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Manager Explains How Rates Are Determined

Deborah Kelley, manager of benefits, has the challenging job of sorting out for MIT and its employees the advantages and disadvantages of the bewilderingly different health insurance plans being offered.

In an interview, she described this constantly changing world.

"It used to be that the Health Maintenance Organizations (HMOs) gave you a premium rate based on the experience of their entire population of covered individuals at all their companies. This rate is called the community rate.

"Now, with the exception of Bay State and the MIT Health Plans, the rates for all our HMOs are based on modified experience rating methods. Each HMO rating method is different. Each uses a number of factors to develop the rate.

"Some of those factors relate directly to our experience. A part of the process involves comparing the demographics and claims utilization of our group, to the demographics and claims utilization of their entire population-their "community."

"We challenge the rates they submit. For example, if there is one very large claim of $100,000 or $200,000, we ask them to reexamine the situation to determine if this is likely to be an ongoing expense, or a one-time occurrence. Such expenses shouldn't be part of the rate-setting for the next year.

"In the simplest terms, if we compare favorably to their community, our rate will be lower than their established community rate; and if we don't compare favorably, our rate can be higher than their established community rate. The difference from the community rate cannot be more than 10 percent, plus or minus.

"Our plan experience has varied, both within the individual components that are used and for the plan as a whole. For example. our Harvard Community Health Plan demographics and experience compare favorably to their community. As a result, our premium for the last few years has been lower than their community rate, and the percentage increase in the rate has been lower than the increase in the community rate.

"Our Bay State premium is not experience rated because in 1991 we entered into a three-year contract which guaranteed that our rate increase would not exceed the national medical component of the Consumer Price Index. As a result, our increase for 1992 was 8.4% and for 1993, it will be 7%. If we did not have this rate guarantee, our Bay State rate for 1993 would have increased 35.5%. This rate would have been developed based on our group's claim experience.

"Our Blue Cross Blue Shield Option 2 contract is self-funded. This means that MIT pays the cost of all claims paid, plus an administrative fee.

"As our claims utilization increases, the cost of this plan increases. The Blue Cross Blue Shield rates are determined solely on the experience of our group. That is hard to predict, and we have underestimated the cost in some years. We don't recover that cost in the next year's rate--MIT pays it in an effort to keep these very high rates for employees somewhat lower than they would be otherwise. So actually, Blue Cross Blue Shield members sometimes end up getting more than the flat amount of subsidy at the end of the year.

"Our utilization rates with those who have stayed in Blue Cross Blue Shield 2 are high; many are employees with serious chronic illnesses in their families. Others don't have serious health problems but want maximum flexibility and choice when they need it.

"We looked at Blue Cross's HMO Blue and Health Flex Blue plans. We found there were significant administrative problems on paying claims. After reviewing MIT's Option 2 experience and 93% HMO enrollment, Blue Cross wouldn't offer us their full line of products. It would not have been a good financial move for them.

"However, for the first time, Blue Cross Blue Shield offered us an insured rate for our out-of-state population. After exploring this option and analyzing the claims experience of this group, we determined it would be beneficial to both the plan members and to MIT to offer this rate, which is a thousand dollars a year less than the in-state total cost," Ms. Kelley said.

"Cost is always a factor, but people are concerned with how a plan really works--the quality of care, how quickly they can see their doctor.

"We've already started to see plans like Bay State tightening up on referrals to doctors and other services. The result is forcing changes on how people use their plan. Those subscribers are going to see sudden changes they may not like. Meanwhile, others are making new products available. The health insurance business is getting more complicated each year, and we will be looking next year at what the best health plan mix will be for MIT," Ms. Kelley said.

A version of this article appeared in the November 18, 1992 issue of MIT Tech Talk (Volume 37, Number 14).

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