1. Session 6 Emerging Issues In Medical Malpractice PREDICTIVE MODELING Kevin M. Bingham – Deloitte. kbingham@deloitte.com Casualty Actuarial Society Annual Meeting Tuesday, November 16, 2004 12:30 PM – 2:00 PM Montreal, Canada

2. Copyright © 2004 Deloitte Development LLC. All Rights Reserved INTRODUCTION Florida Medical Malpractice Report °www.fldfs.com/companies/pdf/www.fldfs.com/companies/pdf/ Med_Mal_2004_Rpt.pdf Exciting Trends in Patient Safety The Actuary’s Opportunity Goal of Predictive Modeling Predictive Modeling Basics Closing Thoughts

3. Copyright © 2004 Deloitte Development LLC. All Rights Reserved Exciting Trends in Patient Safety

4. Copyright © 2004 Deloitte Development LLC. All Rights Reserved Patient Safety Organizations and Other Sources National Patient Safety Foundation (www.npsf.org)www.npsf.org JCAHO Environment of Care (www.jcaho.org)www.jcaho.org °Environment of Care °National Patient Safety Goals (2005 goals now available) °Root Cause Analysis Medical associations (e.g., American Medical Association - www.ama-assn.org) www.ama-assn.org The Leapfrog Group (www.leapfroggroup.org)www.leapfroggroup.org State patient safety organizations (e.g., Virginia - www.vipcs.org)www.vipcs.org Advancements in computerized physician order entry (CPOE) systems Safety books (e.g., “The Satisfied Patient” – James W. Saxton) Legislative action

5. Copyright © 2004 Deloitte Development LLC. All Rights Reserved Safety and Errors Patient Safety – The prevention of healthcare errors, and the elimination or mitigation of patient injury caused by healthcare errors. Healthcare Error – An unintended outcome caused by a defect in the delivery of care to a patient. Healthcare errors may be errors of: °Commission (doing the wrong thing); °Omission (not doing the right thing); or °Execution (doing the right thing incorrectly). Definitions from the National Patient Safety Foundation (www.npsf.org)

6. Copyright © 2004 Deloitte Development LLC. All Rights Reserved The Actuary’s Opportunity

7. Copyright © 2004 Deloitte Development LLC. All Rights Reserved Medical Malpractice and the Actuary – Current Role Traditional Roles °Pricing °Reserving °Tort Reform The Actuarial Profession’s Challenge °Overcoming the negative perception in the media: “Actuaries focus on quantifying the price to charge a physician, or the amount of damages that must ultimately be paid to a victim, instead of focusing our energy on preventing injuries in the first place.”

8. Copyright © 2004 Deloitte Development LLC. All Rights Reserved Medical Malpractice and the Actuary – Future Role? Shift our Focus Towards the Positive Side of the Medical Malpractice Equation °Increase our involvement in patient safety initiatives °Increase our eminence on the positive side of the healthcare equation Join CPOE efforts Join PSOs Submit articles with a heavier focus on patient safety °Use Predictive Modeling in the U/W process in order to price policies in a manner that promotes patient safety and risk management goals Definitions from www.npsf.org

9. Copyright © 2004 Deloitte Development LLC. All Rights Reserved Goal of Predictive Modeling

10. Copyright © 2004 Deloitte Development LLC. All Rights Reserved Current Perception of Specialty Segmentation Loss Ratio Below average Average Above average 135% 125% 110% 115% 100% 90% 80% 70% 140% Internal data 63% 60% 65% 68% 72% 78% 75% 85% 112% 93% Obstetricians Chiropractors Overall L.R. 75%

11. Copyright © 2004 Deloitte Development LLC. All Rights Reserved Current Perception of Specialty Segmentation 80% 70% 63% 60% 65% Loss Ratio - Chiropractors “All chiropractors are good risks” Low frequency Low severity Low profile (i.e., not making headlines)

12. Copyright © 2004 Deloitte Development LLC. All Rights Reserved Current Perception of Segmentation 135% 125% 140% 85% 112% 93% Loss Ratio - Obstetricians “All OB/GYNs are bad risks” High frequency High severity High profile Dramatic rate increases Leaving state Retiring from practice Cutting back on services

13. Copyright © 2004 Deloitte Development LLC. All Rights Reserved Segmentation of the Future 82 66 58 62 70 74 78 90 135 Overall L.R. 75% 40 Dr. Bob Lesse - Chiropractor Dr. Linda Moore - Chiropractor Predicted Loss Ratio Internal / External Data Predicted Loss Ratio

14. Copyright © 2004 Deloitte Development LLC. All Rights Reserved Segmentation of the Future - The Goal of Predictive Modeling 80% 70% 63% 60% 65% 58 90 Dr. Linda Moore Dr. Bob Lesse “Some chiropractors are good risks, some are bad. Focus U/W dollars on good risks.” Chiropractors “All chiropractors are good risks”

15. Copyright © 2004 Deloitte Development LLC. All Rights Reserved Predictive Modeling Basics

16. Copyright © 2004 Deloitte Development LLC. All Rights Reserved Predictive Modeling Approach

17. Copyright © 2004 Deloitte Development LLC. All Rights Reserved Potential Medical Malpractice Sources

18. Copyright © 2004 Deloitte Development LLC. All Rights Reserved Data Preprocessing & Modeling Data Evaluation °Data Collection/Cleansing °Loss Development °Manual Premium Development °On Leveling °Variable Creation °Univariate Analysis °Data Quality Analysis, Capping, Binning °Correlation Analysis °Training vs. Testing Data °External Data Matching and Related Reports Modeling Approach °Loss Ratio Transformations °Principal Component Analyses °Stepwise Regression, Forward, Backward °Generalized Linear Modeling °Neural Network Applications °CART, MARS Algorithms °Comprehensive Actuarial Review & Analysis °Lift Disruption °Longitudinal Drift °Stability Analysis °Reason Code Distribution °Distribution Analysis (premium, class group, geographic, cross line)

19. Copyright © 2004 Deloitte Development LLC. All Rights Reserved Sample Representation of Model

20. Copyright © 2004 Deloitte Development LLC. All Rights Reserved Predictive Modeling Results in Improved Class Segmentation  There is profitable business in “under performing” classes  There is unprofitable business in “over performing” classes  The models help to identify both situations BetterAveragePoor

21. Copyright © 2004 Deloitte Development LLC. All Rights Reserved Reason Codes Reason Codes identify several traditional / acceptable reasons that will be used for external communications. Reason codes explain 80% to 90% of the resulting policy actions Reason codes hopefully drive change in attitude towards risk management and patient safety

22. Copyright © 2004 Deloitte Development LLC. All Rights Reserved Closing Thoughts Physician owned organizations might not be receptive to Predictive Modeling °Comfort level regarding personal data (e.g., credit scoring) °More focused pricing will certainly increase rates significantly for some physicians (lowering rates for others) Patient safety – “It’s time for actuaries to begin focusing more of our efforts on preventing injuries in the first place.”

23. Copyright © 2004 Deloitte Development LLC. All Rights Reserved Closing Thoughts Kaiser Family Foundation Media Advisory for November 17, 2004 “NEW SURVEY ASSESSES PUBLIC'S VIEWS ON HEALTH CARE QUALITY FIVE YEARS AFTER LANDMARK REPORT ON MEDICAL ERRORS”