What is "Trend?" And How Much of It is Price Margin?

One of the major components of premium or rates that insurers use on commercial accounts is called Medical Trend. Loosely defined, Annual Medical Trend is the historical or projected average change per year in an insurers medical, capitation, and pharmacy costs. In the last quarter of 2008, average HMO and PPO annual trends ran between 10-12%. On different cases that I've brokered I've seen trend as high as 17%.

Certainly there is justification for trend increases year over year. New technology and infrastructure in the HC system, pharmacy costs, aging workforce, Medicare reimbursement rates, so on and so forth. But new data shows that the Medical CPI is actually leveling off, and in some cases, declining.

I really have to learn how to upload better graphs from Excel sheets, but the graph below displays the Medical CPI for the last ten years. (Trust me, the data is in there.) Year Over Year (YOY) Medical CPI appears to be flat or declining. I have the rest of the data that shows that this is relevant across inpatient, outpatient and medical services. However, the Producer Price Index ( PPI ) which is the carrier's premium pricing in aggregate is going up 7bps over November and close to 3/4% YOY. It suggests that while the insurance carriers affordability efforts are containing trend, the increased trends that groups are receiving are more an effort for the carrier's margin expansion than it is a legitimate effort to price to a rising trend.

Admittedly, less than a percent is not a lot, but compounded YOY it can be.

-JS