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Why Does Group Health Premium Go Up Every Year?

By October 28, 2020October 29th, 2020Employee Benefits
Health Insurance Premium Increases

In 2020, small and large businesses can expect the average increase in group health insurance premiums to be between 5% and 7%. And for some, the increase will even be higher – climbing by as much as 20% and 30%.

Has your business consistently seen premium increases in your group health?

Why is this the case? Why do your group health insurance premiums always go up? Do you wonder if  businesses ever see decreases? 

Having worked in the group health insurance industry for the past 20 years, I know this is not a new problem. Year after year, employers like you come to me despairing over their latest group health renewal. 

Are you desperately wanting to know if there is something you can do to manage your group health insurance costs?

To help you gain an understanding of why your group health insurance costs almost always see annual increases,  let’s look at some specifics regarding rate increases in group health insurance.

In this article, we will examine:

  • Differences in rate increases between small group health plans and large group health plans 
  • Differences in increased costs between fully-funded group health plans and self-funded group health plans
  • Increases due to rising health care costs
  • The impact of ongoing health care innovations on premium costs

1. Small Group Health Plans vs. Large Group Health Plans

There are differences in how a group health carrier sets premium increases depending on if you have a small group health plan or a large group health plan.

Small Group Health Plan Increases

A small group health plan, as defined by the Affordable Care Act, is group health insurance for a company with 50 employees or less. Small group health increases are standardized.

What I mean by standardized is that insurance companies determine how much they will increase premium rates across the pool of small group companies. Each insurance company has autonomy in determining how much they will increase rates, but they must apply the same increases to all small group health plans. 

The rate increase will be standard for all small businesses.

At the same time, not every small group company will get the same increase. For example, not every business will have a $300 increase or a $2,000 increase. 

The way insurance companies calculate small group premiums is by applying a standard to rate to each individual. And depending on your demographics, the amount of your increase can vary.

Small group increases depend on:

  1. The age of your employees

Unfortunately, this changes every year. (Though we’d all like to stay 25 forever, birthdays roll around every year!) 

Insurance companies give a rate to various age groups – like 0-15-year-olds, 16-20-year-olds, 21-25-year-olds, etc. Each person on your policy will be given a rate and then those rates will be added together to arrive at your final premium.

  1. The home zip code of your employees

Your group health costs are dependent on where your employees live. If your employees have greater access to specialty services and a greater number of providers in their area, your health costs will be more than for those with employees in areas with fewer health care options.

  1. The specific group health plan you enroll in 

Insurance companies will increase the rates of certain products. For instance, a Platinum $20 copay plan may receive a 22% increase while a $2,000 HSA plan may only receive a 7% increase. 

Also, increases within the same product line can change from year to year. One year, your Platinum $20 copay plan may receive a 22% increase, and the next year it may only see a 10% increase.

  1. Increases in actual health care costs

As you will see later in this article, health insurance companies need to raise their rates to account for increases in health care costs. Health care costs rise due to innovations in technology, new prescription drug options, and high-tech procedures, etc.

When a group health insurance company increases their rates, they must file that increase with the government months in advance of the actual renewal date. You will know in advance if you are going to have rate increases.

Large Group Health Plans

In Pennsylvania, any business that employs more than 50 employees is considered a large group health plan. While there are some similarities to small group health premium increases, large group health increases are determined more heavily by factors related to each individual business. 

Health insurance companies will look at data for each large company and determine what rates they will offer to those customers.

The health insurance companies will be looking at:

  1. The changing demographics of the employee

While this includes the ages of your employees, they also consider the gender of your employees. Insurance companies will look at how many women of childbearing age are employed by you. They may take into consideration different risks assigned to men of a certain age group. Group health insurance companies will consider these types of factors when determining your premium amount.

  1. The home zip code of your employees

Just like with small group health programs, group health insurance companies charge a higher rate for employees with greater access to specialty healthcare and higher numbers of providers in their area. 

  1. Healthcare cost inflation

Health care inflation outpaces general economic inflation. Because of the rapid increases in medical advancements, health care costs are always rising. Insurance rate increases match the rising costs of medicine.

  1. General employee health care utilization

Group health carriers will look at your employees’ use of their health care plan in the past. They will look at the number and types of visits your employees had with medical providers.

  1. Employee “Shock” Claims

A “shock claim” is a very high, unexpected health insurance claim that an individual files. For instance, if one of your employees delivers a premature baby – taking care of the baby could be between $500,000 and $1,000,000. This would be a “shock claim.”

2. Fully-funded Group Health Programs vs. Self-funded Group Health Programs

Information about your rate increases will vary depending on the way you fund your group health program. If you are fully-funded and rely on an insurance carrier to provide coverage for your employees you will have significantly less opportunity to influence your group health premium increases.

Fully-funded Group Health Programs

Fully-funded employers have placed all of their group health insurance risk with a group health insurance company. If you have a fully-funded group health plan, your insurance company will likely give you no information regarding why you are seeing an increase in your group health renewal.

If, however, you employ over 100 employees, the group health insurance company may give you limited information about your increase. In this scenario, they may provide you with reports detailing how often your employees used their group health plan and for what purpose they used it. 

The insurance company may also provide you with general reports on any high-cost claims that your employees filed over the past year.

As a fully-funded group health program, you have little information on what is driving your health care costs. 

Self-Funded Group Health Programs

In contrast to fully-funded group health programs, self-funded programs should know exactly what is driving their group health costs.

As a self-funded program, you have full access to the claims that your employees make. You should know how many, what kind of, and how often employees make claims. You should also know about any high-cost claims.

With all of this information, self-funded employers can predict their upcoming claims and plan for those costs.

With this type of program, you might face a few fixed-cost increases. These increases would be due to increases in administrative costs from a Third-Party Administrator and an increase in Stop-Loss insurance premiums.

Increases in administration costs from a Third-Party Administrator

With self-funding your group health, you need a Third-Party Administrator (TPA) to help orchestrate your group health plan. If your TPA increases their rates, this increase would be fixed, not dependent on your employees or their past medical history.

Increases in Stop-Loss insurance premiums

Self-funded programs also rely on stop-loss insurance to cover any catastrophic claims that their employees need to file. You may see an increase in your stop-loss premiums due to an increase in high-cost claims. 

Keep in mind that you should already be knowledgeable about these claims because you would have access to all information about the claims your employees file.

In a self-funded group health program, there should be no health cost surprises!

3. Rising Health Care Costs

Remember that health insurance companies are in business to insure. 

If the cost of claims is rapidly rising, you can be assured that the cost of insurance will follow!

Health insurance premiums generally reflect an increase in the underlying health care costs. Insurance companies pass cost increases onto employers in the form of higher premiums. 

OK, but why is the cost of health care increasing so much?

Now we’ve stumbled on to a complicated question! A question that professionals are constantly studying and trying to answer. 

One of the reasons this question is so tricky to answer is that health care costs and related consumer behavior do not operate the same as other economic models.

Lack of Informed Decision Making

Health care consumers don’t shop around for the best price.

Most of the time consumers shop around for the best price. If they are shopping for a car, they check out several dealerships and look at multiple cars. When shopping for a new phone, a consumer will look for deals online or call several cell phone carriers to see what options and prices they can lock-in. 

This is not the case with health care!

In health care, employees often don’t know the differing costs of health care procedures, facilities, doctors, and prescription drugs. 

For example, most employees don’t know that an advanced scan, such as an MRI, can be thousands of dollars less if performed at a free-standing clinic rather than in the hospital setting. Having the MRI performed at one of these clinics does not lessen the quality of the scan but can save thousands of dollars.

Extreme Variations in Hospital and Doctor Charges

Most people are unaware of just how much variance there is in medical charges from doctor to doctor and hospital to hospital.  Usually only the health insurance company is aware of this reality.

Again, this is very different from most other economic models. If you are shopping for that new car or truck, you can be fairly certain that most dealerships will have comparable pricing – within a reasonable range of one another. 

In health care, the charges for procedures and services can vary widely depending on the provider!

To compensate for this reality, some health insurance plans attempt to steer employee behavior based on costs. These plans will charge employees less when they go to a free-standing clinic than when they go to a hospital for a scan or a blood draw.

Willingness to pay for medical help

Normally when people go to buy something, they have a limit as to what they are willing to pay for whatever it is they wish to purchase. 

Not so with health care! 

With health care, there is no limit to what people will pay to maintain health and receive necessary treatments. 

Health care providers know this and continue to invest in miracle procedures and prescription drugs. Providers know that, regardless of cost, individuals will pay if there is a chance for healing and improved health. 

All of these factors –  a lack of shopping around for services, variance in how much procedures cost from doctor to doctor, and a willingness to pay whatever amount is necessary for medical care – contribute to the rising cost of health care.

4. Ongoing Health Care Innovation

Another factor that influences the rising cost of healthcare is continual advances in medical technology.

High Tech Procedures and Equipment

The procedures and equipment used today were unheard of 20 years ago. These advancements save lives and prolong the quality of life for individuals. BUT, these advancements are EXPENSIVE!

It is expensive to develop new high tech procedures. The costs to develop these advancements are reflected in high tech procedures and equipment.

Incredible Developments in Prescription Drugs

One of the most impressive areas of medical innovation is the development of many new prescription drugs.

People who had at one time resigned themselves to a lifetime of pain, suffering, or even death, now have a new quality of life due to recent developments of “miracle” drugs.

Autoimmune diseases, cancer, and chronic diseases are all treated with high-cost drugs. These drugs are incredibly effective, but also very expensive.

Because “miracle” drug development and production are expensive, you can expect to account for these costs in the cost of your insurance.

Prescription drug costs make up 10% to 15% of an employer’s overall health insurance costs. And for some employers, they can expect this cost to account for 20% to 30% of their insurance costs.

This brings us to these three conclusions:

  • These increasing costs from medical advancements have put pressure on the affordability of health insurance costs for both the employer and employee. 
  • Every year, the cost of health insurance increases for both the employer and the employee.
  • Because of these increases, there is also increased pressure to make regulatory changes to health care at government levels.

5. How about some good news? Let’s look at solutions to premium increases.

You’re probably thinking, “All of this sounds pretty bleak! Is there anything my business can do?”

I know the picture I just painted isn’t pretty, but it is the current reality in the group health world! Honestly, it may sound a little hopeless.

But even with so many factors outside of your control, you still have options that can help you control your group health insurance costs! 

As you prepare for your group health renewal, talk with your health insurance advisor to educate yourself on the possibilities for your business. 

Here are the 4 things you can do to take charge of your renewal process and work toward lower increases and maybe even decreases in your health insurance program.

1. Be knowledgeable. Know what you can do.

Do some digging so that you can answer these questions.

  • Can you change networks? 
  • Can you change your group health insurance product?
  • Should you switch carriers?
  • Can you change your funding method?
  • Can you alter your employees’ behaviors?
  • Should you think about switching your group health care consultant?

2. Consider implementing employee behavior levers to reduce your health insurance costs. 

As an employer, you can influence your employees’ behaviors in terms of their health care. Encouraging the use of telemedicine and healthcare clinics can impact your group health costs. 

Helping your employees develop a wellness strategy and manage chronic diseases like diabetes can also influence your costs. Your group health insurance consultant should have a wide variety of options for helping you incent your employees’ health decisions leading to a reduction in your group health costs.

3. Learn about the various financial levers you can implement to reduce your costs.

As an employer, you also have financial decisions to make that can lower your premium rates. Your group health consultant should help you analyze your current funding method, perform a large claims audit, and evaluate your employer contribution strategy. 

They can also evaluate the use of direct provider contracts, reference-based pricing, etc. to create a strategy for controlling your group health costs.

4. Evaluate, evaluate, evaluate!

I can not overstate this! To make an impact on your group health costs, you will need to consider all of the options available to you. Taking the time to weigh your options (ALL OF YOUR OPTIONS) is the only way to improve your group health insurance program. 

Proactive employers have the most successful group health insurance programs!

Looking for solutions for your Group Health Insurance?

At Baily Insurance, we focus on giving the time and attention our clients need to develop a group health plan that satisfies both employer and employee. 

We believe strongly in educating our clients to help them make an informed decision about the product they are buying.

With over 25 years of combined group health experience, our Employee Benefits team would love to share our expertise with you as you create your group health program.

To explore if our agency might be a good fit for your business, we’d love to set up a short meeting to explain to you our process and give you a clear understanding of what you will receive when you work with our Baily Team. 

Let’s get started right away!