1 Benefits in Health Insurance: Calculating the Costs and Premiums Alliance for Health Reform October 10, 2008 John Bertko, FSA, MAAA

2 Calculation of Health Insurance Premiums For $1 in premium, on average across all markets: –85¢ for claims/services –10¢ for administration (marketing, billing and enrollment, claims adjudication, network management, care coordination) –5¢ for profits or contribution to surplus (for non- profits) [Note that this allocation of a premium dollar varies by market, by region, by calendar year and by company.]

3 Benefit Plan Design Defining what level of benefits is regarded as adequate –Affordability -- a trade-off between cost-sharing and premium cost Cost-sharing -- includes deductibles, coinsurance, copays and out-of-pocket maximum –More cost-sharing reduces premium and utilization »RAND Health Insurance Experiment (HIE) showed that most individuals reduced services used without effects on health »Exception for those in poor health –Can devise designs that have lower cost-sharing for: »Primary care office visits »Screening »Preventive services What is the minimum benefit?

4 Benefit Design and Premiums Premiums –Vary by geographic region, age and level of benefits –Based on: »Population -- e.g., for non-Medicare age adults »Allowed charges (contracted provider rates) »Expected utilization (by age, industry, health status) »Network used (“narrow” network for HMOs vs. tiered networks vs. “wide” PPO networks) »Utilization management (e.g., prior authorization, step therapy, etc.) »Reduced for cost-sharing

5 Benefit Plans –Which design to use as a starting point? FEHBP’s BCBS Standard Plan -- a relatively high level of benefits ($300 deductible PPO) Medicare (without supplemental Medigap) –$1024 Hospital per admission deductible in 2008 –$135 separate Part B deductible in 2008, plus 20% coinsurance –No Out-of-Pocket cap on cost-sharing Average benefit plan purchased by employers –Typically higher deductible PPO »~$500 deductible for large employers »Range from $500 to $2500 for small employers »Range from $1000 to $5000 for individuals –HMO vs. PPO: tradeoffs between smaller provider network and lower premiums Indexing -- at what rate should cost-sharing change each year?

6 Benefit Plans Actuarial Equivalence -- average cost-sharing is the same –E.g., deductibles+coinsurance may be equivalent to copays+per admission cost-sharing Determined by using costs for an “average individual” from a specific population (e.g., adults 18-64), Equivalent plans must cover the same services (e.g., hospital, physician, prescription drugs) –Cost sharing for individuals with different health needs will vary –Actual premiums will vary across insurers for actuarially equivalent benefit designs –Actuarial equivalence can be used to allow variation in benefits while guaranteeing compliance with minimum benefit plan rules Part D uses this standard

7 Example of Actuarial Equivalence Model Plan –$300 deductible –80% in network payment –60% out-of-network payments –$2500 maximum out- of pocket Actuarially equivalent plan –$20 Primary Care copay in network –$50 Specialist copay in network –$100 Emerg Room copay –50% coinsurance out-of- network –$250 per admission deductible –Rx: $10/20/50/25% copays/coinsurance –$2500 maximum out-of- pocket

8 Limits on Rate Variation Same $$s need to be collected Adjusted Community Rating –Vary by age, gender, location, benefit design and network –No variation for health status –Healthy subsidize the less healthy at the same age

9 Limits on Rate Variation Rate bands –Small Group regulation “Manual rates” vary with case characteristics like age, gender, number of employees, location With health status or industry, rates may further vary by (e.g., NAIC model) +/- 35% –Many differences across the states –Most common rate band is +/- 25%

10 Limits on Rate Variation Underwritten rates in Individual market –Three main underwriting outcomes: Standard rate offers for the healthy –Less than rates for “average employees” or dependents since these Individuals are healthy at policy issue Rate-ups or pre-ex offers of insurance –Rate-ups will be from 110% to 200% of standard –Pre-ex offer may have same rate, but limits on covered conditions Denials -- no offer made –Possible use of High Risk Pools

11 Limits on Rate Variation High Risk Pools –Rates are generally 200% to 250% of standard rates –HRP capacity for enrollees is constrained by funding from: Assessments on insured policies Other sources (e.g., tobacco taxes)

12 More Technical Topics Adjusted Community Rating changes to market premiums Use of Reinsurance Effects of Guaranteed Issue Effects on premiums of individual or employer mandates Effects of Risk Adjustment