New Health Plan Strategies for Containing Medical Costs Leonard Davis Institute of Health Economics 2002/2003 Health Policy Seminar Series University of Pennsylvania John W. Rowe, M.D. February 21, 2003

Health Insurance Premiums v. General Inflation Sources: Towers Perrin (red) and the Department of Labor (blue) Health Insurance Premium Change General Inflation

Factors Driving Rising Costs in Healthcare Percentage Points Percent of Total Increase Medical Trend13.7%100% General Inflation (CPI)2.5%18% Drugs, Medical Devices and Medical Advances 3.0%22% Rising Provider Expenses2.5%18% Government Mandates and Regulation 2.0%15% Increased Consumer Demand2.0%15% Litigation and Risk Management1.0%7% Other Categories0.7%5% Source: PricewaterhouseCoopers, April 2002.

Shares of Overall Health Care Spending Growth Physician Services Prescription Drugs Hospital Inpatient Hospital Outpatient Source: Milliman USA Health Cost Index

Overview   Why are Medical Costs Rising?   What are Health Plans doing to control Medical Costs?

Q.Why Are Healthcare Costs Rising So Dramatically? A.Medical Cost = Volume (V) x Unit Cost (C)

Why are healthcare costs rising so dramatically?   The Erosion of Managed Care – V+C ­ ­Backlash ­ ­Managed Care Lite

  The Erosion of Managed Care – V+C Why are healthcare costs rising so dramatically?   Prescription Medication – V+C

  Aging - V   The Erosion of Managed Care – V+C Why are healthcare costs rising so dramatically?   Prescription Medication – V+C

  Aging - V   The Erosion of Managed Care – V+C Why are healthcare costs rising so dramatically?   Prescription Medication – V+C   Provider Consolidation - C

  Leveraging - C   Aging - V   The Erosion of Managed Care – V+C Why are healthcare costs rising so dramatically?   Prescription Medication – V+C   Provider Consolidation - C

  Cost Shifting & Government Funding - C   Leveraging - C   Aging - V   The Erosion of Managed Care – V+C Why are healthcare costs rising so dramatically?   Prescription Medication – V+C   Provider Consolidation - C

  Government Mandates & Legislative Changes - C   Leveraging - C   Cost Shifting & Government Funding - C   Aging - V   The Erosion of Managed Care – V+C Why are healthcare costs rising so dramatically?   Prescription Medication – V+C   Provider Consolidation - C

  Technology - C   Leveraging - C   Cost Shifting & Government Funding - C   Government Mandates & Legislative Changes - C   Aging - V   The Erosion of Managed Care – V+C Why are healthcare costs rising so dramatically?   Prescription Medication – V+C   Provider Consolidation - C

  Expectations - V   Leveraging - C   Cost Shifting & Government Funding - C   Government Mandates & Legislative Changes - C   Technology - C   Aging - V   The Erosion of Managed Care – V+C Why are healthcare costs rising so dramatically?   Prescription Medication – V+C   Provider Consolidation - C

Perspectives on Death Scotland -Imminent France-Inevitable United States-Optional

What do people want from their health care system?   Afghanistan   Portugal   Canada   United States   California   West Los Angeles   Reduce mortality   Reduce morbidity   Improve functionality   Feel better   Look better   Look real good Source: Jamie Robinson - The Aetna Executive Speaker Action Series Presentation January 9, 2002

Strategies to Control Costs   Pharmacy - -Formulary - -Tiering - -Mail Order   Hospital and Physician Contracts   Benefits Structures   Patient Care Management - -Disease Management - -Care Management - -Utilization Management - -Hospitalists   Consumer Driven Health Plans

Consumer Driven Health Plans Provide a greater role for employees in:   Selecting Providers   Choosing Health Plans   Designing Benefit Packages   Sharing Financial Risk

Consumer Reception Consumer Involvement Tiered Networks Health Reimbursement Arrangements A La Carte Customized Packages Traditional Plans Courtesy of Ken Sperling, Hewitt Associates, February 2003

Consumer Reception Consumer Involvement Tiered Networks (PacifiCare, HealthNet) Health Reimbursement Arrangements (Aetna, Lumenos) A La Carte (Vivius, My Health Bank) Customized Packages (Humana, Highmark) Traditional Plans (Cigna, United) Courtesy of Ken Sperling, Hewitt Associates, February 2003

The Aetna HealthFund, Release 1.0   Health Care Spending Account 1. 1.Employer Funded 2. 2.High Deductible 3. 3.Expenditures Apply 100% Toward Deductible 4. 4.Single & Family Options 5. 5.Unused Balances Roll Over   Full Coverage for In-Network Preventive Services   Linked to PPO Networks   No Referrals   Self Insured & Fully Insured Models   Fully Integrated Services & Features

Aetna HealthFund, Release 1.0   Patient Care Management - -Disease Management - -Case Management   Decision Support Tools - -Hospital Comparison - -Price a Medical Procedure - -Evaluate Doctors - -Price a Drug   Claims Management - -On-Line Adjudication   Benefit Explanation – Eligibility (On-Line)   Information Therapy (SimpleSteps, Informed HealthLine)   Monthly Statement

The Jury is Out!   Will These Products Sell?   Will Consumers Access Information and Use it Effectively?   Will Information Regarding the Quality of Individual Physicians and Hospitals become Sufficiently Robust?   Will Access to Care Expand or Contract?   Will We Witness Selection Bias?   Will the Appeal of Consumer Driven Health Plans Serve to Ultimately Reduce the Ranks of the Uninsured?