The Cumulative Impact of Annual Health Plan Increases

This week my colleague Katie Reynolds, GBDS published an excellent article clarifying the impacts of our agency’s underwriting tool assessment while illustrating its positive outcomes on a single year renewal. This is a must-read article for anyone responsible for their large market employee benefits renewal.?

To further expound on the urgency for employer groups to begin utilizing these tools, here’s a breakdown of how your company’s premiums can be affected over time.?

Cumulative inflation is calculated by first choosing a good or basket of goods, and then dividing today’s price by the price at the start of the period. Then subtract 1. If the resulting number is greater than 0, the price of that good has inflated. For example, in 1990, an item was priced at $100, and in 2021 that same item is priced at $208. ($208/$100) - 1 = 1.08. Accordingly, the cumulative inflation rate since 1990 is 108%.?

For example, in the eight-year period prior to the ACA implementation in 2014, healthcare inflation ranged from 6.5% to 11.9% according to an annual report from professional services firm PricewaterhouseCoopers. The same report illustrates that during the eight-year period following the ACA, healthcare inflation ranged from 5.5% to 7%. Thus, the cumulative inflation rate for healthcare from 2006 to 2014 was 98.19%. From 2014 to 2022 the cumulative inflation rate was 59.97%. That’s a difference of 39%.?

To illustrate just how far of an outlier healthcare inflation is even at its lowest, the cumulative inflation rate in the US from 2006 to 2014 was 14%; and from 2014 to 2022 it was 23%.

Next, let’s look at Reynold’s renewal example over an eight-year period with an annual premium beginning at $1M. Because carrier renewals include healthcare inflation and other factors such as demographics, we’ll assume an average annual increase of 15%. She wrote:?

For fully insured employers, we use our underwriting assessment to begin negotiations with the insurance carrier, which often leads to an additional 2% to 5% reduction in renewal premium. Combined with additional negotiated rate decreases of 4% to 6%, our analysis can help reduce final renewals 7% to 12% from the initial proposed amount.?

Here is how cumulative renewal increases can affect an employer’s health plan:?

• With 15% annual renewals over an eight-year period, the annual premium becomes $3,059,023.?
• Assuming 10% annual renewals as the result of rate negotiations, the annual premium becomes $2,143,589 after eight years.?
• Finally, when combining negotiated rate decreases and an additional 3.5% annually as the result of our underwriting tool assessment, after eight years the premium becomes $1,654,996. ?

In the eighth year, by combining savings from renewal negotiations and our underwriting tool assessment?the employer reduces their costs by $1,404,027 annually, which includes an additional savings of $488,593 when compared to the results if the employer relies on renewal negotiations alone.?

For large employers that are currently fully insured, it is no longer a question of whether you need these tools. Rather,?how long will you wait for costs to?accumulate before implementing our underwriting tool assessment??

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