Risk Segmentation in Risk Segmentation in Consumer-Directed Health Consumer-Directed Health

PlansPlans

Wharton – LDI Seminar SeriesWharton – LDI Seminar SeriesMarch 26, 2004March 26, 2004

John Bertko, F.S.A., MAAAJohn Bertko, F.S.A., MAAAVP and Chief ActuaryVP and Chief Actuary

Humana Inc.Humana Inc.

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• 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

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Consumer-Directed Health Consumer-Directed Health PlansPlans

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• 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

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Common Types of Common Types of CDHPsCDHPs

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Level of Employee Engagement

Traditional ProductsHMOPPO

Indemnity

SmartSuiteSM

Tailored Packages“Component Plans”

Different Combinations of Traditional and Consumer

Engaged Plans in Each Package

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1 Premium Costs

Co-pays, Deductibles, Co Insurance Levels

Prescription Drug Benefit Levels

Preference Factors -- Drs, Prescriptions, Hospitals

SmartSelectSM

Individual Plans“Plan Components”

A la Carte Customization of Personal Plans By Key

Features

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5 6 7 8 9

5 FSAs & PCAs• ASO or Fully insured• Has online or offline enrollment• Requires 60-day setup

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Humana’s “Smart” Products • Two CDHP Humana’s “Smart” Products • Two CDHP DesignsDesigns

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• 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 after satisfaction of the

deductible

CoverageFirstCoverageFirst®® -- Spending Account -- Spending Account

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Humana • Example of One New Plan Humana • Example of One New Plan DesignDesign

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• 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

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Risk Segmentation Issues • Overview Risk Segmentation Issues • Overview Part IPart I

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• 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

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Risk Segmentation Issues • Overview Risk Segmentation Issues • Overview Part IIPart II

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• 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

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Risk Segmentation Issues • Overview Risk Segmentation Issues • Overview Part IIPart II

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• 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

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Humana’s Pilot • Results from a Humana’s Pilot • Results from a CDHPCDHP

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• 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

Comments on Enrollment and Comments on Enrollment and SegmentationSegmentation

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• 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

Comments on Claims and Comments on Claims and SegmentationSegmentation

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• 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

Comments on Risk Comments on Risk StratificationStratification

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• 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

SmartSuite • Claims SmartSuite • Claims ResultsResults

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Questions?