Medical Trends vs SG & A Trends

InsureBlog has argued for years that the cost of medical insurance is driven by the cost of medical care, and that the rise in the cost of medical insurance results primarily from the rise in the cost of medical care.

Most of the large consulting firms conduct annual (or more frequent) surveys of the insurance companies to help their clients understand and anticipate the annual rate of "trend" in medical costs and thus in their insurance or benefits costs.

I happened to see a recent survey conducted by Oliver Wyman Actuarial Consulting of Milwaukee. Oliver Wyman is a subsidiary of the international firm of Marsh & McLennan, which is also the parent company of the HR and benefits consultants, William Mercer.

The particular Wyman survey included responses from 104 insurance companies and benefits administrators that, together, cover more than 117 million Americans who are covered in employer, union, or association-sponsored group plans.

The reported median medical trends are not surprising--they range from 9% for HMO plans to 11% for PPO plans. In other words, this is approximately how fast medical benefit payments are rising in these types of plans. The different rates result from differences in utilization management between HMO and PPO plans and other technical factors.

The most interesting thing to me about the Wyman survey is that it included SG&A (Selling, General & Administrative) admin expense trends. The reported median for this category is 3.5%.

These results suggest that rising medical costs explain more than 70% of the median annual increase in group medical insurance benefits cost. The remainder is explained by the insurer's SG&A.