- INSIGHTS
The Top Overlooked Factors of a Renewal Increase
Renewal season means tough conversations with employers about rising healthcare costs.
And many brokers are blindsided by unexpected premium hikes. They’ve managed their claims, kept track of their client’s data, and done everything “right,” yet the renewal increases still hit hard.
Why? Several overlooked factors contribute to renewal increases that aren’t evident at first. Outside trend and other major factors, let’s break down the 4 overlooked factors you’ve been missing heading into renewal season.
1. Conversion Factor - More Belly Buttons, More Costs (Higher PEPY)
One of the most frequently overlooked factors contributing to a higher PEPY at renewal is what we like to call the “belly button factor.” In the health insurance world, “members” equate to actual people or belly buttons.
When we talk about employees enrolled in a plan, we’re not just talking about the number of workers—it’s the total number of people covered, including their dependents.
So, what are dependents? These are the people who rely on the employee’s health insurance coverage.
Typically, dependents include:
- Spouses: The employee’s legally married partner.
- Children: This can include biological children, stepchildren, and sometimes adopted children or children under guardianship, up to a certain age or condition specified in the plan.
- Other eligible family members: This can vary by plan but may include other relatives under specific circumstances.
For example: an employee enrolls their spouse and two children under their health insurance plan.
While the employee counts as one member, their dependents add three more members to the plan.
The problem is, that many brokers overlook how the conversion factor—the ratio of dependents to employees—impacts costs. Here’s a scenario: Let’s say a group starts with 80 enrolled employees, but when you account for their dependents, the total number jumps to 110 (1.3 conversion factor).
By renewal, you’re not just looking at those 84 employees; now you’re covering 130 (1.5 conversion factor) individuals.
That’s a 15% increase in belly buttons covered under enrolled employees. The claims from these extra belly buttons will now be buried into the enrolled employees and increase the overall PEPY.
Often, renewal increases are blamed on high claims or poor plan management, but sometimes it’s just a numbers game. If you aren’t considering dependents, you’re missing a key component of what’s driving up costs.
When renewal time comes, you’re hit with a 20% increase and wonder why—well, it might be because you’ve got more bellies to cover.
2. Average Age Increase - The Silent Cost Driver
Another often ignored factor is the average age of the group. Age is a major predictor of healthcare costs, and as your group ages, their risk goes up.
Studies from the Institute for Health Metrics and Evaluation (IHME) at the University of Washington, predict population aging will cause 20% of healthcare spending growth by 20251. Even if nothing changes in terms of enrolled employees, their healthcare costs will increase over time simply because they’re getting older.
Think about it: If your group’s average age increases from 44 to 48 that’s close to a 10% increase in average age on the plan.
Due to higher costs coming from the older we get, that would mean an increase of over 10% in claims cost.
Those extra four years come with additional risks—higher likelihoods of chronic conditions, more frequent doctor visits, and expensive treatments. The older a population gets, the more healthcare we consume.
That’s why brokers need to look at the age composition of their groups annually. If your group is aging and the risk associated with it isn’t considered in the renewal, it’s no wonder costs are going up. However, many don’t recognize this rising cost until it’s too late, and renewal rates have already jumped.
So, what can brokers do to explain and control renewal increases for employers? Start by addressing the unseen factors.
3. Location Change - Different States, Different Rates
Where employees live matters—perhaps more than you think.
The geographical location of your client’s employees has a significant impact on healthcare costs. Different states, and even different counties, have varying healthcare costs due to local medical practices, cost structures, and provider networks.
For instance, if your group has a spike in enrollment in high-cost states like California, your healthcare costs will rise.
California’s healthcare is much more expensive than a state like Texas, for example. If 10 employees move from Texas to California, the claims experience for that group is going to skyrocket, even if nothing else changes.
This impact is even more pronounced if your organization acquires a new location or picks up a company with 10-20 employees, further driving up costs in high-expense areas.
Many brokers fail to account for these location-based differences when assessing renewal costs. It’s important to track not just how many people are enrolled, but where they’re located. Networks and discounts vary across states, so consider the impact of regional changes when looking at renewals.
4. The Hidden Healthcare Tax - Cost Shifting from Medicare to Commercial Payers
Finally, one of the biggest, yet most hidden, factors in rising healthcare costs is what I call the “hidden healthcare tax.” This is essentially a cost shift from Medicare to commercial payers.
Here’s how it works: Hospitals are required to accept Medicare patients, but they often lose money on them because Medicare reimbursement rates are lower than what it costs to provide care. So, what do hospitals do? They make up for this shortfall by charging commercial payers more.
This is done by the government because they don’t want to pay more for their responsibility on the medicare side.
The government can only directly tax people so much, so their solution here is to run up their healthcare costs indirectly. This cost-shifting is a hidden tax on private healthcare plans, and it’s one of the reasons why renewal rates keep increasing year after year.
To make matters worse, inflation further compounds the problem. When the value of money decreases, hospitals and healthcare providers increase their charges to maintain their margins. This healthcare tax is subtle, but it’s a significant contributor to the rising costs of health plans.
How to Control the Unseen Factors
So, what can brokers do to explain and control renewal increases for employers? Start by addressing the unseen factors.
Take a closer look at the conversion factor and make sure you’re not underestimating the impact of dependents on the overall cost. Pay attention to the age of the group—an aging population will inevitably drive up claims.
Don’t forget to analyze the geographic distribution of the employees and how different states’ healthcare costs can influence the bottom line.
And finally, recognize the impact of the hidden healthcare tax, which shifts costs from public programs like Medicare onto your commercial clients. Renewal time doesn’t have to be a painful process if you stay ahead of these often-overlooked factors.
By understanding and addressing these elements, brokers help employers better control costs and avoid those unexpected, and often frustrating, renewal increases.
What to do next?
If you want to dive deeper into how you can manage these factors and create more predictable renewal outcomes, reach out to us at Virtue Health.
Our private stop-loss consortium helps brokers and employers find long-term, stable solutions that minimize volatility and keep costs under control, even in the most unpredictable of times.
Claim my 30-minute strategy session now.
References:
- Dieleman JL, Squires E, Bui AL, Campbell M, Chapin A, Hamavid H, et al.. Factors associated with increases in US health care spending, 1996-2013. JAMA. (2017) 318:1668–78. doi: 10.1001/jama.2017.15927, PMID –
- Frontiers in Public Health. How heavy is the medical expense burden among the older adults and what are the contributing factors? A literature review and problem-based analysis.
John W. Sbrocco
@johnwsbrocco
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