Inside the Black Box: How
Actuaries Price Health
Insurance
Academy Health Annual Research
Meeting
June 8th 2004
Lisa F. Tourville, ASA, MAAA
Vice President
Agenda

Discuss historical drivers of trend.

Discuss the different ways to define “trend”.

Discuss the components that impact medical expense
trends.
Inside the Black Box: How Actuaries Price Health Insurance
© 2003 Ingenix, Inc.
Inside the Black Box: How Actuaries Price Health Insurance
Poorly Diff.
Neoplasms
Skin/Mucus
Surg-Mult.
DRGs
Nervous
System
Resp.
System
Digestive
System
Newborns
Kid and Urin
Tract
Pharmacy by Therapeutic Class
Contraceptives
Autonomic
Gastro
Hormones
Psychother.
Anti-Inf
Outpatient by Service Category
Preg;
Childbirth
Musc; Conn.
Tissue
Circ. System
Cardiology
E.R. Med.
Chiropractic
OB Gyn
Orthopedics
Pediatrics
Internal Med.
Fam/Gen Prac
Hem. and Onc.
Anesthesiology
Physician by Specialty
Cardio
Cen. Nerv.
Unclassified
Dialysis
DME;
Supplies
Clinical Lab
Observation
Lab & Path
Rx - Facility
Misc OP
Facility
E.R.
Radiology
OP Surg
Top 10 Trend Drivers by Category
Contribution to Trend based on Change in PMPM
Inpatient by Major Diagnostic Category
© 2003 Ingenix, Inc.
Inside the Black Box: How Actuaries Price Health Insurance
Chronic renal
failure
Sprains and
strains
Myocardial
Infarction
Breast cancer
Abdominal
pain
Arthritis
Maintenancy
chemotherapy
Liveborns
Ischemic heart
disease /
chest pain
Low back pain
Top 10 Trend Drivers by Condition
Contribution to Trend based on Change in PMPM
© 2003 Ingenix, Inc.
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
Inside the Black Box: How Actuaries Price Health Insurance
© 2003 Ingenix, Inc.
Product Mix
SG UW Wearoff
Cust/Indy Mix
Geographics
Benefit Plan
Change
Demographics
Health Tech
Pipeline
Components of Medical
Expense Trend
Included in the Ingenix
Trend Forecast Model
Leveraging
Baseline
Utilization
Workday
Core Unit Cost
/ Price
Regulatory
Policy Process
Inside the Black Box: How Actuaries Price Health Insurance
Intensity/Mix
© 2003 Ingenix, Inc.
Ingenix Trend Forecast Model
2000
Member Months
2001
2002
2003
2004
2005
4,532,024
4,902,426
4,044,900
3,158,935
2,992,874
2,967,328
13.1%
14.3%
13.6%
9.5%
11.9%
10.8%
2.1%
0.0%
0.2%
0.0%
0.0%
-1.7%
0.5%
2.0%
0.0%
0.0%
0.0%
-0.4%
-1.5%
0.1%
1.2%
0.0%
-0.1%
0.1%
-1.9%
-1.8%
-2.5%
-1.1%
0.0%
-0.1%
0.0%
-0.6%
-3.5%
1.2%
0.0%
-0.3%
0.0%
0.0%
-3.2%
1.2%
0.0%
-0.1%
0.1%
0.0%
-3.2%
-5.1%
-2.2%
-2.1%
4.8%
5.3%
0.2%
0.6%
0.0%
0.0%
-0.1%
6.3%
5.7%
0.0%
0.7%
0.0%
0.0%
0.1%
5.3%
8.2%
0.4%
1.1%
0.2%
0.0%
-0.1%
0.5%
7.1%
3.3%
1.0%
0.2%
0.0%
0.0%
2.3%
6.0%
1.3%
0.9%
0.2%
0.1%
0.6%
3.4%
4.7%
1.4%
0.8%
0.2%
0.0%
-0.5%
Core Trend Total
11.2%
13.3%
15.8%
12.5%
11.7%
10.3%
Net Trend Total
11.8%
13.4%
12.8%
6.8%
9.2%
8.0%
Allowed Trend
PROFILE OF NET TREND
Business/Product Mix Components
Demographics
Geographic Mix
SG UW Wear-Off
Product Mix
Customer/Industry/Other Mix
Benefit Plan Changes
Business/Product Mix Total
Core Trend Components
Core Utilization (Includes Health Tech.)
Core Unit Cost
Mix of Services (Includes Health Tech.)
Leveraging
Regulatory Mandates
UHG Policy/Process Changes
Work/Calendar Day Adjustments
Inside the Black Box: How Actuaries Price Health Insurance
© 2003 Ingenix, Inc.
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.
Inside the Black Box: How Actuaries Price Health Insurance
© 2003 Ingenix, Inc.
Demographics
U.S. Population Pyramids
2050
Male
Female
2050: And
people wonder
why we’re so
worried!
Inside the Black Box: How Actuaries Price Health Insurance
© 2003 Ingenix, Inc.
Variation by Health Cost Category
and Geographic Region
Source: TrendAlertTM
Inside the Black Box: How Actuaries Price Health Insurance
© 2003 Ingenix, Inc.
Customer / Industry Mix
The impact on Net Trend of One New Group
13.0%
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.
12.5%
12.0%
11.5%
Including
Excluding
11.0%
10.5%
10.0%
9.5%
Q1
Inside the Black Box: How Actuaries Price Health Insurance
Q2
Q3
© 2003 Ingenix, Inc.
Workday/Calendar Adjustments
1.5%
PMPM costs are highest on
Mondays. Friday costs are
the lowest of the regular
work week.
1.0%
0.5%
0.0%
-0.5%
Inside the Black Box: How Actuaries Price Health Insurance
Considering the experience
period and projection period
when experience rating,
calendar make-up can have a
significant impact!
2005q1
2004q1
2003q1
2002q1
2001q1
2000q1
1999q1
1998q1
-1.5%
1997q1
-1.0%
© 2003 Ingenix, Inc.
“Consumer” Demand
Colonoscopies per 1,000
Inside the Black Box: How Actuaries Price Health Insurance
© 2003 Ingenix, Inc.
“Consumer” Demand
Morbid Obesity Admits per 1,000
Inside the Black Box: How Actuaries Price Health Insurance
© 2003 Ingenix, Inc.
Consumer Demand
Inside the Black Box: How Actuaries Price Health Insurance
© 2003 Ingenix, Inc.
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
Inside the Black Box: How Actuaries Price Health Insurance
© 2003 Ingenix, Inc.
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%

2004
PMPM
$
-
Change in PMPM
Medical Trend Impact1
(estimated PMPM = $160)
1
2005
2006
2007
$
0.83
$
1.33
$
$
0.83
$
0.50
$
0.5%
0.3%
1.33
0.0%
2008
$
$
1.33
0.0%
Impact on professional and facility allowed costs (excludes pharmacy)
Source: Ingenix Health Technology PipelineTM
Inside the Black Box: How Actuaries Price Health Insurance
© 2003 Ingenix, Inc.
Pipeline Example:
Impact of Generics
A generic equivalent is
introduced to the market.
Total scripts reduce slightly.
Overall costs decrease
significantly.
140
$ 0.90
120
$ 0.80
100
$ 0.70
80
$ 0.60
$ 0.50
60
$ 0.40
40
$ 0.30
PMPM
Scripts per 1,000
$ 1.00
$ 0.20
20
$ 0.10
0
$ 0.00
Generic Scripts
Inside the Black Box: How Actuaries Price Health Insurance
Brand Scripts
Combined PMPM
© 2003 Ingenix, Inc.
Pipeline: Understanding and
managing the problem
New Medical Developments as a whole
add significantly to Medical Trend
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
$20M
ACTION: Encourage
adoption and incent
utilization
Therapeutic advantage
when appropriately
applied
ACTION: Limit use to
appropriate population
Therapeutic advantage
is unproven
ACTION: Restrict or
control utilization
$15M
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.
Technologies that
increase quality of care
and desired outcomes
$10M
$5M
The University of Michigan professor concluded that
“…but the predominant
factor relates to the
development and utilization
of new medical
techniques…”
Inside the Black Box: How Actuaries Price Health Insurance
Pro-actively addressing the impact
of new medical technologies could
save a 25,000 employee
organization $10 million annually
© 2003 Ingenix, Inc.
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.

Inside the Black Box: How Actuaries Price Health Insurance
© 2003 Ingenix, Inc.
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.
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
Dec-03
Sep-03
Jun-03
Mar-03
Dec-02
Sep-02
Jun-02
Mar-02
Dec-01
Sep-01
Jun-01
Mar-01
Dec-00
Sep-00
Jun-00
Mar-00
Dec-99
Sep-99
Jun-99
Dec-98
Sep-98
Jun-98
0.0%
Mar-99
2.0%
Rolling Quarters
Physician
Hospital
Inside the Black Box: How Actuaries Price Health Insurance
IP Host
OP Hosp
Pharmacy
Adj'd Med CPI
© 2003 Ingenix, Inc.
Cost per Day for Selected Markets
$3,100
$2,900
$2,700
11.1%
Trend Percentages
appear on the top of
each bar.
8.4%
19.4%
15.4%
$2,500
21.6%
12.2%
2004
$2,300
2003
$2,100
$1,900
17.4%
9.1%
$1,700
$1,500
Cost per Day varies
significantly by geographic
market. Contract negotiations
also vary.
Market A Market B Market C Market D Market E Market F Market G Market H
Consider the whole picture!
Inside the Black Box: How Actuaries Price Health Insurance
© 2003 Ingenix, Inc.
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.
Inside the Black Box: How Actuaries Price Health Insurance
© 2003 Ingenix, Inc.
Benefit Plan Design
Impact of Tier Placement in Rx
60%
55%
A drug goes over the
counter. In tiered plans,
Brand #1 is placed in Tier 3
and Brand #2 is placed in
Tier 2.
50%
45%
40%
35%
30%
25%
Brand #1 - Tiered Plan
Brand #1 - Open Plan
Inside the Black Box: How Actuaries Price Health Insurance
Brand #2 - Tiered Plan
Brand #2 - Open Plan
© 2003 Ingenix, Inc.
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.com
Phone: 952-833-7559