Financial Underwriting
Benchmarking and Health Benefits Strategy

Financial Benchmarking to Guide Health Benefits Strategy

An issue we’ve seen time and time again with many employers is in regards to preparing a health benefits plan budget without utilizing good underwriting principles. Many times there is a significant disconnect between human resources (HR) and the chief financial officer (CFO) regarding annual budgets. At LHD, we overcome these common obstacles to better health benefits strategy by what we bring to the table: A team of dedicated financial analysts armed with the state-of-the-art analytics tools and data in order to appropriately evaluate employer populations and plan design modifications.

We’re passionate about leveraging data into actionable insights, recognizing that the process is both an art and a science.


The Art and Science of Financial Benchmarking to Guide Health Benefits Strategy

The dual objectives in underwriting any insurance, including the health insurance in an employee benefits health plan, are assessing risk and determining pricing. The advances in the availability of big data and the analytics technology to leverage data into actionable insights has allowed the science of financial benchmarking to catch up with the art.

In this new balance point, LHD utilizes several game-changing sources and applications to make a high-impact difference in health benefits strategy for hundreds of employers. United Benefits Advisors (UBA) provides hassle-free access to unprecedented benchmarking data, Vital Incite analytics proactively identifies risk and opportunities in health benefits plan data, and we use actuarial applications of Claros Analytics to model and price the risk in healthcare plans and healthcare systems.


The Importance of Financial Benchmarking to Guide Health Benefits Strategy

The ever-increasing cost of providing a health insurance plan as part of employee benefits that meets the needs of employees and employers in the U.S. market has been an important driver in the development of better data analytics technology, applied to health benefits strategy and program design. While big-picture health benefits trends are easily identified, the true power of benchmarking is when it provides more specific information about how an employer’s plan compares to similar organizations along various characteristics—such as size, industry, and geographic location. There is a vast amount of variation in those characteristics that remains hidden if only national trends are viewed.

The potential pitfalls for employers without high-quality financial benchmarking are two-fold. The first is running the risk of paying too much for your health benefits plan. The second is a negative impact on retention if you lose your best employees to competitors offering better plans. The goal at LHD, with our benchmarking efforts, is to help employers uncover and act on trends to mitigate increasing costs while at the same time remaining competitive as an employer of choice.


Which Levers Need Adjusting in Your Plan Design?

One thing we’ve learned from our experience is that a one-size-fits-all healthcare planning approach is never correct, even more so when something as disruptive as a global pandemic causes more turbulence than usual. The key to achieving the objectives of cost containment, while serving the needs of employees and remaining a competitive employer, is allowing company industry, size, and location to inform plan design.

What’s happening in your company’s sector to contain costs? Are companies increasing employee contributions toward premiums and copays? Are they introducing lower-cost plan types such as high deductible health plans? Are deductibles being increased? What about prescription drug plan segmentation? LHD leverages the data to help you identify the best cost levers to adjust on your plan at renewal for your specific situation.


Recent Cost Trends and Containment Strategies for Health Plans

While 2018 saw record-high (10%) cost increases, employers were relieved to see more manageable cost increases in both 2019 (4.6%) and 2020 (5.4%). The employers hit hardest by cost increases in 2020 were those in Western U.S. states, larger employers with 1,000+ employees, and employers in the construction industry. Cost containment strategies were most successful among smaller employers with 25 or fewer employees. Those employers relied on setting higher deductibles, increased employee premium share, and created additional tiers to prescription drug plans, with most plans now featuring four, five, and even six tiers. Savvy negotiations resulted in cutting initial proposed rates nearly in half, from 9.7% to just 5.4%.


Trends in Health Plan Types

Despite their higher cost, employers continue to lean toward preferred provider organization (PPO)/point of service (POS) plans, which make up 57% of all health plans. Health maintenance organization (HMO)/exclusive provider organization (EPO) plans, however, dominate in California and also have a strong presence in Northeastern states. They can also be seen as attractive in particular states, including Wisconsin, Colorado, Florida, and Hawaii. Health savings account (HSA) plans (also called “high deductible” or “consumer directed” plans) are most common in the Central and North Central U.S. (especially Minnesota and Indiana), and in other states such as Maryland, Maine, and Vermont.


The Funding Factor

Fully insured plans remain the most prevalent choice, to the tune of 80% of all plans. The remaining 20% are self-funded or level-funded with a primary goal being potential cost containment. Among the self-funded/level-funded employers, 66% are larger employers (500+ employees), but an interesting recent trend is the growing number of smaller employees choosing the self-funding option.

In the past, only 7% of small employers went with self-funding, but in today’s times that figure is closer to 18%. Smaller employers wondering if they should act on this trend should do so only based on an analysis of their industry, size, region, plan type, population risk, regulatory environment, and other relevant factors. Self-funded plans deliver certain advantages to employees as well, usually in the form of significantly lower deductibles for individuals and families. Below is how the percentage of fully-insured plans has changed during a five-year period by employer size:

  • Small Employers (25-99 employees): 2015 = 93%, 2020 = 82%
  • Medium Employers (100-499 employees): 2015 = 75%, 2020 = 69%
  • Large Employers (500+ employees): 2015 = 37%, 2020 = 34%


Data Makes the Difference for Accurate Benchmarking

The data set LHD uses for financial benchmarking to guide health benefits strategy is second to none. The big-picture data trends referred to above are based on the robust UBA annual data collection effort, which included 11,788 employers sponsoring 21,980 health plans covering 1,366,186 employees nationwide. This data set is nearly three times larger than the next two of the nation’s largest health plan benchmarking surveys combined.

The large number of plans included results in a broader range of categories by plan type than traditionally reported with more respondents in each category. This kind of benchmark data was formerly not available to small and mid-size employers. LHD uses this robust data to help employers more accurately evaluate costs, contrast the current benefit plan’s effectiveness against competitors’ plans, and make corresponding adjustments. Better data means better business decisions regarding health benefit plans.