COST ANALYSIS

[Guest jfgc]

We have 850 employees on a self-funded plan with a $50,000 specific and aggregate coverage. Our current plan design requires designation of a Primary Care Physician with a $15 co-pay and 80% for specialists. We are considering changing from a small TPA and several networks to a national company (UHC) with a plan design of $15 co-pay Primary Care Physician and Specialists. 90% in-network and 70% out-of-network for hospital and increasing prescription drug co-pay to 3 tier $7/$14/$25. How is it best to analyze projected costs? I have prepared a spreadsheet with expected fixed costs and attachment factor but all this seems based on enrollment remaining the same which of course it will fluctuate somewhat. I don't want to surprise the company with higher than projected costs due to an enhanced plan design. Questions: Any suggestions on how to best display projected costs, is there a trend in plan design for company's our size, does anyone have any experience with United HealthCare?

[KIP KRAUS]

jfgc:

Variuos underwriters have varying incremental costs associated with the types of plan changes you are proposing. I assume that you have recieved a number of quotes from vendors other than United Health Care? If not, I would recommend you do. You should be receieving mature expected claims projections from those who are quoting, if not you should be asking for them. Each underwriter should be able to provide their projected incremintal costs associated with the changes.

By the way, $50,000 individual stop-loss seems low for a group your size. Have you looked at increasing this limit and the effects on your stop-loss premiums?

Ask UHC to give you this information based on their experience in the areas where your employees are.

[Greg Judd]

Kip's suggestions are right on the mark. I can only add a question or two: has UHC forecast the new plan design will save the firm $$$? If so, what % over(under) projected costs with existing design? My gut reaction is the new design is likely to mildly increase costs other than Rx, assuming there's little change in the share of employees who can/will use in-network providers.

[Larry M]

spreadsheets are nice ways to project costs - especially on a per person basis - but only if you have a good sense of the changes which might be expected.

[i am assuming you will remain self funded but are moving to another tpa and its network and management philosophy.]

the changes you will see involve a number of issues:

a. the reimbursement level for the participating providers (doctors, hospitals, labs, pharmacies);

b. the percent of employees (and their dependents) who will go out of network, and

c. the effect of changes in gatekeeping.

Once you have determined the current costs associated with your current plan (segregating among hospital, physician, specialist, xray, lab, prescription), estimate the costs you will be incurring for the next year (increasing the costs for general inflation and changes in utilization) to get your estimated costs on your current plan.

then plug in the changes you expect to see using the UHC's networks and revised plan design - you will have to make adjustments for changes in Rx copay and such.

When you are done, you will have a sense of the differences you can expect between keeping your current plana nd movng to UHC.

Note, no matter how well you can estimate the differences between current costs and those expected next year, your estimates will be wrong - even if you do not change tpas!. The best you can hope to achieve is to get the estimate within ten percent of actual - and if that comes to pass, your employer should present you with a medal and you can be inducted into an honorary actuarial society....

[Guest jfgc]

All very good advice and I certainly appreciate it. To analyze costs I compared fixed costs (administration, reinsurance, network access fees) and minimum annual aggregate. I added minimum annual aggregate to expected annual fixed costs based on enrollment remaining the same to get estimated annual actual costs. Presently, we use eight PPO networks and I believe our discounts will be deeper with a national network with more stability. While the administration will be higher we will receive proactive programs such as EAP and disease management. Those programs integrated with the better discounts will hopefully offset the higher admin fee. Somehow I doubt if I get inducted into the honorary actuarial society. I probably will single handedly break the company's budget.

[KIP KRAUS]

jfgc:

EAPs and disease management programs are good programs to have, but I'm not sure you will see a reduction in medical claims directly related to these programs.

By the way, have you considered dropping aggregate stop-loss? Sometimes the cost of this coverage can outway the risk of going with individual stop-loss only. What has your exposure been on the aggregate over the past three years? If it has been less than premiums, you may be better off going without it.

In addition, I still recommend looking at increasing the individual stop-loss to at least $100,000. In some cases, stop-loss carriers will reduce premiums in direct proportion to the increase in stop-loss coverage. A case your size should be able to support a higher individual stop-loss.

[Greg Judd]

Kip's points sure sound right on this one again, as usual.

I'd only add that the stability of your group may influence the impact of his suggestions. If your 850 is a predictable crowd--growing as your business does, & you have a good idea (backed by data for the last 1-3 years) of how many will be leaving & coming in over the course of a year--the market's response should be more favorable than if you're changing size via buying/selling operations in less-predictable fashion.

[Larry M]

stop loss v aggregate reinsurance? hmmm.

if I am the employer and concerned with limiting my annual costs, why am I concerned with individual stop loss? Should I care whether my extraordinary health benefit costs are the result of two or three major claims or one humungous one?

Yes, yes, I know, the individual stop loss may result in a reducton of net claim payments during the year - BUT, any reinsurer (the one taking the risk on the stop loss) worth its salt will be charging me one and a half to three times the expected costs each year. Seems as if that's a heavy price to pay for such a benefit.

On the other hand, if budgeting and the ability to sleep at night if claims go crazy are the reasons for the reinsurance, why not limit it to the aggregate kind?

[KIP KRAUS]

If you are looking to limt your aggregate costs why not have a fully insured plan? If you have credible claims experience (850 employees is 100% credible in most cases), and steady employment, as Greg points out, you should be able budget for your maximum liablity within a margin of 3 to 5%. Stop-loss premiums, whether in a fully insured plan or as an excess risk in a self-insured plan, is typically money that you will never see again regardless of claims paid against it. By the way, has anyone ever seen a stop-loss premium be reduced at renewal, I haven't. In most cases the insurer pleads bad claims experience in their pool, and want a 15 to 25% increase, even though they are not able to (or wont)prove their bad experience.

The last time I got a quote for specific and aggregate on mature claims the carries quoted higher premiums for aggregate than specific. I don't know what Larry M is referring to regarding premiums of 1 to 3 times costs, but I've never seen premiums for specific over 5% of Expected claims(EC).

Most consultants and insurance underwriters Ive dealt with say if you have the choice of individual or aggregrate, got individual.

Maybe there's something different in Cal.

[Larry M]

Kip,

when I said, "...one and a half to three times the expected costs...", I was referring to the costs of the portion of claims in excess of the stop loss.

When the reinsurer quotes "5% of expected claims", the 5% is on the total of all claims, while the expected excess claim may be only 1 or 2% of the total expected claim.

By the way, I have negotiated experience rated reinsurance premiums for my clients (when claims are low, there is a refund or reduction in rates; when claims are higher, there can be an increase). So, yes, I have seen reinsurance premiums reduced because of good experience.

[This message has been edited by Larry M (edited 06-08-2000).]