Leveraged Trend: Why Stop-Loss Costs Rise Faster Than Medical Inflation

# Leveraged Trend: Why Stop-Loss Costs Rise Faster Than Medical Inflation

Your client asks: "Medical inflation is 8%, so why is my stop-loss renewal up 18%?" The answer is **leveraged trend**—one of the most misunderstood concepts in stop-loss underwriting.

## Medical Trend vs. Leveraged Trend

**Medical trend** is the general increase in healthcare costs year-over-year. This includes:
- Provider rate inflation
- New technologies and treatments
- Increased utilization
- Prescription drug cost increases

Medical trend typically ranges from **7–9% annually** ([Segal 2024 Health Plan Cost Trend Survey](https://www.segalco.com/consulting-insights/2024-health-plan-cost-trend-survey); [Milliman](https://www.milliman.com/en/insight/2024-milliman-medical-index)).

**Leveraged trend** applies specifically to stop-loss coverage. It reflects how deductibles **amplify** cost increases above the threshold.

## The Math Behind Leveraged Trend

Because stop-loss only covers claims above a certain threshold (e.g., $100,000), even small increases in large claims have a disproportionate impact on the carrier's liability.

### Example 1: Claim Just Above Deductible

- ISL deductible: **$100,000**
- Year 1 claim: **$150,000** → Stop loss pays **$50,000**
- Year 2 claim (8% trend): **$162,000** → Stop loss pays **$62,000**
- **Carrier liability increase: $12,000 = 24%**

Even though medical trend was only 8%, the stop-loss carrier's liability increased by **24%**. That's leveraged trend.

### Example 2: Claim Well Above Deductible

- ISL deductible: **$100,000**
- Year 1 claim: **$200,000** → Stop loss pays **$100,000**
- Year 2 claim (8% trend): **$216,000** → Stop loss pays **$116,000**
- **Carrier liability increase: $16,000 = 16%**

The leveraged trend is lower here because the claim was already well above the deductible.

## Key Insight: Leverage Varies by Claim Size

Leveraged trend is **not uniform**:
- **Higher** for claims just above the deductible
- **Lower** for very large claims that were already well over

Carriers use an average leveraged trend—based on their book of business—to adjust manual rates annually. This average often ranges from **14-18%** for typical deductible levels.

## Deductible Level Matters

Higher ISL deductibles reduce exposure to smaller claims with higher leverage. As a result:
- Higher deductibles → Lower leveraged trend
- Lower deductibles → Higher leveraged trend

Carriers may apply different leveraged trend assumptions depending on the deductible level being quoted.

## Strategies to Mitigate Leveraged Trend

1. **Annual ISL increases**: Move deductible up with trend
2. **Aggregating specific deductibles**: Share risk without raising ISL for all
3. **Multi-year rate caps**: Lock in maximum increases
4. **Cost containment programs**: Reduce large claim frequency/severity

## Key Takeaways

- Leveraged trend amplifies medical inflation above the deductible
- Claims just above ISL have the highest leverage
- Typical leveraged trend runs 14-18% vs. 7-9% medical trend
- Higher deductibles reduce leveraged trend impact
- Proactive strategies can mitigate renewal increases

*This article is part of our series on stop-loss underwriting. For a comprehensive overview, see our whitepaper: [Stop Loss Underwriting: A Deep Dive](/resources/whitepapers/stop-loss-underwriting-deep-dive).*