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

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

3. How should a plan measure its success??

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

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

6. 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 % of claims (for example)

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

8. 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)

9. 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 ( %)
Profits (1% - 7%)
Hedge against risk
Ranges in total from 5% - 35%

10. 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

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

12. 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”)

13. 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)

14. 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