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Health Insurance Pricing for Non-Health Insurance

Actuaries

Jonathan N. Rubin, F.S.A.CAS 1999 Seminar on Ratemaking

March 11, 1999

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Agenda

• Introduction

• Health Insurance Products

• Managed Care Pricing Methods

• Current Topics

• Roles for Health Actuaries

• Questions

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Health Insurance Products

• Indemnity: Least managed

• Preferred Provider Organization (PPO)

• Point-of-Service (POS)

• Health Maintenance Organization (HMO): Highly managed

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Indemnity

• Provider Access: Any provider

• Medical Management: Possibly PAC/CSR

• Provider Compensation: Fee-for-service (Reasonable and Customary)

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PPO

• Provider Access: Any provider, with non-network at higher cost

• Medical Management: PAC/CSR and possibly some outpatient precertification; patient-driven

• Provider Compensation:

– In-network: Discounted fee-for-service, fee schedule (physician), per diems (hospital)

– Non-network: Fee-for-service (Reasonable and Customary)

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POS

• Provider Access: Any provider, with non-network at higher cost and in-network through PCP referral

• Medical Management: Referral process, prior authorization, case management, disease management; PCP-driven

• Provider Compensation:

– In-network: Discounted fee-for-service, fee schedule (physician), per diems/case rates (hospital), fixed fees (outpatient), capitation

– Non-network: Fee-for-service (Reasonable and Customary)

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HMO

• Provider Access: Network providers through PCP referral

• Medical Management: Referral process, prior authorization, case management, disease management; PCP-driven

• Provider Compensation: Discounted fee-for-service, fee schedule (physician), per diems/case rates (hospital), fixed fees (outpatient), capitation

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Health Insurance Products -- Funding Options

• Fully Insured/Guaranteed Cost: Maximum risk assumed; pooled vs. prospectively experience-rated

• Retroactively Experience-Rated: Dividend/deficit accounting

• Self-Funded (ASO): Minimum risk assumed

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Agenda

• Introduction

• Health Insurance Products

• Managed Care Pricing Methods

• Current Topics

• Roles for Health Actuaries

• Questions

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Managed Care Pricing -- Where Do We Start?

• In its simplest form, Pricing is based on expected future costs

• To understand the pricing process, we need to begin with determining the cost structure by product for each geographic market (community medical costs)

• Community medical costs, per member per month (PMPM), are adjusted by medical cost trend assumptions

• Community Rate is the required revenue to achieve target profit based on trended community medical costs and assumed administrative expenses

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Managed Care Pricing Methods

• Community Rating (CR): Rates established by category of business and geographic area and do not vary by account within these classifications

• Community Rating By Class (CRC): Community rates adjusted by age/sex of eligible employees or members and employer industry

• Adjusted Community Rating (ACR): Community or CRC rates adjusted to reflect actual past claims experience of a specific employer group

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CRC Rating -- Case-Level Inputs

• Census data (employees or members) by age/sex and by geographic area

• Benefit plan selections

• Industry (SIC) Code

• Tier rating adjustments

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What is a CRC Rate?

Trended Community Medical Cost PMPM for Benefit Plan

x Demographic Adjustment Factor

x Area Factor

x Industry Factor

= Expected CRC Medical Costs PMPM

+ Profit, Administrative Load, Commissions, Taxes

= CRC Required Revenue PMPM

==> Tier Rates to Single, 2-Party, Family

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CRC Rate Tiering

• Changing the rate steps may be neutral to revenue, but it can have major implications due to:

– Changes in participation or employer census

– Slice situation against competitors

• Consider all potential impacts when calculating tier factors

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Adjusted Community Rating (ACR)

Adjusted CommunityRate (ACR)

ACR: Represents an account’s required revenue/rates based on CRC, adjusted for credibilized account-level experience

credibility formula

Manual Rate or “CRC”

Community

CaseExperience

Customer

xexperience factor

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Agenda

• Introduction

• Health Insurance Products

• Managed Care Pricing Methods

• Current Topics

• Roles for Health Actuaries

• Questions

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Current Topics

• Forecasting Medical Cost Trend

• Consumer Trends

• Legislative Initiatives

• Provider Issues

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Medical Cost Forecasting

• Start with complete picture of historical medical costs

– Total cost, broken down by utilization and cost per service by service category

– Normalize for shock claims and book-of-business changes

• Provide range of forecasts

– Contracting and medical cost management initiatives

– Consider global economic, provider, and legislative impacts

• ==> “Managed Care” pricing

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Medical Cost Forecasting

Historical Data

Medical Mgmt. Initiatives

Contracting Initiatives

Legislation

Providers

Book of Business

Medical:

Medical/Contracting

Progress

Benchmarks

Pricing:

Trends

Risk Exposure

Forecasting Model

<==Link==>

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Consumer Trends

• Employee Choice/Slice

– Enrollment Prediction

– Underwriting/Selection

– Benefit Strategy

• Open Access

– Value of Referral Process/Benefit Changes

– Provider Contracting Implications

• Prescription Drug Formulary

– Cost of Open vs. Closed

– “3-Tier” Plan Designs

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Legislative Initiatives

• Federal vs. State

• Small Employer Reform

• Mandated Benefits/Coverages

• Mandatory Point-of-Service

• “Any Willing” Provider

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Provider Issues

• Consolidation

• Financial Sophistication

• Capitation/Assumption of Risk

– Percent-of-Premium

– Financial Underwriting

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Agenda

• Introduction

• Health Insurance Products

• Managed Care Pricing Methods

• Current Topics

• Roles for Health Actuaries

• Questions

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Roles for Health Actuaries

• Pricing

• Underwriting/Risk Assessment

• Reserving

• Medical Economics

• Provider Contracting

• Benefits Consulting

• Government