Now is the time of year when some human resources executives look forward to the holiday season—the premium holiday season. But it’s really nothing for employers or employees to celebrate.
What’s not to like about a holiday from paying insurance premiums?
What is a premium holiday?
Traditional health insurance carriers typically implement a premium holiday when their projections for what they planned to spend on members’ healthcare claims fall well short of how much care those members actually used in their plan year.
The carrier offers a significant premium discount or full “holiday,” allowing the employer or employees to forego paying premiums for a given month. Other forms of this practice include partial premium rebates or refunds.
Especially in this year of COVID-19 lockdowns, when many elective or scheduled procedures never took place, insurers are providing these rebates in record numbers. For example, Blue Cross Blue Shield of Massachusetts is refunding $101 million in premiums to its members. Other insurers also are returning massive amounts of cash.
These givebacks are often announced to employers with great fanfare. But they’re not a sign of generosity. It means the health insurer’s projections of its costs for healthcare services for that group were off. Fewer people accessed services—or they accessed less expensive ones—than the carrier’s models anticipated, and the insurer is now simply fulfilling a legal requirement.
Traditional insurers, who assume the risk on the populations they insure, are required under the Affordable Care Act to spend 80% of the premiums they collect on medical care. Known as the medical loss ratio, or the 80/20 rule, the regulation is intended to prevent health plans from paying for excessive administrative overhead, or banking significant profits, through premiums.
Yet premium holidays, refunds and rebates allow insurers to utilize underwriting to inflate projections and keep more of the premium over time.
In a worldwide pandemic, missed projections are to be expected. This happens regularly even in “normal” years. Last year, the University of Nebraska received a premium holiday just in time for the real holidays.
The truth is, insurers often project liberally to make sure premiums never fall short of projections, and their annual premium increases usually reflect that tendency because it makes business sense. When those projections don’t match reality, they refund the difference, looking like heroes for managing costs so efficiently versus their own projections.
None of this is illegal, but sometimes the rebates don’t match the overcharge. Our calculations show utilization is down as much as 40% in 2020, but we’re commonly seeing only 15% to 20% reductions in premiums. This is most likely because profit margins and taxes built into premiums further cut the value of the rebates.
In addition, while premium holidays and rebates provide savings today, they ultimately have no impact on how underwriting for next year will affect premium increases. Premiums may, and probably will, go up again in 2021.
A better model
Under traditional insurance, ultimately both the employer plan sponsor and the employees pay more than they should because of these missed projections. Such machinations aren’t necessary with self-insurance. Self-insured groups pay only for services their members actually use, which allows them to more closely keep premium-equivalent rates in line with actual spending needs.
Instead of relying on the insurer’s projections, the self-insured employer group assumes the claims risk and pays only for the actual cost of care, plus a small fee to the plan’s third-party administrator. By pairing the plan with stop-loss coverage, risk from incurring one or two massive claims during the plan year (major accidents or illnesses) can be further reduced. Further, employers have insight into how members access care or even if they’re not accessing needed preventive care.
Most importantly, self-insured groups have visibility into their actual costs, and instead of waiting for their annual renewal, they can realize savings immediately and can choose for themselves what to do with it. Self-insured plans provide the claims transparency that is essential for employers to control costs and drive quality.
Because of the usual lag in claims at the beginning of a new plan year as well as the possibility of a rebate from a currently fully insured plan, the premium holidays could offer ideal timing to consider a change to self-insurance, and make the 2020 premium holidays your last.
Jim Cusumano is president and CFO of Brighton Health Plan Solutions.