Wednesday, June 25, 2008

Why are short term insurance rates falling?

With health care costs rising sharply, why are so many short term medical insurance plans lowering rates? The latest rate reduction was announced at by HPA Inc., the administraors for Secure STM, including the "3x12" 36 month short term medical plan and the new "Secure Lite" lower cost short term medical insurance.

In an inflaionary environment, rate decreases are usually triggered by a drop in medical care utilization. Evaluating utilization trends in health plans is a complicated topic even for those who have access to the best data. We don't; we are just speculating. Just for the sake of discussion, let's assume that utilization has declined in short term medical insurance in recent years. Why would that be?

The easiest explanation is the increase in policy deductible. The median policy deductible selected by buyers increased from $500 a few years ago to $1000 today. The largest increase in policy deductibles chosen is in the $2500 deductible option.

A person who is healthy enough to meet underwriting standards is unlikely to incur substantial medical expenses in excess of $1000 within the 3-4 month average lifespan of a short term medical insurance policy. Of course some do, and they are the reason that insurance is important. But a larger number of people simply do not incur a claim on the policy that exceeds a $1000 deductible.

Another explanation is that people are actually waiting for group insurance to kick in after the STM before going to the doctor. That makes sense and is the behavior we would expect. Perhaps we will eventually find that fewer people are using STM as a substitute for regular health insurance. Those people might have gravitated to limited benefit and other types of low cost health insurance.

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