1. Actuarial Analysis 101: Profitably Pricing a Healthplan September 10, 2004 John Koelling, A.S.A, M.A.A.A. CIGNA Corporation

2. General Healthcare Financial Cycle Sales and Marketing Members Claims Processing And Reserve Unit Underwriting Pricing

3. What Does The Pricing Unit Do? Sets a price! Sets a price! Forecasts future medical costs Forecasts future medical costs Forecasts future business operating costs Forecasts future business operating costs Ensures profitability? Ensures profitability?

4. Ratemaking Formula + Current Expected Medical Expense + Medical Expense Trend + Adjustments for Plan Design + Adjustments for Contracting Changes + Administration and Operating Expenses + Other Changes + Profit Load (or Risk Charge) Total Premium Needed

5. Drivers of Medical Expense Age Age Sex Sex Occupation Occupation Geographical Location Geographical Location Marital Status Marital Status Medical History Medical History

6. Factors That Impact Medical Trend Technology Technology Inflation Inflation Competition Competition # of Hospitals/Doctors Used # of Hospitals/Doctors Used Customer Group Composition Customer Group Composition

7. Changes in Plan Design Out of Pocket Costs Out of Pocket Costs Services Covered Services Covered Network/Physician Requirements or Exclusions Network/Physician Requirements or Exclusions Pharmacy Covered or Not? Pharmacy Covered or Not? Dental? Vision? Dental? Vision?

8. Question What premium rate (PMPM) should be charged in 2005, to meet desired profitability target? (See handout for data)

9. Solution

10. Lessons Learned Garbage In, Garbage Out Garbage In, Garbage Out Need Smart, Unbiased People! Need Smart, Unbiased People! Always an Educated Guess Always an Educated Guess –Sometimes you win, sometimes you lose Focus on Key Drivers and always KISS Focus on Key Drivers and always KISS

11. Advice Always try to learn as much as you can Always try to learn as much as you can Work hard to add value! Work hard to add value! Seek out career diversity Seek out career diversity Take personal accountability Take personal accountability Always seek feedback, especially NEGATIVE feedback Always seek feedback, especially NEGATIVE feedback

12. Questions? John Koelling John.Koelling@CIGNA.com 860.534.4143