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Benefits Cycle

Benefits Cycle

Mercer, the national human resources and benefits consulting firm, in their annual employer health plan sponsor survey findings, recently projected that the average total cost to renew health plans for 2008 with no changes would yield a 9% increase, but actual increases for 2008 are projected at 6.7% dues to changing plans, adding lower-cost options or by altering benefit design. (see “After a three-year lull, health benefit cost growth picks up a little speed in 2008”, Mercer Press Release, September 5 2007,

Thus what health plan premium rate an employer winds up with from year to year is a result of negotiations and changes in the plan design.

Earlier this month, The Wall Street Journal ran an article by M.P. McQueen, “New Health Plans Tout Predictable Premiums” (see Wall Street Jouranl, October 9, 2007; Page D3; - subscription required)

The article cites an example of Guardian Life offering muti-year premium rate contracts and guarantees, that build-in the ability for Guardian to alter cost-sharing provisions if actual costs for the group exceed specified thresholds. The article also cites multi-year rates from Humana, based upon other requirements.

Multi-year rate guarantees are a sign that premium rate competition may be heightening, which is of course is addressed in the concept of the Underwriting, or Premium Rate pricing cycle.

The pricing cycle phenomena has existed for more than four decades. Under the cycle, during profitable periods for health plans, the plans desire to expand or protect market share and intensify price competition. Competing plans keep pace, triggering mini price-wars and multi-year contracts. Depressed pricing in turn triggers unprofitability, which ultimately escalates to the point where market leaders accelerate their price increases. Other plans follow suit, and soon escalating industry wide increases bring the sector back to profitability and the cycle begings anew.

They cycle has softened during this decade, as plans have grown less competitive due to product and market consolidation, and changes in plan behavior. This softening of competitive behavior, combined with the advent of consumerism and cost sharing, brings us to the concept of a benefits cycle.

Under a benefits cycle, benefit coverage and cost sharing can fluctuate based on plan competition for consumer enrollment during profitable and unprofitable points in the cycle. Guardian Life’s strategy would seem a step in that direction.

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