How Leveraged Trend Will Affect Insurance Pricing in 2023 and Beyond
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.
What to Do
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/