Lisa F. Tourville, ASA, MAAA Vice President

1. Inside the Black Box: How Actuaries Price Health InsuranceAcademy Health Annual Research Meeting June 8th 2004 Lisa F. Tourville, ASA, MAAA Vice President

2. 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

3. Top 10 Trend Drivers by CategoryContribution to Trend based on Change in PMPM Inside the Black Box: How Actuaries Price Health Insurance

4. Top 10 Trend Drivers by ConditionContribution to Trend based on Change in PMPM Inside the Black Box: How Actuaries Price Health Insurance

5. 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

6. SG UW Wear-off Product Mix Cust/Indy Mix Policy Process Regulatory Intensity/Mix Leveraging Geographics Workday Demographics Benefit Plan Change Components of Medical Expense Trend Included in the Ingenix Trend Forecast Model Health Tech Pipeline Baseline Utilization Core Unit Cost / Price Inside the Black Box: How Actuaries Price Health Insurance

7. Ingenix Trend Forecast Model Sample Inside the Black Box: How Actuaries Price Health Insurance

8. 2000 Male Female Projected 2025 Male Female DemographicsU.S. Population Pyramids 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

9. 2050: And people wonder why we’re so worried! DemographicsU.S. Population Pyramids 2050 Male Female Inside the Black Box: How Actuaries Price Health Insurance

10. Variation by Health Cost Category and Geographic Region Source: TrendAlertTM Inside the Black Box: How Actuaries Price Health Insurance

11. 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. Customer / Industry Mix The impact on Net Trend of One New Group Inside the Black Box: How Actuaries Price Health Insurance

12. Considering the experience period and projection period when experience rating, calendar make-up can have a significant impact! Workday/Calendar Adjustments 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

13. “Consumer” DemandColonoscopies per 1,000 Inside the Black Box: How Actuaries Price Health Insurance

14. “Consumer” DemandMorbid Obesity Admits per 1,000 Inside the Black Box: How Actuaries Price Health Insurance

15. Consumer Demand Inside the Black Box: How Actuaries Price Health Insurance

16. 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

17. 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% Source: Ingenix Health Technology PipelineTM Inside the Black Box: How Actuaries Price Health Insurance

18. 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

19. Pipeline: Understanding and managing the problem $20M New Medical Developments as a whole add significantly to Medical Trend Technologies that increase quality of care and desired outcomes ACTION: Encourage adoption and incent utilization 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 professorconcluded that $15M Therapeutic advantage when appropriately applied ACTION: Limit use to appropriate population $10M Therapeutic advantage is unproven ACTION: Restrict or control utilization $5M “…but the predominant factor relates to the development and utilization of new medical techniques…” Pro-actively addressing the impact of new medical technologies could save a 25,000 employee organization $10 million annually Inside the Black Box: How Actuaries Price Health Insurance

20. 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

21. Medical Care CPI Rolling 3-Month Averages 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

22. Cost per Day for Selected Markets 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

23. 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

24. 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

25. Inside the Black Box: How Actuaries Price Health Insurance Contact Information Lisa F. Tourville, ASA, MAAA Vice President 12125 Technology Drive Eden Prairie, MN 55344 Email: lisa.tourville@ingenix.com Phone: 952-833-7559