Insured Health Plans | The roles of market segmentation and discretion

While business people generally know the fourth quarter of every year as “Q4,” health benefits professionals, in particular, observe a disproportionate share of work during this period that probably seems most analogous to the workload of a CPA as April 15 approaches. When you consider Q4 as the renewal months of November, December, and January, you notice an operational bottleneck; 50% of American firms representing 78% of covered workers renew in this three month period. The implications of this are different for brokers that specialize in smaller businesses compared with larger businesses.

There are important differences in health insurance market segments. I have been thinking about some “best practices” for plan sponsors and benefits advisors over the past week, based on books of business within each segment, and will share some thoughts below.

Large Group Health Insurance

There are numerous differences for health insurance plan sponsors resulting from their plan size: the implications of various state laws, Affordable Care Act requirements (e.g. ESRP), compliance obligations (e.g. COBRA), DOL obligations (e.g. Form 5500 reporting), and whether Medicare pays as primary vs secondary are all driven by different standards of size. Another important difference between larger and smaller health insurance plans impacts how rates are developed: how an employer’s own claims are included in the renewal development.

Large plans, often defined as employers with more than 100 employees enrolled on the plan, are different from smaller plans because they explicitly develop future rates based upon past claims experience. In other words, insurers review past claims during some period (i.e. the “Base Experience Period” or “BEP”) and project (using trend factors) a future anticipated claim value for the future renewal period; Groups with worse claims during a given BEP (compared to groups with preferable claims) are expected to again have worse claims during the renewal period (compared with groups with preferable claims.)

The way this development is calculated involves important assumptions and has variation across insurers. These assumptions and conventions include, but are not limited to, which BEP is used, factors utilized in adjusting claims from paid to incurred, pooling for high claimants, credibility assigned to the claims, assignment of a “manual rate” for employers not deemed fully credible, and trend factors utilized for medical and pharmacy claims. Finally, and arguably least important, is the assumption about administrative expense charged by the insurer. You can imagine that an insurer can demonstrate a very aggressive (e.g. 6.5% of premium) administrative fee and be positioned for great profitability if they are able to agree upon conservative assumptions about claim trend, pooling, and completion.

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In our experience, more sophisticated brokers that proactively and independently model renewals can improve client results by 5-10% compared to brokers focused on a simple bid model, where competition is used as the primary means of negotiation.

Smaller Employers

Small group plans are defined at the state level. In Pennsylvania, this applies to groups that employ fifty or fewer people. Also, these plans are “modified community rated” by which “an enrollee’s premium may be adjusted based family size, geography, age and tobacco use.” In contrast, in New York small groups are defined as 1-100 employees and are priced on a “community rated” basis.

One of the interesting issues in managing a benefits consultancy is dealing with the tradeoff of lower average commissions/fees arising from small groups, offset by the improved ability to scale solutions based upon some standardized results due to rating models. For example, on 9/27/22 the Pennsylvania Insurance Department released 1/1/23 rates and product results, which also includes a summary of insurer filings and a workbook with backup data. While it is true that each customer requires some level of customization and attention, there are consistent insights that will apply across entire geographies, which supports some efficiencies when supporting SME.

There are some really interesting takeaways in Pennsylvania from the 2023 filings, by the way. The general renewal book is relatively stable, for both insured and small group segments. Aetna stands out as seeking a substantial decrease, but focused on a specific metal level and certain geographies.

What do we do with this information?

There are a number of ways plan sponsors and insurance agencies should manage employee benefit renewals. These should be segmented by market size, state of client domicile, and client goals. Then, some considerations:

• Small Group
  • Compare costs and benefits of options
  • Compare pros/cons of an ICHRA solution leveraging the individual market
  • Consider level funded solutions in the marketplace
    • Understanding the risks and benefits
    • Also, understanding state-specific limitations (e.g. NY vs Pennsylvania) and other implications (e.g. possible implications to ACA reporting)
• Large Group
  • Review assumptions behind renewal. At a minimum:
    • BEP used
    • Trend factor applied (and months applied)
    • Completion factors included
    • Assumptions behind PBM rebates
    • Risk charges and administrative fees incurred
    • Adjustments to claims based upon network utilization and discounts available
    • Pooling charges assessed and claims pooled
  • Compare pros/cons of an ICHRA solution leveraging the individual market
    • While this tends to get more traction amongst smaller groups, this has been increasingly a strategy, for carve-out as well as full-replacement, in the larger group space in certain states.
  • Consider level-funded and self-funded solutions in the marketplace
    • Understanding the risks and benefits
    • Also, understanding state-specific limitations (e.g. NY vs Pennsylvania) and other implications (e.g. possible implications to ACA reporting)
    • When reviewing true self-funded solutions:
      • Potentially consider captive strategies for medical stop-loss
      • Review solutions for improving costs for pharmacy claims

Some of my favorite consulting and client work involves analyzing the cost structure underlying a given financing strategy for health and welfare benefits and then contrasting the approach against another model, while stress testing the model against future scenarios.

A few charts for review

I thought my readers might be interested in a few ways to slice-and-dice the small group and individual data for Pennsylvania. If you are interested in this type of analysis and discussing implications for a specific geographic region, market, employer, or payer, reach out!

Have a wonderful week! Thank you for reading my blogpost! In a recent blogpost I wondered about how a start-up insurance agency might best differentiate in today’s market. I have made really interesting progress on that front. But, that is a post for a different day!