that rivals a Greek epic poem, with all parties at the mercy of an overcomplicated and tedious process.
TL;DR – it’s not.
Every employer’s situation is different, from scale to location. However, I’ve found what makes employers wary of self-funding generally comes from one of three myths:
Reality: While our turnkey cost-management approach might be disruptive for the current state of the archaic insurance industry, making the transition from your current carrier to ParetoHealth is seamless. Most of our Members see no interruptions – major or minor – to their existing benefit structure. Employees can stick with almost every provider they know and trust without restrictions. The one big change: Members gain access to an enhanced benefits experience.
They enjoy the freedom of creating plans customized to their needs – or they can keep the exact plan designs they currently have in place. We make it easy because we understand that keeping employees happy is just as important as keeping them healthy.
But this is insurance – so surely implementation means a mountain of paperwork, red tape, and endless meetings?
Generally speaking, this part of the process is over in two or three brief meetings to sign some documents. It’s that easy.
Reality: ParetoHealth’s mission is to remove the commonly associated risks of self-insurance to the benefit of small to medium-sized businesses.
Members of our captives are closely vetted to make sure only the right companies with the right leadership teams are joining. Then, after they join, our size and scale mean that we protect Members from unpredictable catastrophic claims better than anyone in the industry. This is how ParetoHeath mitigates the risk of self-funding.
Ironically, the real risk comes from remaining fully insured. Not only are you powerless to prevent big claims, but when one does happen (because it’s inevitable), your fully insured renewal will be through the roof! That terrible renewal will be your burden to bear – indefinitely. Because your current premium is the launching point for calculating your next renewal. In that way, the costs snowball, and you lose ground each year, and there’s no way to make up for it. It’s a financial catastrophe. So the sooner you switch to self-insurance, the better – which brings us to our next myth…
Reality: If you’re operating under a fully insured model, whether you had a good or bad year of claims, your annual premium will always increase. In a good year, your reward is a 2% increase…and that equates to a ton of profit for your carrier. On the other hand, if you’re running poorly and think, “I’ll wait until my claims clean up to move to self-funding,” I hate to be the bearer of bad news, but there’s simply no feasible way anyone can predict all the illnesses or prevent another catastrophic claim from happening.
What happens during month 13 if you stay fully-insured for another year? The scenario of the prior year repeats.
Once you step out from the blind alley that a fully-insured model kept you cornered in, you begin to see a bigger picture. You can build long-term strategies with predictable renewal rates and room to grow your business. NOW is always the best time to join ParetoHealth and get the protections and predictability that have alluded you for all these years.
Like all my colleagues at ParetoHealth, I take pride in my work and am here to help. I know the people behind the numbers. I see that HR director’s daughter who needs a monthly prescribed injection, I see the line worker’s wife battling cancer, and I will do whatever I can to ensure they have access to the best care possible. No matter how often I help unpack the same concerns for people, I still find purpose in it because, like the rest of my colleagues at ParetoHealth, I’m in this for the greater good.
As we approach the new year, now is the right time to review the healthcare trends likely to impact your employee benefits. This can be daunting, so we’ve gathered the data for you.
Let’s dive right in.
The 2023 Global Medical Trends Survey reports that the cost of healthcare on a global level will increase at the highest rate in 15 years1. In North America, the Segal Group predicts that health insurance premiums will increase by 7% or 8% rather than the usual pace of 6% per year2. The survey cites inflation and increased healthcare utilization as the driving forces.
As we emerge from the COVID-19 pandemic, insurers are concerned about consumers’ shifting relationships with healthcare. Many postponed care during the height of the pandemic, so utilization is higher than usual, as patients return to the doctor for more than just an annual checkup and face the consequences of delayed care.
Seventy-five percent of insurers polled said they are concerned about providers overreacting and recommending too many services. But that’s not all. Fifty-two percent worry about their members’ health habits, and 50% cited the underuse of preventive services as a cause of rising costs.1
A 10% increase in overall prescription drug costs is another troublesome circumstance facing employers, mainly driven by medical innovation. Expensive drugs like gene therapies and new HIV treatments emerged on the market this year (which our CEO Andrew Cavenagh predicted in his first blog post). These drugs provide life-altering benefits to those who receive them, but the release of generics, which would help to control market costs, has not kept pace2.
The Inflation Reduction Act will allow Medicare to negotiate the prices of ten common drugs, which will bring some relief to consumers. Still, this changes the economics of certain drug products, and insurers will look to any savings as opportunities to build in profit. In turn, you can expect pharmaceutical companies to hike prices for private insurance companies2.
Employers will have to balance increasing costs with salary demands—all in the midst of a possible recession. In addition, the labor market remains fairly tight, and rising healthcare costs may eat into the funds needed to offer competitive salaries.
Coverage gaps may impact employers’ Diversity, Equity, and Inclusion (DEI) initiatives, as certain gaps, such as fertility treatments, midwives, and HIV/AIDs treatments, tend to be more statistically prevalent among specific segments of the population. However, as noted in the survey report, “Employers have an opportunity to work with their consultants and brokers to bridge these coverage gaps and help deliver more equitable health outcomes across different employee groups.”2 Bridging coverage gaps always has an associated financial cost. Still, employers may have difficulties hiring and retaining employees when they ignore these gaps.
It is not all bad news. The No Surprises Act was enacted this year, and early indications are it effectively reduces unexpected out-of-network hospital charges2. Telehealth is also becoming increasingly valuable; it was ranked as the second-best cost management tool, gaining traction from last year1.
Other key findings are that cancer is the number one condition affecting medical costs, followed by musculoskeletal and cardiovascular disorders. Mental and behavioral health disorders are ranked the fourth most common by incidence and claims and are expected to keep climbing1.
So, what should employers do with this information?
If you’re worried that members are underutilizing their primary care and preventive services, find ways to incentivize the use of those benefits. Since mental and behavioral health claims are on the rise, make sure your benefits provide these resources at the best value to your employees. If there are gaps in your coverage, especially if they relate to DEI initiatives, address them to prevent future hiring issues and legal troubles. Overall, think about how to personalize your benefits to meet the specific needs of your employees.
Stop “just” buying insurance and start delivering great healthcare benefits and resources to your employees.
To mitigate increasing prices, employers should prioritize cost-containment solutions. Fortunately for you, cost containment has been our focus since ParetoHealth’s inception. We believe it’s crucial to know where your healthcare dollars are going and analyze trends to ensure that you are spending wisely while not compromising access or quality of care.
If you’re fully insured, and don’t have visibility into your claims data, now is the time to change that. Being self-insured and part of our captive allows you to make customized, long-term strategies to help weather the blows of inflation and medical trends.
Start the new year right. Learn more about making the essential switch here.
1. WTW. (2022). 2023 Global Medical Trends Survey. Retrieved from https://www.wtwco.com/en-MY/Insights/2022/10/2023-global-medical-trends-survey-report
2. Payne, D. (2022). What will happen with health costs in 2023? Kiplinger. Retrieved from https://www.kiplinger.com/personal-finance/inflation/605084/what-will-happen-with-health-costs-in-2023
No matter where you are in the world, you probably know someone with diabetes. In fact, research suggests that in the United States alone, diabetes affects an estimated 114.4 million Americans, including those that are diagnosed, prediabetics, and undiagnosed diabetics.1 These numbers are expected to grow, with at least 15-30% of pre-diabetics developing type 2 diabetes within 5 years.8 If current trends continue, 1 in 3 Americans will develop diabetes in their lifetimes.2
The consequences continue well after the disease develops. Over a third of people with diabetes develop issues with their blood pressure and cholesterol.3 When left unmanaged, these patients can undergo more serious conditions like heart disease, stroke, kidney failure, lower limb amputations, and adult-onset blindness.4
The costs attached to the disease are also alarming. In 2017, the estimated cost of diabetes in the United States was $327 billion, including $237 billion for direct medical costs and $90 billion in indirect costs for disability, time off from work, and premature death.5 The contribution to overall healthcare costs is so significant that if health center patients with uncontrolled diabetes could reduce their HbA1c (glycated hemoglobin linked to sugar) by just 1.25%, the potential savings in medical costs could exceed $3.44 billion over three years.6
The truth is, diabetes can severely impact a person’s quality of life, and in some cases, cut It short altogether. With alarming numbers to back this up, you could consider diabetes as an expensive, worldwide epidemic.
Which means that the time to act is now.
Fortunately, there is a lot you can do to target this problem directly and indirectly. Raising awareness, providing actionable steps, and actively supporting employees in the workplace is an excellent place to start.
Here’s a list of various tools that your organization can implement to combat type 2 diabetes at work7. As you safeguard health, you also ease what is likely a significant burden on your overall healthcare spending and have a chance to dramatically improve quality of life.
1. Conducting internal health surveys
To form a baseline for your population of employees, use employee health surveys to identify the percentage of workers touched by the diagnosis or at risk of a diagnosis. The results of this survey can help you recognize those that have received appropriate screening for type 2 diabetes and educate individuals that may need direction towards counselling or follow up screenings like blood glucose testing.
If you include lifestyle concerns like physical activity, nutrition, and obesity as part of your survey, this will give you a holistic perspective of your employees’ health.
Overall, creating this baseline should aid in designing the necessary programs for your employees.
2. Developing employee wellness programs
Wellness programs in the workplace targeting lifestyle improvements like good nutrition, weight management, and increased physical activity can directly address type 2 diabetes by delaying the onset of the disease.
According to clinical trials from 2001 by the National Diabetes Prevention Program, “Modest weight loss and physical activity substantially reduced progression to type 2 diabetes among adults who were at very high risk.” Additionally, improved nutrition plays a significant role in helping people cut their risks. In fact, the American Diabetes Association recommends that even people with prediabetes should be counseled on the same lifestyle changes.
So, engaging your employees in these activities could substantially affect the outcomes of the disease.
To truly target the disease, education is crucial. Consider self-management education, disease management awareness, or training–a principal step in improving diabetes care and quality of life.
By hosting educational opportunities for your employees on certain behaviors like healthy eating, movement, and monitoring blood sugar, you encourage a collaborative process in which educators help workers with diabetes or at risk for it gain the knowledge, problem-solving, and coping skills needed to deal with the disease and its related conditions.
4. Access to care and disease management
Whether by providing on site flu shots (diabetics have higher susceptibility to influenza), or making sure each individual is connected to the right team of experts, you should consider having a unique plan of action for diabetes-specific care.
For example, you can utilize a coordinated care team that educates and helps prevent complications and development of co-occurring conditions that may arise with the diagnosis.
In general, guidance, direction, and encouragement from the workplace has a significant impact on handling the disease.
More than likely, diabetes is already playing a significant role in your employees’ overall health. For just that reason alone, it is worth considering taking the extra mile to prevent and manage it. Not only does that improve your employees’ health, but it can also support significant savings.
Lifestyle diseases tend to have a duality to them—when left unchecked they lead to a plethora of other problems, but when prevented or managed correctly and aggressively, this is key to a happier and healthier world, both in and out of the workplace.
1. CDC. National Diabetes Statistics Report, 2017 – Estimates of Diabetes and Its Burden in the United States. 2017. https://www.cdc.gov/diabetes/pdfs/data/ statistics/national-diabetes-statistics-report.pdf.
2. Boyle JP, Thompson TJ, Gregg EW, et al. Projection of the year 2050 burden of diabetes in the US adult population: dynamic modeling of incidence, mortality, and prediabetes prevalence. Popul Health Metr. 2010;8:29.
3. American Diabetes Association. Standards of Medical Care in Diabetes—2019 Abridged for Primary Care Providers. Clin Diabetes. 2019;37(1):11-34. doi:10.2337/cd18- 0105
4. 3. ODPHP. Diabetes | Healthy People 2020. Healthy People 2020. https://www.healthypeople.gov/2020/topics-objectives/topic/diabetes. Accessed October 4, 2019.
5. American Diabetes Association. Economic Costs of Diabetes in the U.S. in 2017. Diabetes Care. 2018;42(10):dci180007. doi:10.2337/dci18-0007
6. Fitch A, Everling L, Fox C, et al. Health Care Guidelines – Prevention and Management of Obesity for Adults. Inst Clin Syst Improv. 2013;Sixth Edition. https://www. healthpartners.com/ucm/groups/public/@hp/@public/documents/documents/cntrb_037112.pdf. Accessed October 8, 2019.
8. CDC. National Diabetes Prevention Program: Working Together to Prevent Type 2 Diabetes. The Diabetes Prevention Program. https://www.cdc.gov/diabetes/ prevention/pdf/NDPP_Infographic.pdf.
We made it! The end of the first season of 80/20 with ParetoHealth has us bringing it all back home, so join us for a trip down memory lane as we look at the history of ParetoHealth and some of the things that formed the company along the way. From our beginnings 10 years ago as three people in a tiny office to where we are now, the story has been a great one. Listen to the episode to hear about the formulation of ParetoHealth’s core values, the impact of COVID-19, and some of our favorite moments from the past few years. The growth of our community, whether this is the core team, our Consultant partners, or the employers who simply wanted more out of healthcare, has been truly incredible. Thank you all for the memories. More importantly, let’s look to the future. Together, there are almost no limits on what we can do.
If you’re an employer and you don’t know what ‘leveraged trend’ is, you need to learn. It will impact the pricing of every type of health insurance, whether fully-insured, level funded, or self-insured in the coming years.
Leveraged trend, in simple terms, is the tendency for large claims to increase at a higher and faster rate than small claims. How this happens is slightly more complicated. Let’s get into it using an example.
First, though, some underwriting math. Exciting, I know but, as always, the devil is in the details.
Imagine you’re a self-funded employer with a $50,000 specific stop-loss deductible. In year 1, you have a claim for $100,000. On a $100,000 claim, you will pay $50,000 and the stop-loss carrier will pay $50,000. What happens if the same claim occurs again the following year (year two)?
Well, if medical trend continues, the cost of the year 2 claim will be higher (this is, after all, what the term “medical trend” refers to). Assuming that medical trend is 8%, the cost of the claim in year two will be $108,000. If your deductible has stayed the same, you will still pay the first $50,000, but the stop-loss carrier will pay $58,000.
In this way, a medical trend of 8% represents an increase of 16% for the carrier. When we look at third-year costs, the difference becomes even starker. A further 8% increase on $108,000 puts the total price at $116,640, or a 33.3% increase to the carrier as compared to year 1.
So, while the employer’s cost for the claim remained flat, the carrier’s cost has increased more by than 33% over two years. Carriers will naturally pass these increased costs along to the employer through increased premiums.
This example was for a self-insured employer using stop-loss, but the same phenomenon will impact fully-insured or level-funded employers in the form of increased pooling charges. The principle is the same: rising claims impact the carrier at a higher rate than they do the insured, and the carrier will seek to offset those costs.
Leveraged trend is a mathematical phenomenon that always exists, but several other things amplify overall costs, particularly the cost of large claims.
The two major factors that will further accelerate the underlying medical trend are inflation and high-cost claims.
The first is inflation. Our current economic situation is unusual in that we have a combination of high inflation, negative growth in the overall economy, and a highly competitive labor market. Approximately half of a hospital’s overall expenses are related to labor, according to the American Hospital Association. As competition increases for talent in nursing, medicine, and hospital administration, the cost of attracting and retaining medical employees is sure to increase. Wage inflation drives medical inflation, which is amplified by leveraged trend.
The second driver of medical trend is the increasing frequency of high-cost, multi-year claims. As we covered in our very first article in The Contrarian, we are likely to see new gene therapies approved for conditions ranging from refractory follicular lymphoma, hemophilia A and B, and diabetic peripheral neuropathy. These are medically exciting treatments for devastating conditions, but they come with staggering financial costs. This will disproportionately increase the cost of large claims.
As we often say, it is no longer a question of whether you are likely to face a million-dollar claim, it is a question of when. Between interventions for cancer, new gene therapies, hemophilia, or end-stage renal disease (“ESRD”), employers can no longer afford to ignore the prevalence of this type of claim.
The first priority for an employer us to take air out of the proverbial balloon by trying to reduce medical costs. The smaller the denominator, the smaller the impact of inflation and leveraged trend. You probably cannot do that if you’re fully-insured or level-funded, as you cannot pull the appropriate levers.
After that, an employer should protect themselves from the volatility of these large/increasing claims. If you are fully-insured or level funded, you’ll feel the impact of greater medical inflation and leveraged trend and a further multiplier in the form of administrative expenses and profit loads.
If you are self-insured, a bare-bones stop-loss policy does not adequately protect employers from the impact of high-cost claims. A ParetoHealth captive provides far more insurance and protection against these large and ongoing claims. The first part of this protection is our 30% cap on stop-loss premium increases. 30% seems like a lot but considering that this premium is such a low percentage of your overall costs, it only leads, on average, to a 7.5% increase in spending. That’s your worst-case scenario, and it doesn’t happen often.
The second is our “No New Lasers” guarantee. Many stop-loss policies include a provision like this, however, they only last the next 12 months. Ours stays in effect for the entire lifetime of your Membership. In all the time we’ve been in business, we have issued exactly zero new lasers.
As always, we need to emphasize one fact: fully-insured employers face a significantly worse situation when medical trend increases than do self-insured employers. Stop-loss premium is a much lower percentage of overall spending for the former than fully-insured premium is for the latter. Additionally, self-insured employers can control the types of benefits they offer, eliminating unnecessary and unused benefits and identifying strategies and implementing high-value programs that address the unique needs of their employees. Fully-insured plans also place more of your healthcare spending in the purview of the carrier, meaning that they have more opportunities to extract profit from various levels of transaction. The cherry on top comes from higher taxes for fully-insured programs.
This begs the question: how do you reconcile the inadequacy of bare-bones stop-loss with the manifest unworkability of the fully-insured model?
The solution is to add a layer of protection, that insulates the employer and, to a certain extent, the carrier. The only way to ensure that the model continues to work is to reduce the volatility of pricing, to flatten the spikes in overall costs.
ParetoHealth offers that solution, and if you are interested in learning more about how we get this done, I invite you to read our analysis of how a group benefits captive controls volatility here: https://paretohealth.com/blog/5-ways-paretohealths-captives-manage-volatility/
We are quickly approaching everyone’s least favorite time of the year – open enrollment.
If you’re fully insured, you’re on pins and needles, waiting to know if you’re going to get a good renewal or a bad renewal. You cannot do much to prepare for open enrollment, because until you get your renewal, you don’t know what your rates will be or who your carrier will be (since you might change carriers based on renewal and competing prices).
If you’re self-insured, you’re in a much better spot. You are still waiting on a stop loss renewal quote, but that quote is unlikely to prompt a change in TPAs or networks – so you can finalize plan design and schedule open enrollment with confidence.
Many employers and their brokers think that they need to wait to see their stop loss quote before setting accrual rates and scheduling open enrollment – but this couldn’t be further from the truth, at least if you’re in one of ParetoHealth’s captive programs. Let me explain why.
Assume a hypothetical ParetoHealth Member (“XYZ Manufacturing”) with 200 employees has an expiring stop loss premium of $400,000 at a $50,000 specific deductible, and an aggregate attachment point of $1.6m. With their consultant’s help, they should be able to estimate the renewal with enough certainty to determine accrual rates and hold open enrollment – and they can worry about the stop loss renewal later.
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. First, I’ll go over aggregate claims, then move onto specific premium, then look at expenses. Add these together, and we can get a good estimate of our total.
If you’ve already gotten your quote, or if you already know how to calculate it, then check out these tips on making open enrollment a success.
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. If you want to listen to us make fun of people who do that, listen to our podcast.
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 (you could cite the other podcast here but that might be too much). 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.