Lisa F. Tourville, ASA, MAAA Vice President

Inside the Black Box: How Actuaries Price Health InsuranceAcademy Health Annual Research Meeting

June 8th 2004 Lisa F. Tourville, ASA, MAAA

Vice President

Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.

Agenda

Discuss historical drivers of trend.

Discuss the different ways to define “trend”.

Discuss the components that impact medical expense trends.


Top 10 Trend Drivers by CategoryContribution to Trend based on Change in PMPM

Physician by Specialty Inpatient by Major Diagnostic Category

Outpatient by Service Category Pharmacy by Therapeutic Class

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Top 10 Trend Drivers by ConditionContribution to Trend based on Change in PMPM

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Different Views of “Trend”

Financial Net Trend

Payers’ liability Excludes patients’ out of pocket expenses

Underwriting Underlying Medical Expense Trend (pulling out business mix

components)

Clinical Allowed Trend

Total provider reimbursement Payer + Patient liability Price, Volume and Intensity


SG UW Wear-offProduct Mix

Cust/Indy Mix

Policy ProcessRegulatory

Intensity/Mix

Core Unit Cost / Price

Benefit Plan Change

Leveraging

Baseline Utilization

Geographics

Workday

Health Tech Pipeline

Demographics

Components of Medical Expense Trend

Included in the Ingenix Trend Forecast Model


2000 2001 2002 2003 2004 2005

Member Months 4,532,024 4,902,426 4,044,900 3,158,935 2,992,874 2,967,328

Allowed Trend 13.1% 14.3% 13.6% 9.5% 11.9% 10.8%

PROFILE OF NET TRENDBusiness/ Product Mix Components

Demographics 2.1% 2.0% 1.2% -1.1% 1.2% 1.2%Geographic Mix 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%SG UW Wear-Off 0.2% 0.0% -0.1% -0.1% -0.3% -0.1%Product Mix 0.0% 0.0% 0.1% 0.0% 0.0% 0.1%Customer/Industry/Other Mix 0.0% -0.4% -1.9% -0.6% 0.0% 0.0%Benefit Plan Changes -1.7% -1.5% -1.8% -3.5% -3.2% -3.2%

Business/ Product Mix Total 0.5% 0.1% -2.5% -5.1% -2.2% -2.1%

Core Trend ComponentsCore Utilization (Includes Health Tech.) 4.8% 6.3% 5.3% 0.5% 2.3% 3.4%Core Unit Cost 5.3% 5.7% 8.2% 7.1% 6.0% 4.7%Mix of Services (Includes Health Tech.) 0.2% 0.0% 0.4% 3.3% 1.3% 1.4%Leveraging 0.6% 0.7% 1.1% 1.0% 0.9% 0.8%Regulatory Mandates 0.0% 0.0% 0.2% 0.2% 0.2% 0.2%UHG Policy/Process Changes 0.0% 0.0% 0.0% 0.0% 0.1% 0.0%Work/Calendar Day Adjustments -0.1% 0.1% -0.1% 0.0% 0.6% -0.5%

Core Trend Total 11.2% 13.3% 15.8% 12.5% 11.7% 10.3%

Net Trend Total 11.8% 13.4% 12.8% 6.8% 9.2% 8.0%

Ingenix Trend Forecast Model

Sample


DemographicsU.S. Population Pyramids

2000

Male Female

Projected 2025

Male Female

Unless the U.S. population “pyramid” holds the same shape from year to year, there will be an impact on trend due to demographics.


DemographicsU.S. Population Pyramids

2050

Male Female

2050: And people wonder why we’re so

worried!


Variation by Health Cost Category and Geographic Region

Source: TrendAlertTM


9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

Q1 Q2 Q3

Including

Excluding

Customer / Industry Mix

The impact on Net Trend of One New Group

The membership for this new group equaled 1% of the total

block of business yet they contributed 40 bps to total net

trend in their first year.


-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

199

7q

1

199

8q

1

199

9q

1

200

0q

1

200

1q

1

200

2q

1

200

3q

1

200

4q

1

200

5q

1

Workday/Calendar Adjustments

Considering the experience period and projection period

when experience rating, calendar make-up can have a

significant impact!

PMPM costs are highest on Mondays. Friday costs are

the lowest of the regular work week.


“Consumer” DemandColonoscopies per 1,000


“Consumer” DemandMorbid Obesity Admits per 1,000


Consumer Demand


Health Technology Pipeline

Be aware of what’s coming down the pipeline. Proactively manage your business to control unnecessary

costs. What to look for:

New treatments New devices New diagnostic tests Changes in guidelines Brand name patent expirations Move from prescription to over-the-counter Changes in FDA status New medications


Pipeline Example: OvaCheck Test For Ovarian Cancer

Expected Release Date: Q1 2005 Impact Grades in linearly over 4 quarters Ultimate Utilization: 97 per 1,000 Expected Technology Cost: $165 (off-setting costs: $0) Peak PMPM: (97*(165-0)/12000) = $1.33 HCC Split: Professional = 20%; Ancillary = 80%

2004 2005 2006 2007 2008

PMPM -$ 0.83$ 1.33$ 1.33$ 1.33$

0.83$ 0.50$ -$ -$

0.5% 0.3% 0.0% 0.0%

1 Impact on professional and facility allowed costs (excludes pharmacy)

Change in PMPM

Medical Trend Impact1

(estimated PMPM = $160)

Source: Ingenix Health Technology PipelineTM


0

20

40

60

80

100

120

140

Scr

ipts

per

1,0

00

$ 0.00

$ 0.10

$ 0.20

$ 0.30

$ 0.40

$ 0.50

$ 0.60

$ 0.70

$ 0.80

$ 0.90

$ 1.00

PM

PM

Generic Scripts Brand Scripts Combined PMPM

Pipeline Example:Impact of Generics

A generic equivalent is introduced to the market.

Total scripts reduce slightly. Overall costs decrease significantly.


Pipeline: Understanding and managing the problem

Brave New World, Old-Fashioned Fear: Advances Are Coming At A Furious Rate-- Health Plans Find

It Difficult To Separate The Cost-Efficient From The Rest

John Carroll, Managed Care Magazine 2/1/2004

Six years ago, the health care economist Michael Chernew concluded from a review of the evidence that the driving force behind rising health care costs was new technology. "It's not increased waste, it's not fraud, it's not increased lawsuits, it's not the fact that people on average are older -- all of that may contribute, but the predominant factor relates to the development and utilization of new medical techniques, of which there are an enormous number," he said in a 1998 study.

The University of Michigan professor concluded that

“…but the predominant factor relates to the

development and utilization of new medical techniques…”

New Medical Developments as a whole add significantly to Medical Trend Technologies that

increase quality of care and desired outcomes

Therapeutic advantage when appropriately

applied

Therapeutic advantage is unproven

ACTION: Restrict or control utilization

ACTION: Limit use to appropriate population

ACTION: Encourage adoption and incent

utilization

Pro-actively addressing the impact of new medical technologies could

save a 25,000 employee organization $10 million annually

$10M

$5M

$15M

$20M


Core Unit Cost - Price

Models have been developed and are used to assign a value to existing contracts (physician and facility).

Models are populated and forecasts are established using all available information from contract negotiators working directly with the providers.

Outlier provisions and percent of charge contracts leave little protection to contract increases.

Non-par payment rates cause volatility in forecasts. Mergers and closings result in variability of market share

and also impact results.


Medical Care CPI Rolling 3-Month Averages

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Jun-

98

Sep-

98

Dec

-98

Mar

-99

Jun-

99

Sep-

99

Dec

-99

Mar

-00

Jun-

00

Sep-

00

Dec

-00

Mar

-01

Jun-

01

Sep-

01

Dec

-01

Mar

-02

Jun-

02

Sep-

02

Dec

-02

Mar

-03

Jun-

03

Sep-

03

Dec

-03

Rolling Quarters

Physician Hospital IP Host OP Hosp Pharmacy Adj'd Med CPI

CPI is a combination of Non Par and Par Revenues. Non Par cost increases are generally

higher than Par. Result: Non Par trend impact is likely higher

than CPI.


Cost per Day for Selected Markets

$1,500

$1,700

$1,900

$2,100

$2,300

$2,500

$2,700

$2,900

$3,100

Market A Market B Market C Market D Market E Market F Market G Market H

2004

2003

9.1%

17.4%

21.6%12.2%

15.4%

8.4% 19.4%

11.1%Trend Percentages appear on the top of each bar.

Cost per Day varies significantly by geographic

market. Contract negotiations also vary.

Consider the whole picture!


Baseline Utilization and Intensity (Mix of Services)

Historical experience is normalized for all other identified trend components.

Regression analyses are performed on units resulting in possible forecasts.

Legislative and economical influences are considered (health care reform, NHE, etc.).

Management initiatives of the client are considered. Final projections are established using a combination of all

information gathered above and pass through an actuarial peer review process.


25%

30%

35%

40%

45%

50%

55%

60%

Brand #1 - Tiered Plan Brand #2 - Tiered Plan

Brand #1 - Open Plan Brand #2 - Open Plan

Benefit Plan Design Impact of Tier Placement in Rx

A drug goes over the counter. In tiered plans,

Brand #1 is placed in Tier 3 and Brand #2 is placed in

Tier 2.

Inside the Black Box: How Actuaries Price Health Insurance

Contact InformationLisa F. Tourville, ASA, MAAAVice President12125 Technology DriveEden Prairie, MN 55344Email: [email protected]

Phone: 952-833-7559

mailto:[email protected]

Lisa F. Tourville, ASA, MAAA Vice President

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