Risk Segmentation in Consumer-Directed Health Plans Wharton – LDI Seminar Series March 26, 2004 John Bertko, F.S.A., MAAA VP and Chief Actuary Humana Inc.

2 CDHPs: –Include a health insurance option that has a health spending account, managed by the consumer member –Provide extensive information on: Costs of services, providers, treatment options Available quality data Trade-offs, using decision-support tools –Frequently require a new HR contribution strategy Move to “flat contributions” (vs. % of premium contributions) Provide credits for “buying down” or higher deductions for “buying up” –Require strong top-level support and communications Proprietary and Confidential Information Consumer-Directed Health Plans

3 Health Reimbursement Accounts (HRAs) –Accounts are usually “notional” without cash contributions –Roll-over of unused notional dollars allowed, after Treasury ruling in June 2001 –Not generally portable, but some employers allow use for COBRA payments (after termination) or retiree health payments Spending Accounts –Account available for regular services, before a large deductible –No roll-over, so less expensive Health Spending Accounts (HSAs) –Enacted under Medicare Act signed in December 2004 –Use cash contributions and are fully portable, if offered with a “High Deductible Health Plan” ($1000 deductible or more) –Likely to be purchased by Individuals and Small Group employers Proprietary and Confidential Information Common Types of CDHPs

4 Level of Employee Engagement Traditional Products HMO PPO Indemnity SmartSuite SM Tailored Packages “Component Plans” Different Combinations of Traditional and Consumer Engaged Plans in Each Package Premium Costs Co-pays, Deductibles, Co Insurance Levels Prescription Drug Benefit Levels Preference Factors -- Drs, Prescriptions, Hospitals SmartSelect SM Individual Plans “Plan Components” A la Carte Customization of Personal Plans By Key Features FSAs & PCAs ASO or Fully insured Has online or offline enrollment Requires 60-day setup Proprietary and Confidential Information Humana’s “Smart” Products Two CDHP Designs

5 Provides a $500 benefit allowance for each family member for covered medical expenses prior to satisfying the deductible Benefit allowance is for in-network services only Copayments, costs for behavioral health services and prescriptions excluded from the allowance Deductible applies after $500 benefit is used Comprehensive PPO coverage after satisfaction of the deductible CoverageFirst ® -- Spending Account Proprietary and Confidential Information Humana Example of One New Plan Design

6 Employer “Risk Pools” –Large employers Typically offer several options -- multiple HMOs and one PPO Contributions are generally same % of premium Current segmentation is mainly by delivery system: HMO fans vs. PPO users CDHPs are likely to initially lead to healthier members choosing the CDHP options while higher use members remain in HMOs/PPOs If not managed, traditional plans “price tags” may go into a “death spiral” –Employers already do some managing –Total replacement solutions provide cross-subsidies Proprietary and Confidential Information Risk Segmentation Issues Overview Part I

7 Employer Risk Pools –Small Employers (2-50 employees) Small Group reform laws require –Guaranteed Issue –Restricted rate bands Most small employers –Insured, under NAIC reform laws –Total replacement, since insurers require this –Provide less of a contribution subsidy »More to employees (50% to 100%) »Sometimes no subsidy for dependents Owner-driven preferences may: –Lead to healthiest groups choosing CDHPs and low rates –“Book of business” for traditional plans may deteriorate, creating a “book death spiral” under Guaranteed Issue/Renewal Proprietary and Confidential Information Risk Segmentation Issues Overview Part II

8 Individual Health Insurance Pool –Sold on a tightly underwritten basis Most buyers are very healthy (70% of those applying) Another 15-20% have pre-existing condition exclusions or premium rate-ups. Rest are declined, or deterred by knowledgeable agents –Health Savings Accounts may become very popular Most Individual health policies already have high deductibles “Healthy and wealthy” may fund higher cost HSAs “Healthy but not wealthy” may choose cheapest high deductible plans More segmentation of a highly underwritten market Proprietary and Confidential Information Risk Segmentation Issues Overview Part II

9 SmartSuite was tested on Humana employees and dependents –Year 1 test for 10,000 Louisville employees/dependents Year 2 became the SmartSelect new product test –Year 2 expansion to 14,000 more outside Louisville employees/dependents All results shown have pre/post analysis of claims for the members involved Proprietary and Confidential Information Humana’s Pilot Results from a CDHP

10 Year 1 –Brand new concept and product –Communication was intensive, but new to the Humana team –6% migration to the CDHP was slightly better than competitors at that time (2-5%, as reported during 2001) Year 2 –“Word of mouth” and better communications effort helped –20% migration from traditional plans to the CDHP Contribution strategy –Year 1: mostly a “buydown” that reduced payroll deductions –Year 2: higher cost to stay in traditional plans Comments on Enrollment and Segmentation Proprietary and Confidential Information

11 In both years, prior claims history for CDHP enrollees was much lower than average member –50% of average in Louisville Year 1 –55% of average in outside-Louisville Year 2 In both years, actual experience of CDHP members was considerably lower than the “Expected” (prior claims projected) –About 25% to 35% lower in each case –Implies that CDHP members made choices about how much to spend, where, etc. –Additional detail on other slides Comments on Claims and Segmentation Proprietary and Confidential Information

12 Prior slide indicates cost-sharing results, after decisions made during Year 1 –As expected, the buydown created greater “point of service” cost exposure Not shown – most of this was offset by significantly reduced payroll deductions –Roughly half of members had an insignificant increase in cost- sharing (average of $15 per year) –Middle expense members (roughly 45% of members) had cost increase of around $100 per year –Highest cost members (only 5% with claims greater than $10,000) reduced their cost sharing by $102/year because they chose the correct option for themselves Comments on Risk Stratification Proprietary and Confidential Information

13 One hundred and twenty-one Smart Product clients to date (as of January 26, 2004) Analysis of 43 groups –48,000 members –3 to 12 months of data –Results are annualized* Average annualized net claims trend for 43 groups is 7.0% *Annualized results include data through 12/2003 SmartSuite Claims Results Proprietary and Confidential Information

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