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Risk Segmentation in Consumer-Directed Health Plans

Risk Segmentation in Consumer-Directed Health Plans. Wharton – LDI Seminar Series March 26, 2004 John Bertko, F.S.A., MAAA VP and Chief Actuary Humana Inc. Consumer-Directed Health Plans. CDHPs:

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Risk Segmentation in Consumer-Directed Health Plans

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  1. Risk Segmentation in Consumer-Directed Health Plans Wharton – LDI Seminar Series March 26, 2004 John Bertko, F.S.A., MAAA VP and Chief Actuary Humana Inc.

  2. Consumer-Directed Health Plans • CDHPs: • Include a health insurance option that has a health spending account, managed by the consumer member • Provide extensive information on: • Costs of services, providers, treatment options • Available quality data • Trade-offs, using decision-support tools • Frequently require a new HR contribution strategy • Move to “flat contributions” (vs. % of premium contributions) • Provide credits for “buying down” or higher deductions for “buying up” • Require strong top-level support and communications Proprietary and Confidential Information

  3. Common Types of CDHPs • Health Reimbursement Accounts (HRAs) • Accounts are usually “notional” without cash contributions • Roll-over of unused notional dollars allowed, after Treasury ruling in June 2001 • Not generally portable, but some employers allow use for COBRA payments (after termination) or retiree health payments • Spending Accounts • Account available for regular services, before a large deductible • No roll-over, so less expensive • Health Spending Accounts (HSAs) • Enacted under Medicare Act signed in December 2004 • Use cash contributions and are fully portable, if offered with a “High Deductible Health Plan” ($1000 deductible or more) • Likely to be purchased by Individuals and Small Group employers Proprietary and Confidential Information

  4. Humana’s “Smart” Products • Two CDHP Designs Level of Employee Engagement SmartSelectSM Individual Plans “Plan Components” A la Carte Customization of Personal Plans By Key Features SmartSuiteSM Tailored Packages “Component Plans” Different Combinations of Traditional and Consumer Engaged Plans in Each Package Traditional Products HMOPPOIndemnity 1 Premium Costs Co-pays, Deductibles, Co Insurance Levels 2 1 3 2 4 3 Prescription Drug Benefit Levels 7 8 9 5 6 4 Preference Factors -- Drs, Prescriptions, Hospitals 5 FSAs & PCAs • ASO or Fully insured • Has online or offline enrollment • Requires 60-day setup Proprietary and Confidential Information

  5. Humana • Example of One New Plan Design CoverageFirst® -- Spending Account • Provides a $500 benefit allowance for each family member for covered medical expenses prior to satisfying the deductible • Benefit allowance is for in-network services only • Copayments, costs for behavioral health services and prescriptions excluded from the allowance • Deductible applies after $500 benefit is used • Comprehensive PPO coverage aftersatisfaction of the deductible Proprietary and Confidential Information

  6. Risk Segmentation Issues • Overview Part I • Employer “Risk Pools” • Large employers • Typically offer several options -- multiple HMOs and one PPO • Contributions are generally same % of premium • Current segmentation is mainly by delivery system: HMO fans vs. PPO users • CDHPs are likely to initially lead to healthier members choosing the CDHP options while higher use members remain in HMOs/PPOs • If not managed, traditional plans “price tags” may go into a “death spiral” • Employers already do some managing • Total replacement solutions provide cross-subsidies Proprietary and Confidential Information

  7. Risk Segmentation Issues • Overview Part II • Employer Risk Pools • Small Employers (2-50 employees) • Small Group reform laws require • Guaranteed Issue • Restricted rate bands • Most small employers • Insured, under NAIC reform laws • Total replacement, since insurers require this • Provide less of a contribution subsidy • More to employees (50% to 100%) • Sometimes no subsidy for dependents • Owner-driven preferences may: • Lead to healthiest groups choosing CDHPs and low rates • “Book of business” for traditional plans may deteriorate, creating a “book death spiral” under Guaranteed Issue/Renewal Proprietary and Confidential Information

  8. Risk Segmentation Issues • Overview Part II • Individual Health Insurance Pool • Sold on a tightly underwritten basis • Most buyers are very healthy (70% of those applying) • Another 15-20% have pre-existing condition exclusions or premium rate-ups. • Rest are declined, or deterred by knowledgeable agents • Health Savings Accounts may become very popular • Most Individual health policies already have high deductibles • “Healthy and wealthy” may fund higher cost HSAs • “Healthy but not wealthy” may choose cheapest high deductible plans • More segmentation of a highly underwritten market Proprietary and Confidential Information

  9. Humana’s Pilot • Results from a CDHP • SmartSuite was tested on Humana employees and dependents • Year 1 test for 10,000 Louisville employees/dependents • Year 2 became the SmartSelect new product test • Year 2 expansion to 14,000 more outside Louisville employees/dependents • All results shown have pre/post analysis of claims for the members involved Proprietary and Confidential Information

  10. Comments on Enrollment and Segmentation • Year 1 • Brand new concept and product • Communication was intensive, but new to the Humana team • 6% migration to the CDHP was slightly better than competitors at that time (2-5%, as reported during 2001) • Year 2 • “Word of mouth” and better communications effort helped • 20% migration from traditional plans to the CDHP • Contribution strategy • Year 1: mostly a “buydown” that reduced payroll deductions • Year 2: higher cost to stay in traditional plans Proprietary and Confidential Information

  11. Comments on Claims and Segmentation • In both years, prior claims history for CDHP enrollees was much lower than average member • 50% of average in Louisville Year 1 • 55% of average in outside-Louisville Year 2 • In both years, actual experience of CDHP members was considerably lower than the “Expected” (prior claims projected) • About 25% to 35% lower in each case • Implies that CDHP members made choices about how much to spend, where, etc. • Additional detail on other slides Proprietary and Confidential Information

  12. Comments on Risk Stratification • Prior slide indicates cost-sharing results, after decisions made during Year 1 • As expected, the buydown created greater “point of service” cost exposure • Not shown – most of this was offset by significantly reduced payroll deductions • Roughly half of members had an insignificant increase in cost-sharing (average of $15 per year) • Middle expense members (roughly 45% of members) had cost increase of around $100 per year • Highest cost members (only 5% with claims greater than $10,000) reduced their cost sharing by $102/year because they chose the correct option for themselves Proprietary and Confidential Information

  13. SmartSuite • Claims Results • One hundred and twenty-one Smart Product clients to date (as of January 26, 2004) • Analysis of 43 groups • 48,000 members • 3 to 12 months of data • Results are annualized* • Average annualized net claims trend for 43 groups is 7.0% *Annualized results include data through 12/2003 Proprietary and Confidential Information

  14. Questions?

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