Agent Debate Rages on Stock Market Health Insurance Premiums…


We too have sold a lot of “dual choice” plans, one of the choices generally being a $2,500 deductible 100% plan. The second round of renewals on those plans are coming in and the rate of increase on the QHDHP is generally 2% to 4% higher than the more traditional deductible and co-pay plans. One of the largest carries in the state has been doing that kind of increase this year. Not a pleasant thought . . . . .however, I have maintained in the past on this forum that the QHDHP will not really do anything to curb overall costs when the insurance carrier’s liability is actually larger under the QHDHP than under the other plan. That apparently is being born out . . . . . or the carriers are just looking at this as an opportunity to raise the floor a little on the premium level of what is supposed to be the up and coming more popular plan. (By the way, I do subscribe to the conspiracy theory — always have since 1963!)

John Malachowski

Decatur IL


Well our worst fear has materialized with Blue Cross’s May 1 small group increase. Some agents may say “who cares about the public, I just got a pay raise since clients are paying more”. I say “this is not good for the upcoming election and our industry”. Many of our clients have reached a wall when they had last year’s 15% rate increase. Now with another double digit increase, agents can’t pull more rabbits out of their hats to help employers. The HSA was a great rabbit for us to use until we get a first year 32% rate increase!

There is going to be a lot a scrambling for us CA brokers during the next couple months.

I now have to agree with Ric Joyner’s future rate increase projections, even for HSA plans. Get ready folks, we may be in for a WILD ride!

Gary Whiddon CFP CA


Subject: Are you ready for the coming premium increases of 25%-60%?

I have a group renewing in May with a 61% increase in premium. I always dread these rate increases because the client is never receptive to rate hikes this high. Even 30% increases are hard to rationalize for clients and their employees. The employees think the broker sets the rates and responds to me accordingly. With the political agenda of a particular party, we wiil no longer see 30% to 60% increases in group premium, just 60% plus increases in our tax bill.

Bob Louis



From: Richard Joyner

Please notice that my posts don’t say a major driver. But the facts are what they are. The reaction to the stock market can’t be denied.
The emails I have gotten from brokers it has already started. The most surprising is the increases they are reporting in the HDHP plans of over 25%!

John while we can disagree on the stock market impact if you follow the charts listed in my blog the increases and decreases followed exactly with the stock market.

What I believed in my 26 years of benefits was utilization and that is what we were told when out delivering renewals but what always stuck in the back of my mind is “why” all the companies seemed to have the same type of renewal costs? How can that possibly be? Each company is managed differently and utilization cannot be the same for every company? Thus there must be an outlier that is affecting them equally and in the same way. How do we explain that? And as an agent do you want present utilization as the primary outlier that is creating the premium increases when in fact it plays just a part as the does everything on the pie chart?

Are we conducting business as usual if we rely on the old line “it is utilization”? Should we not warn and prepare people for the coming increases? There are things we can do. But no employer should be caught flat footed and it would appear to me that my clients are relying on me to bring bad and good news.

So my follow up questions to you are:

1. Can you prove that every company has the same utilization experience?
2. What are other explanations for the seeming increases that plague all carriers at the same time?
3. We know that the stock market plays an important role in property and casualty it can be a logical hypothesis to assume it affects health insurance is it not?

Anyway thanks for the super debate.


From: John Hulla

<Can you prove that every company has the same utilization experience?>

Companies with similar demographics will more or less have the same utilization experience due to the law of large numbers.  Minor variations will occur, mostly as a result of plan design, i.e., copays vs. indemnity, etc.

<What are other explanations for the seeming increases that plague all carriers at the same time?>

The baby boomers are an enormously huge cohort and are aging.  For example, people born between 1945 and 1955 are now between 53 and 63 years old.  As of July 1, 2005 there were 78.2 million of us. These individuals are driving up utilization and health care expenditures and will continue to do so.  That is why Social Security and Medicare together are $50 trillion unfunded liabilities.  The baby boomers are evenly distributed around the country and their effect is felt by almost every company and insurer.  Ditto with new drugs and medical technologies, another driver of increased health care expenditures.

<We know that the stock market plays an important role in property and casualty it can be a logical hypothesis to assume it affects health insurance is it not?>

I don’t know much about P&C, however, I might offer another explanation.  The stock market is not the economy but is one leading indicator of economic activity and is often considered to be a forecast of the macro economy six months out.  Accordingly, leading into and during times of slow or no economic growth, the market will be depressed.  It is during such times that companies will also be more motivated to control costs.  I remember that going into the recession of 2000 – 2001 many companies were riding a crest of profitability and not overly concerned with rising health care expenditures.  However, shortly after the recession began, interest in CDHC grew tremendously.

John Hulla, CEBS


From: Agent X
I read the interesting blog and had a few comments an alternative view you might say: 
A.M. Best’s 2006 report says Life/Health insurers realized a 5.8% net yield on invested assets.  Bonds constituted 50% of the portfolio (across all carriers).  Separate Accounts was over 25%.  The balance is other investments such as, short term cash, real estate, mortgage, loans.  Stock is a small sliver.   On that sliver, it’s hard for me to see carrier prices consistently getting 25% as a needed or benchmark return to maintain carriers good $$ health.        
To me, the tie in with Wall Street is more noticeable in what the street expects and how the carriers react to it:  managing one’s stock share prices similar to any publicly traded company. 
The industry in large part rushed to de-mutualize in the mid-90’s to get access to capital markets so they could buy each other up a la  Travelers/Citigroup/Smith Barney after Clinton signed Graham Leach Bliley.   That financial product super shopping center model seems to have not paned out. 

But now the carriers are left with being publicly traded and have to open their financial kimono up like everybody else.  The Street gets fickle.  One year they want market share.  Another better profitability carriers react with institutional shareholders to keep happy.  If profitability is the drum-beat, carriers raise their pricing if they can.  That’s the tie-in to Wall Street I see. 

Maybe the investment success if more key on P/C side, where the float cycle on premium is much longer. 

If the argument is that the health side must send out big renewals to help cover for a large pension asset management operation that flounders, why then I’d think companies that are mostly just health (like UHC) would eat their lunch.    
We didn’t see in 94-95 a flat renewal cycle as indicative of a great stock market year.  If you will recall, that was also the year of Clinton’s Health Security Act efforts to nationalize healthcare.  The industry was under threat of total re-org by the government. Good time to pull back on pricing. 

My two cents from the Bay Area.
Agent X


Ric response to Agent X

Anthony and all:

All of the investments that were indicated are being affected by the economy at large. The stock market is only a symptom but is an indicator none the less.  The indicator can be used back last year to prepare for the increases. That is my point. We can use it to help plan. What most folks don’t realize is that the stock market is like a thermometer of the health of the economy. By watching it we can prepare for increases or level costs.  The charts from Kaiser and AHIP don’t lie. There is a definite trend.  Again this is one part of the factors. There are other pressures as well that were indicated in the piece.

While my analysis didn’t include the overall portfolios there just doesn’t seem to be any other reason that all carriers would have nearly same rates with the same increases. I am not a conspiracy theorist but actually the information provide by Tyler helps prove my theory. Utilization cannot be the same throughout the industry. If so then the democrats definitely have a great case for universal health care.

Regarding gaining 25% that could be overall portfolios. Some must be liquid and some can be more advanced. But if you have billions or millions in reserve this can add up to lots of change.

Any fund manager has a goal to reach in their investment strategy and 25% is a moving target, and if they come in at 25% terrific if more then great. If less other things need to change.

Thanks for the debate.



I don’t believe we can truly consider the vagaries of the stock market as a factor in this equation.

Realistically, reserves on health insurance these days should be in the 15% to 18% of annual premium range – perhaps even less (I know they may not be that low, but that is what they should be and if they are higher, it is because the brokers/consultants aren’t watching the store).  Reserves are lower now because of managed care and electronic adjudication of claims.  Doctors submit claims direct vs. the old days when the “shoebox effect” deferred submission of claims by employees; carriers adjudicate a large percentage of claim submissions automatically.  Net result, claims are paid faster (presumptively more accurately) and the needed reserves are lower. 

Now, let’s look at the other side of the equation.  To fund the reserves, the plan sponsors have to pay the premium.  Some pay on or before the due date, but the vast majority use some or all of the grace period.  For sake of discussion, let’s assume that they pay, on average, half way through the grace period.  That is roughly 4% of annual premium that the employers (and a corresponding 4% of the 15% reserves) are holding as an interest free loan.  Net impact is that the net reserves available for investment are about 11% to 14% of annual premium and the potential time horizon is as little as two months to pay off all claims. 

Yes, the aggregate of the entire potential pool is huge and investment managers can choose to manage as they see fit, but with this pool of money, it is essentially in fixed income securities, not so much in equities.  And remember, the vast majority of larger employers are on self insured arrangements, which mean that they hold the reserves, not the insurance carrier or TPA.  How they “invest” this unspent money is usually in their own business not in securities and their net return is whatever they are earning on capital, but they, not a carrier, keep that return.

So what is causing increases?  Utilization increases are only a part – as the average age of groups increases, the older population is like any other machine, it wears out more often and the repair is more expensive medical expense than in the past.  Groups that have decreasing age populations, for whatever reason – growth, etc. – tend to have lower trends in their claims, because their utilization isn’t increasing as fast as the general population’s is.  It is worth noting that the trend factors, while similar and in a tight range, aren’t the same for all carriers and in some cases, they vary by product and geographic area.

The other factors, we have heard them before (or should have) are inflationary increases – and medical CPI has consistently exceeded general CPI in rate of growth – and technology improvements and the adoption of those new technologies.  Think about it – have you ever received a new type of treatment that cost less than the treatment approach it replaced.  And things like the all too common approach of full anesthesiology for a colonoscopy – as seems to be the prevalent practice in the Northeast in recent years, while not be adopted as “standard” in other parts of the country add cost to the whole system. 

Malpractice and the need for lawsuit reform still gets occasionally blamed, too.  Now there is a class action suit pending on a carrier’s decision not to cover elective gastric bypass surgery and an AG looking into the long established methodology for determining reasonable and customary.  These add cost to the providers and to the carriers that could be reduced or eliminated with elimination of a “sue everybody” mentality.

And a carrier last week threw another item into the mix – oil price increases – as they filter through the system, oil based chemicals that are part of pharmaceuticals and a key component in plastic or synthetic disposable items (syringes, gloves, etc.) become more expensive, adding to the cost spiral.

So think about it – all these things have a whole lot more impact on health care costs than investment returns on reserves, which the rate setters in the state insurance commissioner’s offices do ask about before they approve the rates for community rated groups.

And, true, trend doesn’t impact each group the same, but if you aren’t large enough to be able to justify your own trend calculations, then as with almost all other components of the rating, you have to live with what the carrier is projecting for the average account.  And if you are large enough and have a strong enough spokesperson, the carrier’s will buy arguments about why it should be different for a specific case – true, not that often, but it has happened.


Lee Director———————————————————————

Ric Joyner comment:

Lee excellent. My point is that it is a thermometer.  Investors Business daily uses the term that the health of the economy is shown by the stock market. When it is on the rise lower premiums. When on the fall higher premiums.  And I like your analysis because it shows that there are many factors which is in the AHIP study and I am not disputing. BUT what is the face of the economy? The stock market.  We can use this to plan in advance and warn our clients and HR depts to start budgeting.

Great post. Thanks much. May I use it in the blog?


Two factors I would like to throw in for consideration in this discussion:

1)  Insurance companies are in competition (not collusion) with each other so you can expect to see roughly parallel changes in their underwriting cycles.  We all know there are times when companies are more aggressive and other times when they are very conservative: we talk about “soft” and “hard” markets.  I suspect this is driven by the dual engines of market share and profitability.

2)  Insurance companies have to keep at least their statutorily required reserves and surpluses in investments that the various insurance departments will “admit” (find acceptable).  From experience I can state that stocks are not an asset class the departments will recognize (you wouldn’t believe how CONSERVATIVE they are!), so their reserves and required surpluses have to be in something more or less risk-less like T-bills.





Several private colleges & universities in Tennessee said “enough” several years ago, which is why I am doing what I am doing.

Another thing I thought about reading another of the messages tying stock market and insurance market trends: when the “health of the economy” is on the rise, existing businesses are growing, new ones are starting, etc., and the reverse when it is falling.  We all know that as covered lives in a group increase, all other things being held constant, the loss experience looks better and when covered lives decrease it looks worse.  Also, operating expense ratios are better as groups are larger and deteriorate as they get smaller.

Hmmmm.  It’s seems to be getting harder to hold to a simple explanatory model with only a few factors.


Gregg, Agent TN


I understand what you’re saying, Patrick, but that doesn’t take into account that the larger the deductible, the less likely most folks are to ever get past it. For a deductible of $2500 under an HDHP scenario, only maybe 30% of the population covered might reach that deductible (meaning that 70% won’t cost the carrier much past the preventative care on a 100% coinsurance plan with integrated Rx and “free” in-network preventative care).

For a deductible of $5000, maybe 5% of the covered population might actually reach their deductible (and my experience selling quite a few $5000 individual/$10000 family deductible policies in the HSA market is that virtually none of them ever use their coverage at all).

Surely that has to factor in somehow? On a “traditional” plan with a small deductible but copays for virtually everything (PCP, spec, ER, IP and OP hospital, Rx), virtually all insureds pose at least some risk for the carrier for small and intermediate claims.

Interesting stuff, to be sure. Thanks for the post!



John Sinibaldi

Seminole FL



Original Message:

Sent: 3/6/2008 11:34:54 AM

From: Patrick Burns

Subject: Are you ready for the coming premium increases of 25%-60%?

I would expect HDHP trends to be overall higher than lower deductible plans, due to the fact that Higher Deductible plans in general have a higher trend, regardless of whatever consumer directed health care mitigation there is. Underwriters call this effect leveraging.

It works like this: If I have a claim of $10,000 and I have a $100 deductible plan, and health insurance inflation is 5%, then next year, the plan will incur costs of $10,400, up from $9,900 this year, a difference of 5.05%.

If I have that same claim, and I have a $2500 deductible, the insurance company cost would be $7500 for this year. Next year, the insurance company cost would be $8000, a difference of 6.67%.

The higher the deductible the higher the cost increases.

In CA, the Blue Cross Lumenos plans are coming out with a 35% increase on the HDHP plans, which is much more than the leveraging effect I describe. But I think that is due mostly to the way they allowed folks to enroll mid year and carry over their deductibles this year – giving them a loss ratio over 100% in that product line. I would imagine that this is a one time blip.


Patrick GBA