Americans don’t agree on much, but we can all agree that our health insurance system is incredibly complicated. That’s something that self-insured employers know all too well. Making decisions about deductibles and risk tolerance are tough when so many factors are in play, and when multiple decision makers have to weigh in. One of the major factors that self insurers should be aware of is the concept of leveraged trend.
First, some background. Medical trend is the rate at which medical costs grow. According to one extensive study done by Aon, the average 2018 medical trend was 7% for the United States, up from 6% in 2017. So that means that, on average, a medical procedure that cost $100 in 2017 would cost $107 in 2018.
A self-insured group’s costs can balloon quickly when the deductible doesn’t keep pace with the medical trend rate. To demonstrate, let’s say that your plan has a specific individual deductible of $200,000.
- In 2017, a member submits a claim for a $225,000 procedure. The stop loss provider pays the $25,000 that exceeds the deductible.
- In 2018, the member needs the same procedure and submits another claim. Assuming a medical trend rate of 7%, in 2018 the procedure costs $240,750. The stop loss provider’s portion of the bill is $40,750.
The amount covered by the deductible didn’t change, but the portion covered by the stop loss carrier increased by 63% in one year. This phenomenon is what’s called leveraged trend. In a case like this, the medical trend rate doesn’t affect the deductible – it only affects the portion of the bill that stop loss covers, so the stop loss provider ends up bearing a greater and greater financial burden each year. That burden ends up being shared with the plan members in the form of increased premiums.
Now let’s say that the deductible is increased from $200,000 in 2017 to $210,000 in 2018. The stop loss carrier’s portion of the procedure would be $30,750, which is a 23% increase from 2017 – but it’s significantly lower than the 63% increase that was incurred when the deductible remained unchanged.
As the two example cases demonstrate, a plan’s deductible plays a significant role in determining the leveraged trend rate for a specific claim.
That’s why it’s so important to make informed choices about deductibles for your stop loss coverage. Lower deductibles can result in higher premiums down the line. Increasing your plan’s deductible allows you to budget medical costs with greater accuracy.
We know that stop loss insurance coverage can be confusing, and making the right decisions about your plan is daunting. Contact Stop Loss Insurance Brokers now for help making the right choices regarding stop loss coverage for your Self-Funded plan.