Texas State Planning Grant Texas State Planning Grant ConferenceConference

January 31 – February 1, 2002January 31 – February 1, 2002

The Economics of Health InsuranceThe Economics of Health Insurance

Tim D. Lee, FSA, MAAATim D. Lee, FSA, MAAA

Milliman USAMilliman USA

Houston TXHouston TX

(713) 658-8451(713) 658-8451

Source: Milliman USA Health Cost Guidelines Milliman USA

The Economics of Health The Economics of Health InsuranceInsurance

Where Does the Premium Go?

What Drives the Cost of Medical Care?

How Do Insurance Companies Determine Their Premium Rate?

Source: Milliman USA Health Cost Guidelines Milliman USA

Where Does the Premium Go?Where Does the Premium Go?100 Employee Group100 Employee Group

Medical Claims, Administrative Expense & ProfitMedical Claims, Administrative Expense & Profit

$0

$40

$80

$120

$160

$200

Medical ClaimsAdministrative Expense & Profit

80%

20%

Source: Milliman USA Health Cost Guidelines Milliman USA

Where Does the Premium Go?Where Does the Premium Go?100 Employee Group100 Employee Group

Break-down of Medical ClaimsBreak-down of Medical Claims

$0

$40

$80

$120

$160

$200

HospitalPhysicianRXOther MedAdministrative Expense & Profit

20%

5%

15%

30%

30%

Source: Milliman USA Health Cost Guidelines Milliman USA

Where Does the Premium Go?Where Does the Premium Go?100 Employee Group100 Employee Group

Break-down of Administrative Expense & ProfitBreak-down of Administrative Expense & Profit

$0

$40

Provider Relations/Member Services/Financial Mgt.Claims ProcessingCommissionsProfitPremium Tax

7%

5%

3%

3%

2%

Source: Milliman USA Health Cost Guidelines Milliman USA

Where Does the Premium Go?Where Does the Premium Go?100 Employee Group100 Employee Group

Break-down of Medical Claims, Administrative Break-down of Medical Claims, Administrative Expense & ProfitExpense & Profit

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200 Hospital

Physician

RX

Other Med

Provider Relations/Member Services/Financial Mgt.

Claims Processing

Commissions

Profit

Premium Tax

20%

80%

Source: Milliman USA Health Cost Guidelines Milliman USA

Where Does the Premium Go?Where Does the Premium Go?Small Group vs. Medium Group vs. Large GroupSmall Group vs. Medium Group vs. Large Group

$0

$40

$80

$120

$160

$200

$240

10 EmployeeGroup

100 EmployeeGroup

10,000EmployeeGroup

Medical ClaimsAdministrative Expense & Profit

$168

$160

$160

$72$40

$20

70%

30% 20

%

80%

8.3%

91.7%

Source: Milliman USA Health Cost Guidelines Milliman USA

Where Does the Premium Go?Where Does the Premium Go?Individual InsuranceIndividual Insurance

$0

$40

$80

$120

$160

$200

$240

Medical ClaimsProvider Relations/Member Services/Financial Mgt.Claims ProcessingCommissionsProfitPremium Tax

60%

40%

Source: Milliman USA Health Cost Guidelines Milliman USA

Where Does the Premium Go?Where Does the Premium Go? IndividualIndividual vs. Small Group vs. Medium Group vs. vs. Small Group vs. Medium Group vs.

Large GroupLarge Group

$0

$40

$80

$120

$160

$200

$240

Individual 10 EmployeeGroup

100 EmployeeGroup

10,000Employee

Group

Medical Claims

Administrative Expense & Profit

60%

40%

70%

30%

80%

20%

91.7%

8.3%

Source: Milliman USA Health Cost Guidelines Milliman USA

Where Does the Premium Go?Where Does the Premium Go?

Conclusions:Conclusions:

Premium is primarily driven by the cost of medical claims.

Administrative costs are relatively minor and inflexible.

Portion spent on administration shrinks as groups get larger.

Insurer profits are a very small piece of the total premium.

Source: Milliman USA Health Cost Guidelines Milliman USA

What Drives the Cost of What Drives the Cost of Medical Care?Medical Care?

Type of Service Used

Frequency of Use (Utilization)

Provider’s Charge for Service

Source: Milliman USA Health Cost Guidelines Milliman USA

Sample Costs Per MemberSample Costs Per Member

=

=

=

x

x

x

$350$507.0 prescriptions

Pharmacy

$180$603.0 visitsPhysician Visits

$750$2,500 .3 daysInpatient Hospital

Annual Annual CostCost

ChargeCharge

Per ServicePer ServiceAnnual Annual

UtilizationUtilization

Type of Type of

ServiceService

Source: Milliman USA Health Cost Guidelines Milliman USA

New Types of Services

Source: Milliman USA Health Cost Guidelines Milliman USA

How Do Medical Costs Vary How Do Medical Costs Vary By Age and Gender?By Age and Gender?

Annual Average = $2,600 Per MemberAge Male Female

0 – 1 $3,600 $3,600

2 – 18 $1,050 $1,050

19 – 29 $1,150 $2,000

30 – 39 $1,600 $2,900

40 – 49 $2,500 $3,800

50 – 59 $4,600 $5,200

60 – 65 $7,500 $6,900

Source: Milliman USA Health Cost Guidelines Milliman USA

How Do Medical Costs Vary How Do Medical Costs Vary By Age and Gender?By Age and Gender?

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

$5,500

$6,000

$6,500

$7,000

$7,500

0 5 10 15 20 25 30 35 40 45 50 55 60 65

Male

Female

AGEAGE

Source: Milliman USA Health Cost Guidelines Milliman USA

How Do Medical Costs Vary How Do Medical Costs Vary By Geographic Area?By Geographic Area?

National Annual Average = $2,600 Per Member

$2,160Wichita Falls

$2,240Ft. Worth

$2,340El Paso

$2,550Dallas

$2,630Houston

$2,800Tyler

$3,040Galveston

AmountArea

Source: Ingenix MDR Payment System Milliman USA

How Do Medical Costs Vary How Do Medical Costs Vary By Provider?By Provider?

$3,188$2,031Cataract Removal CPT 66984

$3,629$2,117Septoplasty CPT 30520

Hospital Outpatient

$7,092$6,326Coronary Artery Bypass CPT 33534

$56$43Office Visit CPT 99212

Physician

7575thth PercentilePercentile

2525thth PercentilePercentile

ServiceService

2001 Charges in Austin/San Marcos

Source: Milliman USA Health Cost Guidelines Milliman USA

Plan Benefits Copays

Indemnity Plan HMO Plan

How Do Medical Costs How Do Medical Costs Vary Vary

By Benefit Plan?By Benefit Plan?

Plan Benefits = 79% of Changes

Plan Benefits = 93% of Charges

Plan Benefits 20% Coinsurance $500 Deductible

Plan Benefits = 79% of Charges

Source: Milliman USA Health Cost Guidelines Milliman USA

How Do Medical Costs Vary How Do Medical Costs Vary By Insurance Product?By Insurance Product?

Inpatient Hospital Costs Per Member

=

=

=

x

x

x

60%$300$1,500.2 days

Discounts and Utilization Management (HMOs)

$450

$750

Annual Cost

$1,500

$2,500

Charge Per Service

40%.3 daysDiscounts (PPO)

0%.3 daysUnmanaged

SavingsAnnual

Utilization

Type of

Delivery System

Source: Milliman USA Health Cost Guidelines Milliman USA

How Does Underwriting How Does Underwriting Affect Medical Costs?Affect Medical Costs?

0

20

40

60

80

100

120

140

160

180Large Group 1 2 3 4 5 6+ Average

Policy Year

Source: Health Care Financing Administration, Office of Information Services: Data from the Medicare Decision Support System; data development by the Office of Strategic Planning.

Milliman USA

Why Do Insurers Underwrite?Why Do Insurers Underwrite?Percent Distribution of Medicare Persons Served Percent Distribution of Medicare Persons Served

and Program Payments Under Medicare: CY and Program Payments Under Medicare: CY 19971997

Am

ount

of P

rogr

am P

aym

ents

$29.8 Million Persons Served

$175.4 Billion in Program Payments

$25,000 or More

$10,000-$24,999$5,000-$9,999

$2,000-$4,999

$500-$1,999

$1-$499

$25,000 or More

$10,000-$24,999

$5,000-$9,999$2,000-$4,999$500-$1,999$1-$499

6.3%

9.4%

8.3%

13.8%

26.4%

36.0%

50.1%

26.5%

10.2%

1.2%

Percent of Persons Served

Percent of Program Payments

4.7%7.3%

Source: Milliman USA Health Cost Guidelines Milliman USA

How Do Insurance Companies How Do Insurance Companies Determine Their Premium Determine Their Premium

Rate?Rate?

Estimate Medical Costs Using Some Objective Criteria:

•Product (Indemnity, PPO, HMO)

•Plan Benefits

•Age

•Gender

•Geographical Area

Source: Milliman USA Health Cost Guidelines Milliman USA

How Do Insurance Companies How Do Insurance Companies Determine Their Premium Determine Their Premium

Rate?Rate?

Estimate Medical Costs Using Some Objective Criteria:

•Product (Indemnity, PPO, HMO)

•Plan Benefits

•Age

•Gender

•Geographical Area

Adjust the Estimate for Underwriting Information (Objective and Subjective)

Source: Milliman USA Health Cost Guidelines Milliman USA

How Do Insurance Companies How Do Insurance Companies Determine Their Premium Determine Their Premium

Rate?Rate?

Estimate Medical Costs Using Some Objective Criteria:

•Product (Indemnity, PPO, HMO)

•Plan Benefits

•Age

•Gender

•Geographical Area

Adjust the Estimate for Underwriting Information (Objective and Subjective)

Add Expected Administrative Expenses and Profit

•Product

•Group Size

Source: Milliman USA Health Cost Guidelines Milliman USA

The Economics of Health The Economics of Health Insurance Insurance

SummarySummary

Premiums Are High Because the Cost of Medical Care is High

Some Administrative Cost Savings Possible For Small Groups; But Not a Significant Impact On Affordability

Expected Cost of Medical Care Can Vary Significantly Among Small Groups; That’s Why Premiums Will Vary Among Groups

To Make Premiums Affordable, Focus On The Cost of Medical Care