Most people don’t think of the Rule Of 72 as having a health insurance application, but it has significant relevance when you look at the growing cost of healthcare.
The Rule Of 72 has historically been a Rule used in the investment business, and it’s the Rule of compounding interest. It demonstrates the number of years it takes money to double. To illustrate the number of years it takes money to double, divide a particular interest rate into the number 72, and the result is the number of years it takes that money to double due to compounding.
For example, if you deposited $100 in a bank account and could earn 8% interest annually, in nine years the money would double to $200. If you were to again earn 8% interest on your money, in nine more years you’d have $400.
Applying the Rule Of 72 to health insurance costs is a little bit more interesting. For example, if you received a 9% increase every year on your insurance premiums, in eight (8) years your premium costs will have doubled. Chances are you would also have received more significant increases in your premiums over that stretch of time, so it’s probable that your costs have doubled in less than eight years. Oh, by the way you probably changed your plan of benefits and shifted costs to employees ffrom time to time to mitigate those increases, so the value of your plan has also been diminished.
Healthcare costs are growing rapidly as everyone knows and there are many reasons why, which I will not get into in this article. They are increasing at an alarming rate and are unsustainable if they continue. Cost shifting benefits to employees through High Deductible Health Plans (HDHPs) may temporarily decrease your premiums but the rate increases will continue, albeit at a slightly lower rate. This is because cost shifting does not get to the root cause of our healthcare problems. I could argue that HDHPs, while making the consumer more educated and informed, can also lead to the postponement of needed healthcare services thus compounding the problem. For example, if I have a $3000 deductible and a MRI costs $1,000 (not to mention the needed surgical procedure) I may choose to postpone that procedure until I can afford it. Or if a needed drug was extremely expensive, I might think “Well I’m okay, and I can do without that prescription for period of time”.
On many occasions I’ve spoken to employers and they feel pretty good abouta 7%, 8% or 9% annual increase. That’s probably because they experienced an increase significantly greater than that at some point in the past. But if you look at the long-term picture of where your costs were 5 or 10 years ago, and the Rule Of 72, you can only imagine where your costs are headed.
Whether your plan is fully insured and you’re dealing with annual premium increases, or partially self-funded and receiving increases in your specific premiums or aggregate attachment point, the Rule Of 72 will have an impact on your future expense.
If you want to learn about some real strategies that bring real results, and turn back the clock on the Rule Of 72, then I can help.
Unfortunately, the brokerage business is one which is overpromised and under delivered. You don’t know what you don’t know.