In my last post, I discussed an article by a pet owner who received her pet insurance renewal letter and discovered the premium was increasing 52%!
I ended the post asking this question, "What strategies can pet insurance companies put in place to greatly reduce the need to increase premiums dramatically at one time or is it simply unavoidable from time to time?"
I've called on Dr. Jack Stephens, the veterinarian who founded the first successful pet insurance company in the United States (VPI) in 1982 and a second company (Pets Best) in 2005, to answer that question.
In this guest post, he will reveal what pet insurance companies are facing in their struggle to hold down premiums in the face of increased utilization and sophistication of veterinary care. He also discusses possible solutions that the industry can put in place to ensure that pet insurance remains an affordable and valued aid in helping pet owners pay for the healthcare of their pets.
One of the reasons cited for increasing pet insurance premiums is “veterinary inflation.” Although veterinarians do raise their fees occasionally, veterinary inflation is more often due to increased acceptance of diagnostic procedures, new and more costly treatments, and overall quality of care rather than specific increases in fees.
The biggest driver of increasing premiums is increased utilization of veterinary services by those pet owners who've opted to insure their pet. They are likely to take their pets to the veterinarian more frequently and are more likely to use Emergency Clinics and Specialty Hospitals. The study we are funding at the North American Pet Health Insurance Association (NAPHIA) will demonstrate this premise - that insured pets are receiving better care & more care, because pet owners can afford a broader range of services.
The European insurance industry has also experienced increasing premiums because the market is more mature and has a greater percentage of pets insured. European insurers have gone more and more to individual rating to compensate. An individual pet’s rates are based on usage of various coverages and claims costs. For example, heavy users pay more than infrequent users.
Insurance premiums are generally set based on known or expected losses (claim payments). Losses are the only variable or unknown factor when rates are proposed to the State Departments of Insurance. Most overhead and profit factors are the same or very close for all insurance underwriters/carriers. The expected losses are determined by experience (which illnesses are occurring more frequently and/or costing more than expected).
Rates are further refined based on experience by zip code, species, breed, and age. For instance, rates in urban areas will typically be higher than rates in rural areas and some breeds have more claims than others. In addition, most insurers add in an annual inflation factor for rising utilization of vet services.
Insurer profits are limited by each state department of insurance to 5-10% maximum. Cost factors (administration, overhead & marketing) are also reviewed. No rate increase is allowed if the insurer exceeds the acceptable profit margin or the State deems other cost, such as overhead, out of line.
Part of problem for pet insurers is that filing for rates is so onerous that it can take a year or more to be approved by some states. Therefore, consumers can have lower rates than experience warrants for a couple of years and when the filing is finally approved, the rates jump more than if gradually increased each year based on experience. Consumers may not remember or recognize that they had little or no rate increase for several years, only to be surprised when the increase finally comes through.
Another reason rates increase is that pet insurers are constantly adding benefits and coverages to meet competitive pressures and consumer needs. Therefore, the renewed plans often have more coverage which adds to the cost.
If an underwriter is slow to set rates based on experience for a few years, the policyholder can be surprised when the rate increase is finally approved – not realizing that the pet insurer may have been losing money or not reaching their profit target for some time.
Ultimately, rates are based on who purchases the coverage and how it is used. For example, veterinarians are able to provide more services for insured pets which can influence the use and cost. Increased utilization can have an effect not planned for from prior experience.
An underwriter that guesses wrong can lose millions and many do for a while. That is why each State sets reserve requirements to be certain only financially capable companies are licensed. Insurance companies do guess wrong sometimes and need to utilize their reserves or on rare occasions become insolvent, requiring the state guarantee fund to step in and pay claims.
Also, insurers may be unprepared for new diseases or treatments which could have a financial impact on the future claims experience.
When proposing a new benefit or coverage, the insurance company relies on an actuary’s educated guess as to what impact the new coverage will have based on limited information when setting rates. But only experience (data) gained over time by actually providing the coverage/benefit will allow fine-tuning of the premium the company needs to charge.
It is also to be expected that premiums will rise as a pet ages because older pets will eventually develop chronic conditions that require more continuous care than conditions usually seen in younger pets.
When I started VPI in 1982, there was no basis for setting rates. Several large carriers stated “lack of actuarial data” as one of the reasons they would not enter the market (pre VPI). I hired a statistician (paid him with some cash and stock) to do an analysis of a random sampling I did of veterinary cost. I went into multiple practices (I only went to progressive practices) and selected every 100 client files and recorded why they came in, the diagnosis, and costs for each visit.
I decided to use a similar approach utilized in the dental field by California Dental Service which paid a set benefit. Back in 1980, veterinary medicine was pretty vanilla with most vets practicing empirical care (treating the symptoms) because the human/animal bond was limited to fewer pet owners and costly care was not in demand as it is now.
So, I set up the benefit schedule method of paying claims based on the diagnosis - taking into account anesthesia and diagnostics as an additional benefit to the diagnosis with their own benefit or fee allowance if utilized. At that time, setting the premium was problematic and of great concern since no data existed - other than my survey of cost. The resulting benefit schedule worked wonderfully for years.
Then, over the years, veterinary medicine went from less expensive, empirical care to greater use of diagnostics, specialist care, and emergency medicine. Even though we filed for increases in the Benefit Schedule every 2-3 years, it could not keep up with the varied quality of care and amounts some pet owners were willing to spend.
Also, pets can have conditions that are more severe than the norm, develop complications, or the veterinary hospital may simply provide a higher standard of care (diagnostics, treatments, around-the-clock care) which costs more to provide.
For a few years I had the adjusters evaluate the claims by severity, complexity, referral to specialist and used an additional “tentative diagnosis” as well as the primary or final diagnosis to pay more. But this required judgment decisions that practically didn’t work very well.
Before I left VPI in 2004 I had a plan on the table to file for a flat 80% payment after the deductible for new sales and any policyholder that wanted to switch. However, this approach was abandoned after I left.
Several companies still use the usual, customary, and reasonable (UCR) model to determine reimbursements. However, there is no central site or source for what is considered UCR in veterinary medicine. Companies usually use their own claims data and/or fee surveys to determine what is UCR.
In human medicine they have enough data to publish what is UCR for every aspect of care, down to the cost of an aspirin. However, the quality of care delivered by veterinarians and wanted by clients is broad, determined primarily by the bond between pet owner and pet.
When I started Pests Best, I went with the 80% plan from day one as the only choice and later we added 70/80/90/100% coverage with multiple deductible options. Again, it took a “leap of faith” and lots of intuition to set the rates, since there was no access to actuarial data and I didn’t have access to the data I had at VPI. A lot of adjustments and fine tuning were required over the first few years.
VPI has elected not to change from reimbursing claims based on a benefit schedule to a flat percentage of the cost incurred for the pet. A benefit schedule is certainly acceptable, if provided to the policyholder, which VPI has done since early on in their history.
Their benefit schedule (which I originally developed) sets the maximum amount they will pay out based on the diagnosis, not the cost, amount, or quality of care. This may result in more stable premiums, but reimbursements to consumers may be lower than expected (based on the actual veterinary charges) when compared with the flat rate model.
When pet owners are disappointed in the amount they are reimbursed, they often feel that pet insurance isn’t worth it or perhaps even wonder if their veterinarian overcharged them (more than insurance will pay).
A flat percentage allows pet owners to better budget for their contribution to the treatment because reimbursements are more predictable when based on the actual cost of care. It also addresses the veterinary profession’s move from empirical care to diagnostic and specialty care as more and more pet owners treat pets as family members and not “animals.”
Just treating the symptoms and waiting to see if the pet responds (empirical care) is less acceptable today than in the past. Veterinarians are utilizing more diagnostics to arrive at a definitive diagnosis so that proper treatment can begin earlier in the course of an illness and is preferred by pet owners who are bonded to their pet.
In my opinion, the fixed benefit model cannot adequately address the increased costs incurred when sophisticated diagnostics and care offered by specialist and emergency facilities are needed – especially when complications develop. However, it does provide more stable premiums since the consumers will have higher out of pocket cost when veterinary care exceeds the benefit allowed.
I created both industry problems (the benefit schedule at VPI and the flat rate model at Pets Best), but pets are increasingly receiving better care as a result.
When Pets Best introduced the industry to the flat percentage reimbursement, I knew this would have an impact on setting premium rates. But the utilization of veterinary care for pets has always been too restricted. That is, most pets were not receiving the needed or best care due to cost. Insurance reduces the consumer concern for cost, and as a result of broader utilization (which is good for the pet), costs go up.
As an industry, those of us paying a flat percentage of cost without restrictions must address the issue of rising premiums as utilization rises. Options include:
- Provide limited plans or coverages for those who want to spend less on their pets e.g. our Feline or Cancer plans (Pets Best).
- Providing more copay options and higher deductibles that will allow pet owners to adjust their premium to fit their budget - especially as their pet ages.
- Individual rating – rates would rise for those pets that experience higher claim payments.
- Eliminate coverage for affordable costs e.g. office visits/exams and more frequent, but low cost illnesses, while maintaining coverage for illnesses that place significant financial burdens on pet owners.
The list of solutions can be as large as our imagination, but requires full disclosure so the consumer understands the value proposition.
Historically, pet consumers have not wanted higher deductibles and co-pay options, but this may be the ultimate option for the consumer along with more cafeteria options (limited plans for less premium) offered by insurers when premiums rise. The alternative is self-insuring by consumers, and historically they are not good at budgeting for unexpected accidents and illnesses, which can result in limited care, or worse euthanasia.
Again, I want to thank Dr. Stephens for providing a sort of "behind the scenes" look at what is involved in setting premiums for pet insurance policies.
What did you learn about this subject that you didn't know before reading this post? Have you faced a significant rise in your pet insurance premium, and if so, what did you do about it?