Health Insurance Pricing for Non-Health Insurance Actuaries

1. Health Insurance Pricing for Non-Health Insurance Actuaries Jonathan N. Rubin, F.S.A. CAS 1999 Seminar on Ratemaking March 11, 1999

2. Agenda • Introduction • Health Insurance Products • Managed Care Pricing Methods • Current Topics • Roles for Health Actuaries • Questions

3. Health Insurance Products • Indemnity: Least managed • Preferred Provider Organization (PPO) • Point-of-Service (POS) • Health Maintenance Organization (HMO): Highly managed

4. Indemnity • Provider Access: Any provider • Medical Management: Possibly PAC/CSR • Provider Compensation: Fee-for-service (Reasonable and Customary)

5. 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)

6. 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)

7. 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

8. 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

9. Agenda • Introduction • Health Insurance Products • Managed Care Pricing Methods • Current Topics • Roles for Health Actuaries • Questions

10. 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

11. 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

12. 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

13. 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

14. 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

15. Community Customer Case Experience Manual Rate or “CRC” credibility formula Adjusted Community Rate (ACR) experience factor ACR: Represents an account’s required revenue/rates based on CRC, adjusted for credibilized account-level experience Adjusted Community Rating (ACR) x

16. Agenda • Introduction • Health Insurance Products • Managed Care Pricing Methods • Current Topics • Roles for Health Actuaries • Questions

17. Current Topics • Forecasting Medical Cost Trend • Consumer Trends • Legislative Initiatives • Provider Issues

18. 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

19. Medical Cost Forecasting Historical Data Medical Mgmt. Initiatives Contracting Initiatives Legislation Providers Book of Business Forecasting Model Medical: Medical/Contracting Progress Benchmarks Pricing: Trends Risk Exposure <==Link==>

20. 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

21. Legislative Initiatives • Federal vs. State • Small Employer Reform • Mandated Benefits/Coverages • Mandatory Point-of-Service • “Any Willing” Provider

22. Provider Issues • Consolidation • Financial Sophistication • Capitation/Assumption of Risk • Percent-of-Premium • Financial Underwriting

23. Agenda • Introduction • Health Insurance Products • Managed Care Pricing Methods • Current Topics • Roles for Health Actuaries • Questions

24. Roles for Health Actuaries • Pricing • Underwriting/Risk Assessment • Reserving • Medical Economics • Provider Contracting • Benefits Consulting • Government