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.
Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.
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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Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.
Top 10 Trend Drivers by ConditionContribution to Trend based on Change in PMPM
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Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.
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
Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.
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
Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.
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
Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.
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.
Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.
DemographicsU.S. Population Pyramids
2050
Male Female
2050: And people wonder why we’re so
worried!
Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.
Variation by Health Cost Category and Geographic Region
Source: TrendAlertTM
Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.
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.
Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.
-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.
Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.
“Consumer” DemandColonoscopies per 1,000
Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.
“Consumer” DemandMorbid Obesity Admits per 1,000
Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.
Consumer Demand
Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.
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
Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.
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
Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.
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.
Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.
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
Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.
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.
Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.
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.
Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.
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!
Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.
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.
Inside the Black Box: How Actuaries Price Health Insurance © 2003 Ingenix, Inc.
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