1. Inside the Black Box: How Actuaries Price Health Insurance Academy Health Annual Research Meeting June 8 th 2004 Lisa F. Tourville, ASA, MAAA Vice President

2. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance Agenda  Discuss historical drivers of trend.  Discuss the different ways to define “trend”.  Discuss the components that impact medical expense trends.

3. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance Top 10 Trend Drivers by Category Contribution to Trend based on Change in PMPM

4. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance Top 10 Trend Drivers by Condition Contribution to Trend based on Change in PMPM

5. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance Different Views of “Trend”  Financial  Net Trend  Payers’ liability  Excludes patients’ out of pocket expenses  Underwriting  Underlying Medical Expense Trend (pulling out business mix components)  Clinical  Allowed Trend  Total provider reimbursement  Payer + Patient liability  Price, Volume and Intensity

6. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance SG UW Wear- off Product Mix Cust/Indy Mix Policy Process Regulatory Intensity/Mix Core Unit Cost / Price Benefit Plan Change Leveraging Baseline Utilization Geographics Workday Health Tech Pipeline Demographics Components of Medical Expense Trend Included in the Ingenix Trend Forecast Model

7. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance Ingenix Trend Forecast Model Sample

8. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance Demographics U.S. Population Pyramids 2000 Male Female Projected 2025 Male Female Unless the U.S. population “pyramid” holds the same shape from year to year, there will be an impact on trend due to demographics.

9. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance Demographics U.S. Population Pyramids 2050 Male Female 2050: And people wonder why we’re so worried!

10. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance Variation by Health Cost Category and Geographic Region Source: TrendAlert TM

11. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance Customer / Industry Mix The impact on Net Trend of One New Group The membership for this new group equaled 1% of the total block of business yet they contributed 40 bps to total net trend in their first year.

12. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance Workday/Calendar Adjustments Considering the experience period and projection period when experience rating, calendar make-up can have a significant impact! PMPM costs are highest on Mondays. Friday costs are the lowest of the regular work week.

13. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance “Consumer” Demand Colonoscopies per 1,000

14. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance “Consumer” Demand Morbid Obesity Admits per 1,000

15. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance Consumer Demand

16. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance Health Technology Pipeline  Be aware of what’s coming down the pipeline.  Proactively manage your business to control unnecessary costs.  What to look for:  New treatments  New devices  New diagnostic tests  Changes in guidelines  Brand name patent expirations  Move from prescription to over-the-counter  Changes in FDA status  New medications

17. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance Pipeline Example: OvaCheck  Test For Ovarian Cancer  Expected Release Date: Q1 2005  Impact Grades in linearly over 4 quarters  Ultimate Utilization: 97 per 1,000  Expected Technology Cost: $165 (off-setting costs: $0)  Peak PMPM: (97*(165-0)/12000) = $1.33  HCC Split: Professional = 20%; Ancillary = 80% Source: Ingenix Health Technology Pipeline TM

18. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance Pipeline Example: Impact of Generics A generic equivalent is introduced to the market. Total scripts reduce slightly. Overall costs decrease significantly.

19. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance Pipeline: Understanding and managing the problem Brave New World, Old-Fashioned Fear: Advances Are Coming At A Furious Rate-- Health Plans Find It Difficult To Separate The Cost-Efficient From The Rest John Carroll, Managed Care Magazine 2/1/2004 Six years ago, the health care economist Michael Chernew concluded from a review of the evidence that the driving force behind rising health care costs was new technology. "It's not increased waste, it's not fraud, it's not increased lawsuits, it's not the fact that people on average are older -- all of that may contribute, but the predominant factor relates to the development and utilization of new medical techniques, of which there are an enormous number," he said in a 1998 study. The University of Michigan professor concluded that “…but the predominant factor relates to the development and utilization of new medical techniques…” New Medical Developments as a whole add significantly to Medical Trend Technologies that increase quality of care and desired outcomes Therapeutic advantage when appropriately applied Therapeutic advantage is unproven ACTION: Restrict or control utilization ACTION: Limit use to appropriate population ACTION: Encourage adoption and incent utilization Pro-actively addressing the impact of new medical technologies could save a 25,000 employee organization $10 million annually $10M $5M $15M $20M

20. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance Core Unit Cost - Price  Models have been developed and are used to assign a value to existing contracts (physician and facility).  Models are populated and forecasts are established using all available information from contract negotiators working directly with the providers.  Outlier provisions and percent of charge contracts leave little protection to contract increases.  Non-par payment rates cause volatility in forecasts.  Mergers and closings result in variability of market share and also impact results.

21. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance Medical Care CPI Rolling 3-Month Averages CPI is a combination of Non Par and Par Revenues. Non Par cost increases are generally higher than Par. Result: Non Par trend impact is likely higher than CPI.

22. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance Cost per Day for Selected Markets Cost per Day varies significantly by geographic market. Contract negotiations also vary. Consider the whole picture!

23. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance Baseline Utilization and Intensity (Mix of Services)  Historical experience is normalized for all other identified trend components.  Regression analyses are performed on units resulting in possible forecasts.  Legislative and economical influences are considered (health care reform, NHE, etc.).  Management initiatives of the client are considered.  Final projections are established using a combination of all information gathered above and pass through an actuarial peer review process.

24. © 2003 Ingenix, Inc. Inside the Black Box: How Actuaries Price Health Insurance Benefit Plan Design Impact of Tier Placement in Rx A drug goes over the counter. In tiered plans, Brand #1 is placed in Tier 3 and Brand #2 is placed in Tier 2.

25. Inside the Black Box: How Actuaries Price Health Insurance Contact Information Lisa F. Tourville, ASA, MAAA Vice President 12125 Technology Drive Eden Prairie, MN 55344 Email: lisa.tourville@ingenix.comlisa.tourville@ingenix.com Phone: 952-833-7559