The short answer
A claims report compares the claims your plan has paid with the premium it collected, usually month by month. It's useful, but it's a snapshot. Recent months are always incomplete, very large claims may be taken out, and "premium" can mean the full bill or only the part left after taxes and fees.
Each of those choices moves the loss ratio, the number most reports lead with. The renewal is priced on the carrier's version of that number, which is often higher than the one on page one.
Many carriers don't release claims reports to fully insured small groups at all. If you get one, here's how to read it.
One year, four loss ratios
This group paid $1,500,000 in premium. Here's how its loss ratio moves as each choice changes.
| What's counted | Claims | Loss ratio |
|---|---|---|
| Paid claims, as reported | $1,140,000 | 76% |
| Add back $30,000 pooled above $175,000 | $1,170,000 | 78% |
| Add $135,000 not yet paid (IBNR) | $1,305,000 | 87% |
| Divide by premium after $50,000 of taxes and fees | $1,305,000 | 90% |
None of these is wrong. They answer different questions. The first says what has been paid so far. The last is close to what the carrier compares with its target loss ratio when it sets your renewal.
What a monthly report looks like
Most reports list paid claims month by month. Here are the last six months of a typical report, run on December 31. The last three months match our IBNR example.
| Month | Paid so far | Share of bills in |
|---|---|---|
| July | $97,000 | About all |
| August | $99,000 | About all |
| September | $96,000 | About all |
| October | $95,000 | 92% |
| November | $82,000 | 78% |
| December | $48,000 | 45% |
At a glance, costs are falling fast. They aren't. The last three months are just missing bills. Read the report with five questions in mind.
Five things to check
1. Paid or incurred claims
Paid claims are counted by the date the bill was paid. Incurred claims are counted by the date of the care. Because bills arrive weeks or months after care, the last few months of any paid report look low.
December's $48,000 is only 45% of its bills. Complete, it's about $107,000, the most expensive of the last three months. Carriers add an estimate for the missing bills, called IBNR (incurred but not reported). Before reading anything into a recent drop, find out how much of the total is estimate.
2. What counts as premium
Some reports divide claims by the full premium. Others divide by premium after taxes, fees and commissions, which pushes the loss ratio up. If a report compares your loss ratio with a target, both have to use the same premium, or the gap between them means nothing.
3. Large claims and pooling
A few members with very high costs can drive a large share of a group's claims. Many carriers pool them: they take out each person's claims above a set amount, the pooling point, and charge a pooling fee instead. A report may show claims with or without the pooled amounts, and the renewal may use the other version. A large claimant report, normally without names, shows each high-cost member's total, what was pooled and whether the condition is ongoing.
4. Cost per person, not just totals
Total claims rise and fall with headcount. A group that grew 10% will see total claims grow even if costs per person didn't. PMPM (per member per month) takes enrollment out of the comparison, and splitting medical from pharmacy shows where a change actually came from.
5. Which months are behind your renewal
The claims behind a renewal usually end five or six months before the new plan year starts. The report you're reading may cover a different 12 months, so a recent improvement, or a bad spring, may or may not be in the renewal. Match the dates before comparing the two.
What a claims report can't tell you
A report shows what happened. It doesn't show what the carrier expected, and the renewal depends on both. A 90% loss ratio is high against an 85% target and fine against a 92% one. How much your own claims count also depends on group size. See Credibility and Experience Rating.
Questions to send your broker
- Are these paid or incurred claims, and how much of the total is IBNR?
- Is the loss ratio based on gross premium or net of taxes and fees?
- Were large claims pooled, at what level, and are they ongoing?
- Can we see claims PMPM by month, with medical and pharmacy separate?
- Is this the same claims period the renewal uses?
If the report and the renewal tell different stories, get an independent second opinion.