Those in the stop loss market have heard the phrase “leveraged trend” when discussing renewal calculations with your stop loss carrier.  While few understand how this works, all have seen its’ significant impact on your clients’ stop loss renewals.

What is leveraged trend? How is it calculated?  And more importantly, what can you do to offset its effects?

What is leveraged trend and how is it calculated?

Leveraged trend is the effect of first dollar claim inflation, which can range from 5% to 10%, on individual stop loss claims.  The impact of leveraged trend increases as the individual stop loss deductible increases.  Here are examples to illustrate:

Client A has a $50,000 individual stop loss deductible and has a member who incurred $100,000 in claims in the policy year.  The amount of the claim reimbursable to the employer is $50,000.  Assuming 5% claim inflation, that same claim will be $105,000 in the upcoming policy period.  So, while the first dollar trend is only 5%, the amount over the individual stop loss deductible will increase by 10% (the leveraged trend), from $50,000 to $55,000.

Client B has a $75,000 individual stop loss deductible and has a member who also incurred $100,000 in claims in the policy year.  The amount of the claim reimbursable to the employer is $25,000.  Assuming the same 5% claim inflation, that claim will be $105,000 in the upcoming policy period.  This means the amount over the individual stop loss deducible will now increase by 20% (the leveraged trend), from $25,000 to $30,000.

This is why even though total medical claims may only increase at 5% per year, groups may see increases on their stop loss premiums in excess of 5%.

How to “bend” the leveraged trend curve?

There are several options which may be used to help offset the impact of leveraged trend.  Here are some examples:

  • PBM, Network and Cost Savings Programs.  Consider moving to a more controlled formulary with your PBM, adding a reference based pricing network option and/or instituting claim control measures with your TPA – any of which would impact first dollar trend, and by extension, the impact of leveraged trend.
  • Increase the Individual Stop Loss Deductible.  Contemplate increasing the individual stop loss deductible in an amount equal to first dollar trend.  For example, if annual trend is 5%, you could increase the employer’s $100,000 individual deductible to $105,000.  Such a change would have minimal impact on the risk-share to the employer but would help lower overall fixed costs and offset the impact of leveraged trend.
  • Aggregating Specific Deductible (ASD).  Most carriers offer a dollar-for-dollar offset to ISL premium if an aggregating specific deductible is added.   There is little downside to the employer as the ISL premium reduces by the amount of the ASD and is only payable if there are claims exceeding the individual deducible level.  A good option to offset the impact of leveraged trend.

At Resolute Underwriting Strategies, we have years of experience in crafting solutions for self-funded customers and would welcome working with you to “bend” the leveraged trend cost curve for your clients.