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

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 Medical: Medical/Contracting Progress Benchmarks Pricing: Trends Risk Exposure Forecasting Model

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