Actuarial Analysis 101: Profitably Pricing a Healthplan

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Actuarial Analysis 101Profitably Pricing a
Healthplan

• September 10, 2004
• John Koelling, A.S.A, M.A.A.A.
• CIGNA Corporation

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General Healthcare Financial Cycle
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What Does The Pricing Unit Do?

• Sets a price!
• Forecasts future medical costs
• Forecasts future business operating costs
• Ensures profitability?

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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

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Drivers ofMedical Expense

• Age
• Sex
• Occupation
• Geographical Location
• Marital Status
• Medical History

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Factors That Impact Medical Trend

• Technology
• Inflation
• Competition
• of Hospitals/Doctors Used
• Customer Group Composition

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Changes in Plan Design

• Out of Pocket Costs
• Services Covered
• Network/Physician Requirements or Exclusions
• Pharmacy Covered or Not?
• Dental? Vision?

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Question

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

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Solution
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Lessons Learned

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

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Advice

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

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Questions?

• John Koelling
• John.Koelling_at_CIGNA.com
• 860.534.4143