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.

Aggregate Claims

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.

Specific Premium

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.

Expenses

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.

Total

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.