What are healthcare cost trends? In layman’s language they can be defined as medical inflation. As an example, if a procedure cost $1,000 last year, based on a 10% healthcare cost trend, it will cost $1,100 next year. The same is true of drugs and everything else connected to healthcare.
Where do these numbers come from? These trends or inflation factors are derived from actuaries who study cost trends and actual paid claims for various groups and insurance companies. Because costs vary from region to region, trends are often assigned to geographic areas of the country, many times by zip code groupings. Trends also vary by healthcare specialty, hospital, pharmacy, lab, imaging, durable medical equipment, physical therapy and a thousand other offerings in the healthcare environment. In other words, when someone says national medical trend is 8% or 10%, it’s not as simple as it sounds.
Why is trend important, or is it? Yes, trend is important. Medical trend, however, is an exercise in leaping over the problem.
What is the difference between trend and medical trend? Trend is a specific look at a single group. This exercise is helpful and can be a true representation of the performance of a particular program. Medical trend is often an aggregate of the aforementioned healthcare aspects. Aggregated medical trends, while not totally useless, can be a polluted interpretation of market direction. In contrast, analyzing actual data on a specific group over time can produce meaningful cost trends.
Many factors are important to understand when analyzing actual data on a specific group. The size of a group dictates credibility of how accurate the results are for a given group. It is also critical if the group is fully insured (pays a premium to an insurance company who pays all eligible claims) or self-funded (employer is responsible for eligible claims up to certain caps with the rest covered by reinsurance).
Two examples to illustrate the difference of a fully insured group vs. a self-funded group taking into account terminology used above:
1) A fully insured group receives a renewal with a rate increase of 23%. The increase is based on a geographic trend, combined with aggregated losses of several like groups. This employer may not see the medical trend factor used was 10%. What the employer does see is a terrifying increase of 23%.
What should this employer do? Look at their total annual cost over a ten year period, divide each year by the total number of employees and divide the total by 12. This will give them a cost per employee per month. Looking at this over time will develop a cost trend. This can be used to argue the 23% rate increase due to medical trend is unreasonable. As a side note, when a fully insured premium increases, the agent/broker commission also increased.
What is the outcome for this group? The fully insured plan can figure cost variance by comparing annual premiums. The downside to this process is that any wellness programs or like initiatives are difficult to validate. There is too much general information involved and an employer will rarely get credit for wellness.
2) A self-funded group receives their reinsurance renewal, and the rates increased 23%. The increase is not concerned about medical trend based on geographic trends on other groups’ claims. In fact, the increase is only on the reinsurance, not on the biggest part of healthcare costs, claims. Medical trend has very little to do with this increase.
Trend, however, is critical to the employer’s decision regarding funding levels. A well run self-funded program will track actual claims experience over time and by using the formula in example 1, produce a cost per employee per month to standardize results. While geographic trends can be helpful to a self-funded group when determining fully funded costs, most groups do not always fully fund their plans.
What is the outcome? Cost trends and the impact of wellness initiatives can be readily identified based exclusively on the group’s performance. In other words, if the ten year trend is 7% and drops to 4%, the 3% difference is real dollar savings, representing a very large amount of money.
What has been the result of medical trend over the past several years on healthcare cost? After saying a lot about trend in this memo, there are many other factors that also affect this measurement: recession, cost shifting, new drugs, new medical procedures and seemingly endless list offered by society’s staggering technological advancement. Medical trends have been as high as 14% to 15% and are now hovering at 6% though large insurance companies still use 10%. The problem is that even though the medical trend is at 6% health insurance costs more today than when the medical trend was at 14%. It is still too expensive for many people. Employers who pay the bulk of healthcare cost should be cautious when told that medical trend is a certain number. Employers should be asking where the number came from and what it means.
At the end of the day, trend is associated with two things: your data and the behavior of your group. I encourage all employers to demand good data from their provider or claims payer and that behavior change become a standard expectation of those covered under their health plans. If we as a nation are to ever control healthcare costs, we must stop shifting cost to employees and instead begin shifting responsibility.