My Claims Went Down. Why Did My Premium Go Up?

The short answer

A renewal isn't a reward for last year. It's the carrier's estimate of what your plan will cost next year. Good claims lower that estimate, but trend, the carrier's standard rates and timing all push it back up. For most groups, a good year means a smaller increase. It rarely means no increase.

The math on one group

This is the same 180-member group as our Experience Rating example. It pays $700 per member per month (PMPM), about $1.5 million a year. Its claims fell from $640 PMPM to $600, a 6.3% drop. Here's the renewal both ways.

Both columns use the same assumptions as the Experience Rating example: 8% trend a year for 18 months, a $650 manual rate, 42.4% credibility and an 85% target loss ratio.

The better year was worth a little over 3 points: +10.9% instead of +14.1%. That's about $48,000 a year this group doesn't pay. It's real money. It just isn't a rate cut.

There's a second catch. Down from last year isn't the same as below expectations. In the Experience Rating example, this same $600 is still about 5% above what the group's current premium assumed.

Six reasons a good year counts for less

1. Trend is added for more than a year

A renewal projects your past claims forward to the middle of the new plan year. That's often 18 months or more, so at 8% a year, trend adds about 12% on its own. In the example, $600 of past claims becomes $673 before anything else happens. See Medical Trend.

2. Your claims only get partial weight

Unless your group is large, the carrier blends your claims with its manual rate, its standard price for a group like yours. At 180 members, this group's own claims get 42.4% of the weight. The other 57.6% comes from the manual rate, which your good year doesn't touch. See Credibility.

3. A small group's claims may not count at all

Under the Affordable Care Act, fully insured small-group plans are priced for the carrier's whole small-group pool. Small group usually means under 50 employees, or under 100 in California, Colorado, New York and Vermont. Only each person's age, your location, tobacco use and how many family members are covered can change the rate. Your group's claims can't.

So a small group's renewal is mostly the carrier's filed rate change plus aging. Everyone is a year older, and under the federal default age curve that adds about 2% to 5% a year for employees in their 40s and 50s. A great claims year doesn't lower it. A bad one doesn't raise it either.

Level-funded and self-funded plans are different. They're priced on your own claims, which is one reason some small employers move to them.

4. The good months may not be in the data yet

A renewal is built on a claims period that usually ends five or six months before the new plan year starts. If your claims improved recently, that improvement may show up in next year's renewal, not this one.

It can cut the other way too. The last few months on a claims report often look low because those claims haven't all been paid yet. Carriers add an estimate for them, called IBNR. A report showing a recent drop may just be showing claims that haven't arrived.

5. A big claim going away isn't the same as lower costs

Many carriers pool large claims. They take out each person's claims above a set amount, say $125,000, and charge every group a pooling fee instead. If a member with $300,000 of claims leaves your plan, your claims report drops by $300,000. But the carrier only counted $125,000 of it, so the claims behind your renewal drop by $125,000 at most, and the pooling fee stays.

6. Last year's rate may have been held down

If last year's renewal was negotiated down or capped below what the carrier calculated, the carrier may be making up the difference now. Some of your good year can disappear into that catch-up. It's worth asking whether this offer includes any.

Changes in who's enrolled, plan design and carrier fees can also add to an increase. The Renewal page breaks down each piece.

When good claims do lower the rate

Your own claims count most in large groups with high credibility, and in level-funded and self-funded plans. A level-funded plan may also refund part of a good year's surplus. A drop that holds for two or more years, in a group big enough to be credible, is when a flat renewal or a decrease becomes realistic. Even then, it has to beat trend first.

Questions to ask your broker or carrier

1. Is our renewal based on our own claims, the carrier's pool, or a blend? If a blend, what credibility did we get?
2. What claims period is it based on, and how complete were the last few months?
3. How much trend was applied, and over how many months?
4. Were any large claims pooled, and above what amount?
5. Does this offer include any catch-up from last year's renewal?
6. What would the renewal be with our most recent months of claims included?

If the answers don't add up, get an independent second opinion.