What’s the Secret Sauce in Setting Health Insurance Rates?

For the past five years or so, I’ve managed the bills in our household. I know many of you reading this are like me – you have some bills that are exactly the same every single month. Think about your house note or rent, car notes, maybe even your cable or internet bill. These are all about the same amount every month.

You might not be happy with the amounts, but they are predictable, and I find some comfort, some real value, in that.

Then, there are those pesky wildcard bills.

You know the ones I mean. Like your electric, water or gas bills. Or paying for food. Try as I might, I cannot accurately predict how much those bills are going to be every month. Even trying to read the meters and track how much we are using at home doesn’t work for me. Too many variables! What day are they going to read the meter? What’s the unit cost going to be? I know some utility companies offer to average your usage for you and charge you the same amount every month, just so people won’t stress about it so much.

What’s the fun in that?

Reading the Meter on Healthcare Costs

Imagine paying the bills here at Blue Cross and Blue Shield of Louisiana. I could start by isolating the members who pay us premiums to use to pay for 100% their healthcare costs each month, after their deductibles and coinsurance – that would be fully insured group and individual customers. For just those members, that means predicting the healthcare costs of around 600,000 people! And if you can’t get a close estimate of what their healthcare needs will be and how much their claims will cost, you can’t set premiums with any confidence. And that means you can’t function as an insurance company.  Since the money we are managing and predicting is YOUR money, you want us to be really good at this prediction stuff.

Oh, and did I mention you have to predict their healthcare costs as far out as 18 months from now? Yep. Thank goodness we have really smart people to do that for us. More about them in a bit.

Truly, that ability to understand and forecast healthcare costs is the real secret sauce to running any successful health insurance plan. The more accurately we can predict our members’ healthcare costs, the closer we can tie the premium rates and keep increases down to a minimum level. More certainty in expenses means more confidence in predicting rates.

Just like at home, for those bills that move up and down each month, you know you have to keep some extra funds around just in case it pops up higher than you expected. When insurance companies are uncertain, they have to charge a bit more in premium rates to cover the costs of healthcare services. That’s how it works.

2020: The Year of the Never-ending Utility Bill

So, you might imagine that for a healthcare company like us, 2020 was a bit like having all of our bills be like utility bills, every month. COVID-19 adjustments, treatments and changes to the ways or how often people got medical care really put us in a challenging situation. A lot of the healthcare we expected to pay for – routine doctor visits, annual screenings and tests, etc. — was delayed or moved back, maybe for months or even into this year.

Our members also needed a lot of unexpected care, like COVID-19 tests, medications and/or hospitalizations that we couldn’t have anticipated, especially in Fall 2019 when we set rates. And federal and state laws said we had to pay for many of those costs from the premiums we collected with no cost-share from our members. It really played havoc with our ability to predict costs. After all, at this time last year, could you have predicted how 2020 would turn out? Of course, we never shy away from a challenge.

For the past decade, the way we spend the money you trust us with has been heavily regulated by the federal government. This means we have to guarantee you that a fixed percentage of your premiums as a group are spent on nothing but healthcare. When healthcare usage and costs fluctuate a lot, it’s easy to miss those marks.

To keep it fair, during  2020, we issued rebates to 19,000 individual members ($1.6 million) and premium credits to 18,000 of our group customers and 43,000 individuals with Medicare Supplement policies ($26.7 million) to make sure we didn’t run afoul of those rules. That’s just one thing we did because COVID-19 made it harder for us to predict healthcare costs.

What About the Future?

We are watching very carefully trends in healthcare costs and spending as we head into 2021, for a lot of reasons. First of all, a lot of people who put off treatments and elective surgeries in 2020 will likely get that care as soon as they can in 2021, so we need to be ready for that. And that 2020 make-up care is in addition to the regular spending we already plan to pay for in a given year to cover routine care costs.

Second, COVID-19 is not going away easily or quickly. As I’m writing this, Louisiana is setting records for the number of COVID-19 patients in the hospital. So, we know we have to prepare to cover a lot of COVID-19-related healthcare costs this year, too.

And, we’re directly responsible for these payment for the 600,000 people who trusted us in 2020 with over $4 BILLION in their hard-earned money, while helping manage and predict those costs for another 500,000 who are part of self-funded group plans! How’d you like that to be part of your monthly bill-paying and household budget-setting?

Fortunately, we have staff members with advanced degrees in mathematics (they are called actuaries) who are really good at forecasting these things. I even get to work with them on forecasting how many members we’re going to have into the future, and what their demographics will look like. Honestly, it’s an honor to work with such smart and committed folks, and they never stop gathering data, updating their models and running new forecasts to help us set your rates as low as possible. Remember, uncertainty = more costs!

The Straight Talk is, the secret sauce of Blue Cross and Blue Shield of Louisiana is our people, who are committed to accurately predicting future healthcare costs, which allows us to keep rates for you as low as possible.