Factors Affecting Claims | Group Insurance Rate Making

Factors Affecting Claims

As previously mentioned, equity requires that rates reflect those factors that result in different claims experience for different groups. Although there are variations among insurance companies, the following factors are used by most insurance companies to determine rates for life, disability income, medical expense, and dental insurance: the sex, age, geographic location, occupation, and income of group members; the size of the group; and the length of time that rates will be used.

Sex. The sex of insured persons is taken into account for determining rates for life, disability income, medical expense, and dental insurance.

Age. Age is also used as a rating factor for life, disability income, and medical expense insurance. Dental insurance rates usually do not take age into consideration.

Geographic Location. At one time, geographic location was a rating factor for medical expense and dental insurance only. However, an increasing number of insurance companies are using geographic variations for determining life and disability income insurance rates. For these latter types of insurance, rates may not be determined separately for a wide variety of locations. Rather, the insurance company may have only two or three rate schedules, with each schedule applying to several different geographic locations on the basis of past claims experience.

Occupation. Occupation is virtually always reflected in both group term life and accidental death and dismemberment insurance rates. It may also be reflected in disability income, medical expense, and dental insurance rates, but the number of groups for which it is of concern is relatively small. Consequently, some companies ignore it as a rating factor but may not write such coverages when certain occupations are involved.

Income. At one time, the income level of group members was commonly used as a factor in establishing disability income, medical expense, and dental insurance rates. Currently, income level is still a factor in determining dental insurance premiums, but it is more likely to be an underwriting consideration in disability income and medical expense insurance.

Size. The size of a group also affects rates because the proportion of the premium needed for expenses decreases as the size of a group increases. All manual premium rates are based on an assumption that the size of a group falls within a certain range. If the size of a group varies from this range, an appropriate rate adjustment is made to reflect this differential. In addition, many insurers reserve the right to rerate a group during the period of the contract if the group changes in size by a certain percentage. This is particularly important in an era of downsizing and mergers.

Time. A final factor considered in the calculation of rates is the length of time for which the rates will be used. This is a concern primarily for coverages that involve medical and dental claims, which over time will be expected to increase in severity because of inflation. In inflationary times, monthly rates that are guaranteed for three months can be lower than those guaranteed for one year.

Frequency of Premium Payment Period
Because group insurance premiums are usually paid monthly, this is the period for which rates are generally determined. When premiums can be paid less frequently (such as annually), they are usually slightly lower than the sum of the monthly premiums for the same period of coverage.

Calculation of Manual Rates
Manual rating involves the calculation of the manual premium rates (also called tabular rates) that are quoted in an insurance company's rate book. These manual rates are applied to a specific group insurance case to determine a final premium rate (sometimes called an average premium rate) that then will be multiplied by the number of benefit units to obtain a premium for the group.

There are three different manual rating methods. However, if identical assumptions are used, each method should result in approximately the same premium for any given group. The first method determines separate manual premium rates for groups with certain characteristics that an insurance company feels will affect claims experience. A second approach establishes a single standard manual rate that is adjusted in the premium-calculation process to compensate for any characteristics that deviate from those of the standard group. A third method merely combines the first two approaches and considers some factors in determining the manual premium rate and other factors in determining the final premium rate.

The first step in the calculation of manual premium rates is the determination of the net premium rate, which is the amount necessary to support the cost of expected claims. For any given classification, the net premium rate is calculated by multiplying the probability (frequency) of a claim's occurring by the expected amount (severity) of the claim. For example, if the probability that an employee aged 50 will die in the next month is .0005, then the monthly net premium for each $1,000 of coverage is .0005 × $1,000, or $.50. Because premiums are collected before claims are paid, the insurance company adjusts this figure downward for anticipated interest earnings on these funds.

In general, insurance companies that write a large volume of any given type of group insurance rely on their own experience in determining the frequency and severity of future claims. Insurance companies that do not have enough past data for reliable future projections can turn to many sources for useful statistics. Probably the major source is the Society of Actuaries, which regularly collects and publishes aggregate data on the group insurance business that is written by a number of large group insurance companies. Other sources of information are industry trade organizations and various agencies of the federal government.

The second and final step in the calculation of manual premium rates is the adjustment of the net premium rates for expenses, a risk charge, and a contribution to surplus. Expenses include commissions, premium taxes, claims settlement costs, and other costs associated with the acquisition and servicing of group insurance business. The risk charge represents a contribution to the insurance company's contingency reserve as a cushion against unanticipated and catastrophic amounts of claims. The contribution to surplus or net worth represents the profit margin of the insurance company. While mutual companies are legally nonprofit, they, like stock insurance companies, require a contribution to net worth that is a source of financing for future growth.

From the standpoint of equity, the adjustment of the net premium rate is complex. Some factors, such as premium taxes and commissions, vary with the premium charge; however, the premium tax rate is not affected by the size of a group, whereas the commission rate decreases as the size of a group increases. To a large degree, the expenses of settling claims vary with the number, and not the size, of claims. It costs just as much administratively to pay a $10,000 claim under a group life insurance plan as it does to pay a $100,000 claim. Certain other costs tend to be fixed regardless of the size of a group. For simplicity, some insurance companies adjust, or load, their net premium rates by a constant percentage. However, other insurance companies consider the different patterns of expenses by using a percentage plus a constant charge. For example, if the net premium rate is $.60, this might be increased by 20 percent plus $.10 to arrive at a manual premium rate of $.82 (that is, $.60 × 1.2 + $.10). Because neither approach adequately accounts for the difference in expenses as a result of a group's size, another adjustment based on the size of the group will be made in the calculation of the final premium rate.

CLAIMS | Plan Provisions and Taxation

Medical expense contracts that provide benefits on a service basis (such as HMOs and the Blues) generally do not require that covered persons file claim forms. Rather, the providers of services perform any necessary paperwork and are then reimbursed directly.

Medical expense contracts that provide benefits on an indemnity basis typically require that the insurance company (or other provider) be given a written proof of loss (that is, a claim form) concerning the occurrence, character, and extent of the loss for which a claim is made. This form usually contains portions that must be completed and signed by the employee, a representative of the employer, and the provider of medical services.

The period during which an employee must file a claim depends on the provider of coverage and any applicable state requirements. An employee generally has at least 90 days (or as soon as is reasonably possible) after medical expenses are incurred to file. Some insurance companies require that they be notified within a shorter time (such as 20 days) about any illness or injury on which a claim may be based, even though they give a longer time period for the actual filing of the form itself.

Individuals have the right under medical expense plans to assign their benefits to the providers of medical services. Such an assignment, which authorizes the insurance company to make the benefit payment directly to the provider, may generally be made by completing the appropriate portion of the claim form. In addition, the insurance company has the right (as it does in disability income insurance) to examine any person for whom a claim is filed at its own expense and with the physician of its own choice.

Most self-funded plans contain subrogation provisions. If state law allows, they are also commonly contained in the group medical expense contracts of HMOs, PPOs, the Blues, and insurance companies. A subrogation provision gives the plan (or the organization that provides plan benefits) the right to recover from a third party who is responsible through negligence or other wrongdoing for a covered person's injuries that result in claims being paid. If a covered person receives a settlement from the third party (or their liability insurance company) for medical expenses that the plan has already paid, the covered person must reimburse the plan. The plan also has the right to seek a recovery for benefits paid if legal action is not taken by the person who receives benefits.

Claims Review, Preventive Care, Encouragement of External Cost-Control Systems

Claims Review
There is no doubt that claims review can generate substantial cost savings. In general, this review is done not by the employer but by the provider of medical expense benefits, a third-party administrator, or some independent outside organization. At a minimum, claims should be reviewed for patient eligibility, eligibility of the services provided, duplicate policies, and charges that are in excess of the usual, customary, and reasonable amounts. Many medical expense plans routinely audit hospital bills, particularly those that exceed some stipulated amount, such as $5,000 or $10,000. They check for errors in such items as length of stay, services performed, and billed charges. Many insurance companies have found that each dollar spent on this type of review results in two or three dollars of savings.

A newer trend in claims review is utilization review or case management, which may be done on a prospective basis, a concurrent basis, a retrospective basis, or a combination of the three. A prospective review involves analyzing a case to see what type of treatment is necessary. Hospital preadmission authorization, second surgical opinions, and predetermination of dental benefits fall into this category. However, when a patient is hospitalized, concurrent review can lead to shorter stays and the use of less expensive facilities. Concurrent review is normally carried out by a registered nurse and typically begins with precertification of a hospital stay for an initial specified length of time. The nurse then works with the patient's physician to monitor the length of stay and to determine whether other alternatives to hospitalization—such as hospice or home health care—can be used. Many providers of medical expense benefits pay for these alternative forms of treatment even if they are not specifically covered under the medical expense plan, as long as their cost is lower than the cost of continued hospitalization.

A retrospective review involves an analysis of care after the fact to determine if it was appropriate. Such a review may lead to a denial of claims, but its purpose is often to monitor trends so that future actions can be taken in high-cost areas. For example, a retrospective review may lead to the establishment of a concurrent review program for a hospital with excessive lengths of stay.

Health and Preventive Care
There is little doubt that persons who lead healthy lifestyles tend to have fewer medical bills, particularly at younger ages. It is also evident that healthier employees save an employer money by taking fewer sick days and having fewer disability claims. For these reasons, employers are increasingly establishing wellness programs and employee-assistance plans. With increasing health awareness among the general population, the existence of these programs has a positive side effect—the improvement of employee morale.

Encouragement of External Cost-Control Systems
While a certain degree of cost containment is within the control of employers, the proper control of costs is an ongoing process that requires participation by consumers (both employers and individuals), government, and the providers of health care services. Many agencies and committees of the Department of Health and Human Services carry out these activities at the federal level. This government department has the primary responsibility for identifying health care needs, monitoring resources, establishing priorities, recommending courses of action, and overseeing laws that pertain to health care.

At the state and local level, many employers are active in coalitions whose purpose is to control costs and improve the quality of health care. These groups—which may also involve unions, providers of health care, insurance companies, and regulators—are often the catalyst for legislation, such as laws authorizing PPOs and establishing hospital budget-review programs. Some coalitions act as purchasing groups to negotiate lower-cost coverage for members. For example, one midwestern coalition consists of several large corporations and offers a uniform health plan to the 50,000 employees of its members. The plan is self-funded by the coalition and utilizes the services of about 1,000 primary care physicians and 4,000 specialists. Another coalition, an example of a different approach, represents over 10,000 companies with fewer than 150 employees each. The coalition negotiates with providers of medical expense coverage and offers its members a choice of about a dozen different group plans. The annual increase in cost to coalition members has been significantly less than the annual increase in cost for other companies in the area that do not belong to the coalition.