Understanding Benefits Claims Costs for 2020

Employers are still dealing with the uncertainty of COVID-19 claims costs as they prepare for 2021 renewals. In our Meet the Experts video series, Kathy Prosser (former National Employee Benefits Practice Leader) speaks to Ryan Meissner (now President, Employee Benefits Practice) to shed light on what employers can expect in the coming months.

2020 Claims are an Anomaly

Most carriers are treating this year as an anomaly. Because people stayed at home during the Spring of 2020, the volume of healthcare claims was lower from the middle of March to the end of May before increasing in June and July. Many experts expect claims will increase in the latter part of the second quarter and continue to rise in the third and fourth quarters of 2020.

Experts are watching closely to see what true utilization will be. For example, if there was a 30% reduction in claims activity during the Spring quarantine period, it is unlikely that there will be an immediate 30% spike in claims since our healthcare system is not equipped to handle that level of activity. The increase in utilization will likely occur gradually during late 2020 and into 2021. That is why utilization, the impact on claims, and carrier pricing are being closely watched through the end of 2020 and into 2021.

In general, the market is being careful about how they assess future employer clients. Carriers are receiving fewer premiums than they budgeted while still confirming future claim expectations. Employers and their broker partners will need to watch out for changes in items like retention, IBNR, and claims charges to ensure that carriers are being upfront and producing honest renewals for employers.

Can we predict claims costs?

Utilization has a direct impact on claims cost. Until utilization returns to anticipated levels, it will be hard to predict claims for the next 12 to 24 months. Until the economy is completely open and business is back to normal, no one has a clear answer of when “baseline utilization” will return. At this point, expectations are that there will be about a five to ten percent increase in utilization above the normal range in the fourth quarter of 2020.

Once we get to the end of the third quarter of 2020, we will have a better understanding of actual claims incurred by the users on employer sponsored health insurance plans. This understanding will allow us all to better pinpoint what 2021 budgets should look like for employers. However, there will still be large and chronic claims that carriers will need to negotiate with facilities which could push claims into the next plan year.

Claims Impact on 2021 Renewals

While lower claims typically result in more advantageous renewal rates, employers should adjust their expectations for 2021. Carriers are not placing much emphasis on 2020 experience data (some carriers are using as little as four months of 2020 data to project 2021 renewals). However, if past claims experience has been positive, we can usually turn that into a favorable renewal moving forward.

For employers with fully-insured plans, reduced utilization doesn’t necessarily result in lower renewal rates. Employers with these plans should focus on market leverage more heavily than usual heading into their 2021 renewal plan year. For self-insured employers flat budget projections might actually be conversative given the reduction in utilization during the quarantine period. Additionally, we advise employers to look for further negotiations in fixed costs since the market is expected to be more competitive than usual in this space.

In general, the market is being careful about how they assess future client’s claims. Carriers are receiving fewer premiums than they budgeted for while they are still in the midst of understanding future claim expectations. Employers and their broker partners are watching out for items like retention components, IBNR methodology, effective claims trend, and large claims charges and assumptions to ensure that carriers are being upfront and producing honest renewals for employers. Employers need to make sure that carrier released renewals are based solely on actual claims activity and projected claims heading into the next renewal period.

Employer Strategies for 2021

First, working closely with your broker consultant is a must. Employers should set a modified budget for 2021 that includes all claims that have not been processed or paid yet, and a projection around an expected gradual increase in utilization.

For employers with fully-insured plans, they should know that some carriers are being very aggressive in the current market and to be open-minded to changing things about their benefits offerings. Some of these changes could include plan changes, contribution strategies, and network changes. Example plan changes could include; deductible and out of pocket maximum increases, and changes to pharmacy formulary plans to reduce costs. Employers should look very closely at this renewal for potential opportunities like premium holidays, rate caps, and wellness credits. The market is open for business, and this might be the year where any solution might be on sale. Employers can work with their consultants to work on an aggressive marketing strategy that best fits their current and prospective needs.

Self-insured employers must also decide how to work the 2020 plan year claims into a future budget that makes sense. Reduced claims in 2020 may lead to budget suppression in 2021. However, it is very important to understand how to treat claims during an unprecedented time, and how to project out accurately heading into 2021. Currently actuaries across the country are predicting a wide array of outcomes that range from 4% to 40% increases, which is extreme. Developing scenarios and working closely with your broker consultant is imperative. Make sure you take a well-informed and educated approach to creating a budget for 2021—and beyond.

Renewal season is here and planning for 2021 is bound to be more complex than ever with COVID impact not fully known yet.

Employers are breathing a big sigh of relief as 2020 comes to a close but face new challenges for 2021. Understanding utilization, claims costs, budgets and projections, and carrier market options is bound to be confusing. An experienced broker consultant like Woodruff Sawyer will help you understand plan options that are a great fit for today and for your future.