Trend factors and, more specifically, health trend factors, use an organization’s experience with historical claims to forecast future healthcare benefits costs. Insurers apply these trends as a way to rate your plan. The trend factor captures anticipated increases in the cost of medical goods and services and considers changes in utilization patterns driven by factors such as aging demographics. For example, the introduction of a new, expensive drug or class of drugs that replaces a lower-cost alternative would be considered in the trend factor. Similarly, the influx of generic drugs has contributed to a reduced healthcare trend in recent years.
For over a decade there has been relatively little movement in the trend factor being used in the rating process, apart from annual adjustments for inflation. The rate the insurers have routinely applied has hovered around 12% to 15%, despite considerable evidence that medical inflation has stabilized in recent years, and that the actual trend has been significantly less.
There has been some recent good news on this front with the majority of the insurer industry lowering their health trend factors to 11.5%. It all happened in a chain reaction with one insurer announcing a reduction in their trend factor and, in quick succession, most have followed suit—all landing on the exact same number. And the reasons put forward to justify the change are—perhaps not surprisingly—identical. The industry is definitely singing from the same song sheet.
From a plan sponsor perspective, the reduction in the health trend factor is good news; future rate adjustments can be more modest when the insurer trend factor is a significant component of the rating process. And yet there is something very unsettling about how the industry has responded to this issue.
Competitive pricing
There are many aspects about pricing in the group benefits market that are driven by the competitive market—and this simultaneous reduction is a good example. While each insurer has provided rationale for the reduction in trend, the market reaction would suggest an alternate reason for the change. One insurer reduced its trend and the rest felt compelled to follow for competitive reasons. The outcome is positive from a plan sponsor perspective but it does speak to the need for a competitive insurance market place to drive pricing.
A mix of science and art
The fact that the industry is landing on the same number would suggest there is some science but also a lot of art in determining the number. It’s highly unlikely that every insurer is experiencing the exact same historical trend on their block of business (a consideration in the establishment of future trend) or that they have identical views of the future. Many insurers are quick to defend their trend factors, some even going so far as to suggest they are non-negotiable. And yet their landing on 11.5% would suggest otherwise: trend factors are clearly negotiable. Insurers have painted themselves into a bit of a corner and are going to have work very hard to justify the trend factor in the future and make this more science than art.
Margin of error
Is 11.5% the right number? I can almost guarantee it is not. There is considerable evidence to suggest that medical inflation is still running at 6% to 8%, so there still appears to be some margin in the new number. Regardless, it is more appropriate to focus on actual trend wherever possible as a proxy for future trend. The unique characteristics of the group should be considered in the establishment of a future trend rather than applying an estimated trend factor that is, by its very nature, neither specific nor unique.
Part of me wants to accept the reduction in trend at face value, be thankful on behalf of our clients and move on. But I can’t. There is something very worrisome about the unified front being taken by the industry on this issue. It lacks credibility, while many insurers talk about greater transparency in product pricing and providing better information to clients and advisors. It feels as if we have taken a step backward and that is troubling.
So the reduction in trend is good news…sort of.
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