Health insurance is a perk that many companies use to recruit and retain top talent. In fact, 70% of workers in the private sector have access to healthcare insurance, according to data published by the Bureau of Labor Statistics. It’s a sound strategy because health benefits usually appear at the top of many employees’ wishlists — so when employers decide to provide a plan, it can go a long way toward showing that staff well-being is top-of-mind. One thing that may not be obvious — especially if it’s your first time offering a plan to employees — is that insurance rates are not set in stone. Available coverage can change, your staff can grow or shrink in size (affecting your costs), or state and local mandates can cause costs to fluctuate.
The good news is that, in most cases, your broker is available to answer policy-related questions and help you understand the causes of rate increases. Additionally, there will always be some common explanations when rates trend upward annually.
Let’s learn more about the most common reasons rates can increase, how staff changes affect them, and what it means for your business.
Why are there annual increases to health insurance?
When a renewal notice arrives in your mailbox (or inbox), it’s easy to get sticker shock. One thing to remember is that the world of health insurance is similar to most other products and services in the marketplace: subject to yearly price increases. So, just as vendors you count on for inventory or supplies might raise prices (as their costs go up), so too might the health insurance companies, as the same logic applies to their cost of operating.
It’s all relative, says OnPay’s former Vice President of Insurance, Paul Foery, who has over 30 years of expertise assisting small and medium-sized businesses with employee benefits and workers’ compensation. “Just like most industries, the cost of doing business usually goes up from year to year. Additionally, the age of employees is a large part of why the dollars and cents change annually. The thing to remember is every year we get older, and rates are based on age,” he says.
Furthermore, because most businesses choose to pay insurance premiums monthly, even a modest price increase can turn heads. For example, a 6% increase on a $500 per month premium ($30 per month) can seem like a lot, especially if you’re multiplying that number by ten employees. Now compare it to your $3 hamburger at a fast food restaurant that raises prices by 6% — or 18 cents, it may not seem as bad. You may even find that change buried under the cushions of your living room sofa.
Now that we’ve covered some of the fundamental reasons why health insurance premiums climb at renewal time, let’s take a high-level look at how data plays a role when rates increase.
How does data affect decision-making?
It’s important to remember that price increases stem from the cost of doing business and analysis from professional number-crunchers who are called actuaries. These are analysts that usually have keen business acumen and work across industries, from banking to commerce. According to the Society of Actuaries, some of these specialists even provide insights into costs associated with things as niche as pet insurance.
In the health insurance industry, actuaries spend a lot of time trying to predict the likelihood of customers filing a claim. Their analysis comes together through a mix of financial theory, number-crunching, and statistics to forecast the cost and probability of an event. The higher the chance, the more an actuary can justify any rate hikes to insurance premiums. The takeaway is that when premiums rise, the figures are not random, but instead are usually based on historical data gathered over the last 100 years.
Prices can also change depending on where you do business or the type of work your employees perform. Insurance costs in Tulsa, Oklahoma will be very different from those in Chicago, Illinois, while some occupations will always have a higher inherent risk that carriers consider when determining premiums.
Though this data does play a significant part in why you may see fees going up, there are some additional typical scenarios that can also impact health insurance premiums.
Common reasons for renewal increases
To break down some of the most common scenarios of why health insurance rates go up annually, we tapped OnPay’s Vice President of Insurance once again. Here are some of the common reasons Paul has come across since starting in the insurance industry:
Normal inflation
- When running a business, inflation usually comes with the territory (we mean standard inflation — not price increases due to historical inflation). Costs of products and services increase yearly across the board, no matter the type of company, industry, or location. It’s also normal for rates to go up during renewal periods because a company has enjoyed a year without a price increase.
Medical inflation
- In addition to standard inflation, medical inflation is another reason you may experience a rise in costs. For example, innovation in the healthcare industry usually comes with a high price tag, and as new technology enters the market, carriers end up paying for procedures and medicine that didn’t exist just a few years earlier. Additionally, a significant amount of research and funding goes into developing life-changing prescription drugs. And It’s common for insurance costs to increase as a result.
Roster on the rise
- It’s a positive sign when the size of your team is growing — because it usually signals your business is taking steps forward. And as the roster changes, you’re likely adding people to your insurance policy. So as you hire new talent over the course of a year, it will naturally affect your insurance policy’s price simply because more people in your group are receiving coverage.
But keep in mind, even if there are zero changes to the makeup of your staff and your employee numbers stay the same, rates can still go up. That’s because everyone is a year older, which affects rates. Typically, the average age of your group members will be used by insurers when calculating your premium and will likely be higher than average if your group skews a bit older. This is due to the way carriers set rates. It’s also important to note that just as rates can increase, they can sometimes do the opposite. For example, if you hire young apprentices, your health insurance pricing may decrease.
If you have questions or need outside help to manage health insurance coverage, a Broker of Record can assist in negotiating rates and advise on policies that make the most sense for your employees and business.
New mandates
- When new federal and state mandates pass, you and your employees will enjoy new coverage previously unavailable. Remember that these are government-level decisions, so when carriers have to provide more, rates typically go up as a result. But while costs may rise, there are often tangible benefits for your staffers, adding up to happier and more productive employees.
Rate guarantee
- When you purchased your group employee benefits, the rates were guaranteed for 12 months, so if you’re quoted a price at the age of 40, you won’t pay the rate increase until the renewal time rolls around.
Key takeaway: Talk to your broker at renewal time
Taking a look at the bigger picture, health insurance is one of those must-have benefits that employees take into account during a job search — or when deciding to stay with their current employer.
Investing in health coverage for employees puts you ahead of the competition and makes you a more attractive employer in the long term. When the renewal package arrives, it pays to reach out to your broker to discuss options and understand why rates go up — and down. There could be alternate plans or different copays to consider to minimize those increases.
Before making any decisions, get in touch with your broker at renewal time and discuss your options.
Please note all material in this article is for educational purposes only and does not constitute tax or legal advice. You should always contact a qualified tax, legal or financial professional, in your area for comprehensive tax or legal advice.
