1. Analyzing and Reducing Costs

2. Plan for Today Review and reflect on Roulette Excel Exercise Relate exercise to major cost-reduction strategies of health plans Checkpoint #3

3. Premiums for Low Risks DeductiblePremium Joe and Mandy Round 1 Round 2 Zero $1890 $2587 Julie and Mike Round 1 Round 2 Zero $500 $1930 $2200

4. Consumers Managed care, $1000 deductible

5. Community-rated Premium 15*.1*($18,000-$1000) + 4*.2*($18,000-$1000) 19 = 15*$1700 + 4*3400 19 =$2058

6. Plans

7. Lessons to learn about community rating Some low risks will opt out with community rating –They don’t get a premium based on their low average claims. –Average claims are higher with them out of the pool. Profitability of health plans depends on what mix of risks they get

8. Actuarial Cost/Pricing Model

9. Average claims per policy = (Ave. use) * (Plan’s net cost per unit) (Ave. use) * (Provider payment - copay) Basic building blocks in developing rates –Utilization rate –Net cost per unit (Provider payment, copay) –By type of service Ave. premium per policy = (Ave. claims per policy) * (1 + load)

10. How Plans Reduce Average Medical Costs Reduce utilization, especially –Hospital inpatient –Specialty and referrals Negotiate lower prices with hospitals, physicians, and other suppliers

11. Utilization Management Hospital utilization management –Pre-certification –Concurrent review –Case management and discharge planning “Referral authorization” (by gatekeeper) “Demand management” –Techniques and programs (such as nurse call-in lines) to reduce member demand for services

12. Plans Can Also Cut Administrative Costs (Load) Reduce profit Streamline –Marketing and sales –Member services –Provider relations –Clinical management –Rating and underwriting (Finance) –Operations –Information management