Insurance Trend and Inflation Factors

Oct 28, 2011

Although they are sometimes discussed in the same context, there are distinct differences between inflation and trend utilized by insurance companies. Although interrelated. they are not the same thing.  Inflation in Canada is often linked to the Consumer Price Index (CPI), and  is measured by taking changes in cost for a standardized “basket of goods”.  In Canada general inflation is around 3 to 4%, while inflation in healthcare has ranged from 10% to 15% depending on whose data you are reading.  So how are inflation and trend related? Past claims experience alone will not predict anticipated future costs, health trend takes into consideration inflation, as well as utilization, cost shifting between the private and public sectors, and most importantly aging. This combination of forces, referred to as “trend”, is used to predict claims costs as closely as possible for the upcoming policy year. Trend is but one component of how renewal premium is calculated, but it is an important factor utilized by insurance companies in projecteing anticipated rate requirements.

When we break down the makeup of a trend factor, we must take into account Inflation, but also utilization and the aging of the population.

The impact of inflation on trend. Inflation and trend may be terms that are interchanged, but inflation itself is actually a component of trend. The cost of services and items we buy and consume are continuously changing, and for the most part moving upward.  We have seen the ingredients in drugs and the dispensing fees charged at the pharmacy increase, and this will place inflationary pressures on the cost of the prescription drugs you buy. Trends in new drug therapy and disease states, as well as R&D costs, has lead to  higher inflation in health costs when compared to general goods.

Utilization and aging. We as a society are using more services and a lot of that has to do with age. As employees age their annual claim costs increase, especially in the area of prescription drugs. Drug utilization is closely associated with aging. Older employees are more likely to be repeat users and will use the drug plan much more often than younger employees. For example, Cardiac, antilipemic and hypotensive drugs are much more common at older ages, and are generally more expensive drug therapies. Many conditions related to aging cannot be treated as effectively with lower cost substitutes. As we live longer, the introduction of new drugs increases our longevity and quality of life.

Government legislation and even plan design will lead  to the potential for your benefit plans  to have greater costs, even if claims usage is the same. With increased government belt tightening, drugs continue to be de-listed leaving private plans to make up the difference. Costs of service providers such as chiropractors and physiotherapists, are also on the increase and will add  to inflationary pressures. With average costs increasing, this may also mean that deductibles in the program may not have the cost offsetting effect they once had. For example, the $25 deductible will have less impact this year if your physiotherapist now charges $75 instead of $60.

As noted, projecting future costs is more complex than looking at past claims experience. The factors that impact future costs are complex in themselves and will place upward pressure on rates at a much greater pace than the general inflation we are accustomed to seeing. The key is to understand the pressures and ensure that whatever trend rate that is being applied is fair and makes sense for your particular circumstances.

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