Health Actuary Pricing

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Health Actuary - Pricing
Purdue University October 29, 2009 Andy Henn,
FSA
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Overview

• Pricing Mile High Level
• In Class Exercise

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Health Pricing Mile High Level
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Cost Drivers of Healthcare Expense

• Product design
• (Declining) Health status of overall population
• Age/gender/occupation/family mix of business
• Geographical location
• General inflation
• Technology Rx research
• Regulation mandated benefits
• Hospitals/Physicians used and reimbursement
  negotiations
• Malpractice
• Fraud/abuse

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Rating Formula

• Expected medical expense per member per month
  (pmpm)
• (1 Trend) 18 21 months
• Administrative Expenses (pmpm)
• Commission (pmpm)
• (1 - Profit or Risk Charge Load )
• Total Premium Needed (pmpm)

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Other Considerations

• Timeline
• Load rates 12/1 for 4/1 effective date
• Experience period ends 7/31 for 4/1 eff. date so
  long lead time required!
• -----------------------------------------
  ------
• 8/1 1/1 8/1 12/1 4/1

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Other Considerations

• Overall desired/needed premium must be met
• If one product is priced below target, then
  another must be priced above target
• Must carefully model/predict market penetration
  of each product
• Excess profits/losses can easily occur
• Called subsidization

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Subsidization Example

• National Nutrition Institute offers 30,000 prize
  to university with largest increase in
  consumption of apples
• PU notices that donuts are preferred over apples
  so they need to persuade students to purchase
  apples ie, price apples lower to change
  selection
• Estimate that 350k increase in of apples will
  win the prize
• Donuts cost 0.50 each and 1.3MM sold per year
• Apples cost 0.40 each and 750k sold per year
• After consulting with the PU Food Service, the
  decision is to lower apples to 0.35 and raise
  donuts to 0.60 to slightly increase overall
  revenue but drive the 350k swing in selection
• New prices drive bigger selection than
  anticipated 550k change and PU RUNS AWAY with
  the 30,000 prize!
• BUT are they really winners?!?

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Apples Vs Donuts
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In-Class Example Time!
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Health Savings Account (HSA) vs. Traditional
Deductible Plan

• Insurer has 2 products (1) HSA (2) 500
  Deductible
• HSA is priced at 100 PMPM with 2 market share
• Traditional 500 deductible at 150 PMPM
• Sales says competitors are lower we need to be
  15 lower on HSA to get market share up to 10
• How should we price the 500 Deductible to
  maintain same overall premium level?
• What is annual revenue shortfall if 13 move to
  HSA and you average 300,000 members for the year?

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STEP 1 Determine Total Premium PMPM
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STEP 2 Determine New 500 PMPM
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STEP 3 Annual Revenue Shortage
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Tips

• Check recheck all assumptions and data
• Model variations to understand possible impact of
  actual results
• Challenge Sales and Underwriting
• Monitor emerging results carefully