Medical Premiums Are C.R.A.P.

If you’re a Business Owner, CFO, or HR Professional that views your employees as assets and investments… 

Let’s take a look at a great acronym for medical premiums known as C.R.A.P. Where C is for claims, R is for reserves, A is for administration, and P is for pooling.

But what’s the point of these four terms and how are they relevant?

In essence, C.R.A.P. is what your medical premiums are based on: the claims your plan receives, the reserves put aside by the insurance company to cover inaccurate projections, the insurance company’s administrative fees, and the process of pooling beneficiaries to soften risk.

Now that we’ve introduced the C.R.A.P. acronym, let’s dig into the specifics of each letter.

C Is for Claims

First up, we have claims and this also happens to have the biggest impact on what you pay. 80% of your premium cost is related to the claims your plan receives. Based on a number of factors, insurance companies make projections for the upcoming year on how many claims will come in.

Claims are such a large piece of your premium costs that insurance companies are mandated to spend 85% of premiums on care and quality improvement (while the rest can go to admin, overhead, marketing, etc.).

While a good idea in theory, this has proven to be an incentive for insurance companies to spend more. But here’s the important thing about claims: you have the ability to control, manage, and even evacuate your claims.

This begins by asking the question, “How do I manage my claims?” Rather than, “How do I eliminate people getting sick or having an accident?” The later you have no control over, but the former you can manage.

Consider this closing thought for claims: Who has more skin in the game when it comes to cost?

Is it the employer spending say half a million in medical benefits or the individual employee paying on average 6 – 8 hundred a month? It’s up to you the employer to ask better questions and figure this out. You have more skin in the game.

R Is for Reserves

Next up, we have reserves. This is when the insurance company puts an amount of money aside for expected claims. This money is used to pay policyholders for filed claims or expected claims on their policies.

The insurance company uses this fund like a little savings account or insurance policy in the event that something unexpected pops up or if they’re slightly off on their analysis.

Reserves are a smaller percentage of your costs, roughly 22%, depending on the size of your company, industry, and various other factors. In comparison, it has nowhere near the impact on cost that claims do.

Reserves are built into the overall formula of how premiums are calculated. In general, you may have some say in this, so there are certain instances where working with an advisor will allow you to tweak or adjust this percentage in your cost formula.

A Is for Admin

Up next, there is administration. This accounts for all the administrative functions necessary to run the insurance plan, such as calls to customer service, printing and mailing membership cards and statements, paying broker commissions, consultants, vendors, and more.

Administrative costs are a very small component of the overall premium cost at 7%. Note, however, that this might be where you want to consider paying a bit more.

But why would you want to pay more in administrative fees?

Here’s an example. Let’s say that you have an employee that requires knee surgery and the employee is set on having their specific doctor perform that surgery. But what if you could add to your plan a service that looks at all the available facilities in the area and finds the ones that are highest rated, have the best quality control, the least number of sepsis infections, the lowest recurrence rates, and the best costs.

Of course, it’s understandable that people want to go with their familiar doctor or facility. But as the employer with more skin in the game when it comes to cost, it’s okay to conduct a little more analysis to ensure that it’s the best option and one that’s not costing you more than necessary.

The point we’re emphasizing here is that one way to cut down on your claims is by spending more time managing those claims and paying a bit more on administration.

A good advisor may cost you money, but if a good advisor saves you between 30 – 70% while getting you better coverage, isn’t that a trade you want to make in exchange for a 1% increase to your admin fees?

P Is for Pooling

Lastly, we have pooling. Insurance pooling is when smaller groups or businesses join (or pool) together to become statistically relevant. Greater numbers allow these smaller groups to soften their risk and secure better insurance rates.

Pooling is related to the term credible, which you may hear from time to time. For example, there are certain health plans touted as being Medicare credible. Essentially, credibility means statistical relevance. In other words, do you have enough data to make a conclusion?

There is an extra fee that you’ll pay in order to pool with other employees from several companies. Typically, this fee is about 8% of your overall costs. The cost can vary slightly based on the age, sex, and location (i.e. local cost of care) of your employees.

If you’re a Business Owner, CFO, or HR Professional that views your employees as assets and investments…