On a recent episode of the Global Captive Podcast, Richard asked me “can medical inflation be easily controlled when using a captive to underwrite medical?”
Nekisha Tyrell, chief underwriter at HSBC’s captive, and I both gave what I would call “a knowing laugh”. And it certainly wasn’t because it was a bad question from Richard, but I think it was the word “easily” that got us.
Medical inflation is one of the biggest topics in the global employee benefits industry and thousands of insurance professionals around the world spend their time studying it to ensure they’re effectively pricing their medical benefits.
I understand that not everyone will be familiar with this topic, so before we delve into the role captives can play in managing medical inflation, let me take the conversation a little bit back to basics.
What is medical inflation?
Simply put, medical inflation is the rise in the cost of medical treatment from one year to the next.
Generally, medical costs rise year on year as treatments get more expensive. New drugs, treatments and technology all help to make healthcare more effective, but that comes at a cost.
And, of course, healthcare isn’t immune to general inflation trends either. Lots of things that contribute to the delivery of healthcare rise in cost every year too, like transport, energy and employee salaries, to name a few examples.
All of these contributing factors play into the final price of treatments and healthcare services and are included in overall medical inflation.
Ultimately, this means that medical inflation tends to outpace general inflation and rises at a faster rate. And just like general inflation, medical inflation can differ significantly country-to-country and region-to-region, making it a substantial challenge for multinationals writing medical insurance in a global programme to keep on top of it.
Medical insurance is also wide-ranging, adding another layer of complexity. Because medical insurance is a more used benefit than something like life or accident insurance, there can be thousands of claims to manage.
These can vary from surgeries and other inpatient procedures for serious conditions, to more common claims like dental, optical and physio that anyone could need anytime.
The increased incidence of these kind of claims makes correctly pricing medical insurance even more important. Correct pricing is crucial on any line of business, but given the thin underwriting margins in medical, the claims frequency and medical inflation, it’s something insurers (and captives) need to get right.
Pricing medical in a captive programme
In recent years, there’s been a growing tendency to write employee benefits lines of business to a captive. This started with more long-tail risks such as life, accident and disability, but recently employers have started to look at using their captive to write medical policies too.
Adding employee benefits has helped captives to offset traditional property and casualty risks with unrelated business, benefit from underwriting profit and influence global employee benefits standards around the world with central governance.
But, as the ultimate risk bearer, it’s important that captives properly understand how to price their medical risks, particularly with medical inflation rates so high.
Insurers use medical trend to project the percentage increase in the cost of their medical policies from one year to the next. Trend works on the assumption that the plan design is exactly the same as the year before and shows the percentage increase on an apples-to-apples basis.
Many of the largest brokers and consultants in the employee benefits space publish their annual trend reports each year – this helps to show the projected rise in cost of treatment in each region and at a global level. And by using these trend rates, captives can more effectively price their medical insurance.
Here’s a rough idea of how to price medical risks.
- Review your previous years’ claims.
- Adjust the claims cost for past changes (ie, head count changes, has the number of people covered by the policy increased or decreased?)
- Adjust the claims cost for changes being made at this renewal (ie, plan changes – are you going to increase cover in some areas, reduce it in others?)
- Increase your adjusted claims cost for medical trend. This is likely to be the country trend but could be based on the region, the portfolio or, if there is credible enough data, the group being priced.
- Add expenses and any profit margin.
And this pricing method is effective. Employee benefits professionals sometimes worry that including medical will negatively impact a global programme’s overall performance, but it’s possible to underwrite medical policies quite accurately at the global level.
In 2021 the net loss ratio of medical policies included in MAXIS GBN global programmes was 99% and this figure has been consistent over recent years with the exception of 2020. In 2020 there was claims suppression due to the social restrictions in multiple markets because of COVID and this resulted in an improved performance, but this is of course an anomaly.
Controlling medical inflation
So, we know that it is possible to price medical accurately, but now to get to the crux of Richard’s original question “can a captive help employers control medical inflation?”
In short, the answer is yes. Once you’ve predicted your claims cost for the year ahead, you can then begin to explore cost-containment measures. Many of these are around plan design and will depend on the medical portfolio of each captive. Here are some ideas:
- Are your people using “out of network” providers? Many insurers will have relationships with preferred providers and claims could be more costly if an insured person is going to a different provider. If your people seem to be going to an out-of-network provider, you could consider bringing that supplier into your network or adding a co-pay (a charge paid by the insured person) for using the out-of-network service.
- Is there a trend of using more expensive branded drugs? If there’s a generic alternative that provides the same health outcomes, you could consider adding a co-pay to the branded drug to discourage usage of the more costly brands.
- Do you have the correct benefits limits set? Reviewing your limits could be another way to ensure your medical costs aren’t spiralling.
Aside from plan design, health and wellness programmes could be vital for keeping employees healthy and controlling medical inflation. Including medical in a global programme gives employers access to a wealth of medical claims data from around the world.
By analysing medical claims, you can start to build a picture of the overall health of your employee population and assess the conditions that are causing the most costly claims. You could then look at implementing targeted wellness interventions based on these.
For example, if you see increased respiratory and heart conditions in countries where smoking is more prevalent, you could consider a smoking cessation programme.
This is just one example, but in reality, every employer will have a variety of wellness challenges… If you’re not sure where to start, I’d suggest discussing this with your global employee benefits network, broker or consultant!
Writing medical in a captive can be complex, but I hope this shows that medical inflation is something that can be monitored, managed and controlled… just maybe not easily.