Health Insurance Pricing Also known as “Rating” or “Setting Premiums”

Plan for Today What’s the goal of a managed care plan? Measuring success or failure Pricing Pricing practice

How should a plan measure its success??

Profits - a key measure of success Total profits = (Ave. premium - Ave. cost) * (Number of customers)

Pricing (Setting premiums) To cover claims + administrative costs + profits Moral hazard, adverse selection Community versus experience rating Components of pricing “model”

How Do Plans Set Premiums? Total premiums (for a group) = Total claims + Admin. costs + Profits Total group premiums = Total claims + Percent of claims for administration and profits Total claims + 15% of claims (for example)

Total group premium = Total claims + 15% of claims for administration and profits = (Total claims) * (115%) Percent (100% + “load”) = (Total claims) * (1.15) Proportion (1 + “load”)

Total premiums ---> Per policy (Total claims) * (1 + “load”) Number of policies Average premium per policy = (Ave. claims per policy) * (1 + load) = (“Actuarial value”) * (1 + load)

Ave. premium per policy = (Ave. claims per policy) * (1 + load) Load includes (varies by size of group) Marketing (0.1% - 8%) Claims processing (3% - 8%) General administration (0.7% - 10%) Premium taxes (0 - 3.5%) Profits (1% - 7%) Hedge against risk Ranges in total from 5% - 35%

Ave. premium per policy = (Ave. claims per policy) * (1 + load) Premium based on averages Enrollment more attractive for persons with higher expected claims People with lower expected claims don’t buy Average claims increase when they drop out With “adverse selection” Initial premium won’t cover average claims

Plans control adverse selection by Enrolling groups defined by employment Restricted coverage of pre-existing conditions Waiting periods Excluding “uninsurables” Minimum participation requirements

Ave. premium per policy = (Ave. claims per policy) * (1 + load) Whose average??? Everyone in community (“community rating”) Groups/people with similar expected claims based on past experience (“experience rating”)

Ave. premium per policy = (Ave. claims per policy) * (1 + load) Basic building blocks in developing rates Utilization rate Net cost per unit (Provider payment, copay) By type of service Average claims per policy = (Ave. use) * (Plan’s net cost per unit) (Ave. use) * (Provider payment - copay)

Ave. premium per policy = (Ave. use). (Provider payment - copay) Ave. premium per policy = (Ave. use)*(Provider payment - copay)*(1 + load) Insured people use More services Choose more expensive providers A phenomenon known as