Texas State Planning Grant Conference January 31 – February 1, 2002 The Economics of Health Insurance Tim D. Lee, FSA, MAAA Milliman USA Houston TX (713)

Milliman USA Source: Milliman USA Health Cost Guidelines The Economics of Health Insurance Where Does the Premium Go? What Drives the Cost of Medical Care? How Do Insurance Companies Determine Their Premium Rate?

Milliman USA Source: Milliman USA Health Cost Guidelines Where Does the Premium Go? 100 Employee Group Medical Claims, Administrative Expense & Profit 80% 20%

Milliman USA Source: Milliman USA Health Cost Guidelines Where Does the Premium Go? 100 Employee Group Break-down of Medical Claims 20% 5% 15% 30%

Milliman USA Where Does the Premium Go? 100 Employee Group Break-down of Administrative Expense & Profit 7% 5% 3% 2%

Milliman USA Source: Milliman USA Health Cost Guidelines Where Does the Premium Go? 100 Employee Group Break-down of Medical Claims, Administrative Expense & Profit 20% 80%

Milliman USA Where Does the Premium Go? Small Group vs. Medium Group vs. Large Group $168 $160 $72 $40 $20 70% 30% 20% 80% 8.3% 91.7%

Milliman USA Where Does the Premium Go? Individual Insurance 60% 40%

Milliman USA Where Does the Premium Go? Individual vs. Small Group vs. Medium Group vs. Large Group 60% 40% 70% 30% 80% 20% 91.7% 8.3%

Milliman USA Where Does the Premium Go? Conclusions: Premium is primarily driven by the cost of medical claims. Administrative costs are relatively minor and inflexible. Portion spent on administration shrinks as groups get larger. Insurer profits are a very small piece of the total premium.

Milliman USA What Drives the Cost of Medical Care? Type of Service Used Frequency of Use (Utilization) Provider’s Charge for Service

Milliman USA Source: Milliman USA Health Cost Guidelines Sample Costs Per Member = = = x x x $350$507.0 prescriptions Pharmacy $180$603.0 visitsPhysician Visits $750$2,500.3 daysInpatient Hospital Annual Cost Charge Per Service Annual Utilization Type of Service

Milliman USA New Types of Services

Milliman USA Source: Milliman USA Health Cost Guidelines How Do Medical Costs Vary By Age and Gender? Annual Average = $2,600 Per Member AgeMaleFemale 0 – 1$3,600 2 – 18$1, – 29$1,150$2, – 39$1,600$2, – 49$2,500$3, – 59$4,600$5, – 65$7,500$6,900

Milliman USA Source: Milliman USA Health Cost Guidelines How Do Medical Costs Vary By Age and Gender? AGE

Milliman USA Source: Milliman USA Health Cost Guidelines How Do Medical Costs Vary By Geographic Area? National Annual Average = $2,600 Per Member $2,160Wichita Falls $2,240Ft. Worth $2,340El Paso $2,550Dallas $2,630Houston $2,800Tyler $3,040Galveston AmountArea

Milliman USA Source: Ingenix MDR Payment System How Do Medical Costs Vary By Provider? $3,188$2,031 Cataract Removal CPT $3,629$2,117 Septoplasty CPT Hospital Outpatient $7,092$6,326 Coronary Artery Bypass CPT $56$43 Office Visit CPT Physician 75 th Percentile 25 th Percentile Service 2001 Charges in Austin/San Marcos

Milliman USA Source: Milliman USA Health Cost Guidelines Indemnity PlanHMO Plan How Do Medical Costs Vary By Benefit Plan? Plan Benefits = 79% of ChangesPlan Benefits = 93% of Charges Plan Benefits = 79% of Charges

Milliman USA Source: Milliman USA Health Cost Guidelines How Do Medical Costs Vary By Insurance Product? Inpatient Hospital Costs Per Member = = = x x x 60%$300$1,500.2 days Discounts and Utilization Management (HMOs) $450 $750 Annual Cost $1,500 $2,500 Charge Per Service 40%.3 daysDiscounts (PPO) 0%.3 days Unmanaged Savings Annual Utilization Type of Delivery System

Milliman USA Source: Milliman USA Health Cost Guidelines How Does Underwriting Affect Medical Costs? Policy Year

Milliman USA Source: Health Care Financing Administration, Office of Information Services: Data from the Medicare Decision Support System; data development by the Office of Strategic Planning. Why Do Insurers Underwrite? Percent Distribution of Medicare Persons Served and Program Payments Under Medicare: CY 1997 $29.8 Million Persons Served $175.4 Billion in Program Payments $25,000 or More $10,000-$24,999 $5,000-$9,999 $2,000-$4,999 $500-$1,999 $1-$499 $25,000 or More $10,000-$24,999 $5,000-$9,999 $2,000-$4,999 $500-$1,999 $1-$ % 9.4% 8.3% 13.8% 26.4% 36.0% 50.1% 26.5% 10.2% 1.2% Percent of Persons Served Percent of Program Payments 4.7% 7.3%

Milliman USA How Do Insurance Companies Determine Their Premium Rate? Estimate Medical Costs Using Some Objective Criteria: Product (Indemnity, PPO, HMO) Plan Benefits Age Gender Geographical Area

Milliman USA How Do Insurance Companies Determine Their Premium Rate? Estimate Medical Costs Using Some Objective Criteria: Product (Indemnity, PPO, HMO) Plan Benefits Age Gender Geographical Area Adjust the Estimate for Underwriting Information (Objective and Subjective)

Milliman USA How Do Insurance Companies Determine Their Premium Rate? Estimate Medical Costs Using Some Objective Criteria: Product (Indemnity, PPO, HMO) Plan Benefits Age Gender Geographical Area Adjust the Estimate for Underwriting Information (Objective and Subjective) Add Expected Administrative Expenses and Profit Product Group Size

Milliman USA The Economics of Health Insurance Summary Premiums Are High Because the Cost of Medical Care is High Some Administrative Cost Savings Possible For Small Groups; But Not a Significant Impact On Affordability Expected Cost of Medical Care Can Vary Significantly Among Small Groups; That’s Why Premiums Will Vary Among Groups To Make Premiums Affordable, Focus On The Cost of Medical Care