1 pricing medical insurance individual and group meeting-cum-seminar on preparedness towards...
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Pricing Medical InsuranceIndividual and Group
Meeting-cum-Seminar on Preparedness Towards De-tariffing in Non-life Insurance
Hyderabad, March 14, 2006
Edgar P Balbin, Senior Manager, BearingPoint
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Setting Premiums for Medical Insurance
A. Overview: The rate analysis process
B. Individual Medical
C. Large Group Medical
a. Prospective
b. Retrospective
c. Administrative services only
D. Summary of Key Concepts
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Overview. Rate Analysis Process
The premium rates, plus investment income earned on invested premiums, needs to generate adequate revenues to cover expenses and meet company margin requirements.
Revenue and expenses will both depend on the nature and characteristics of the population being insured.
Premium calculation must include an analysis of the claims costs plus expenses appropriate to the population to be insured.
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Individual Medical Insurance
Type of Individual Medical
Community Rating (uni age, uni sex)
Guaranteed Issue (uni-health)
Underwritten. rates vary by age, sex, health condition, some applicants are rated substandard, perhaps 10-15% are turned down.
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Rate Analysis Process for Individual Medical
Costs and Expenses are:
Policyholder Claims
Administration costs
Agent Broker Costs
Taxes and Fees
etc.
So in health insurance the actuary spends a lot of his/her time analyzing likely future claims costs levels for the insured population.
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Rate Analysis Process – 5 step process
1. Look at Past Experience – for claims, premiums and expenses
2. Restate past premium to reflect expected rate levels.
3. Project past claims into the future to reflect trends and changes in policy design.
4. Compare projected versus desired
5. Apply regulatory limits
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Step 1. Look at Past Experience
What Happened?
Suppose 2005 results were:
Premiums earned 1.08 crore Rs
Claims incurred 1.20 crore Rs.
Loss Ratio 111%
crore = $220,000 and about $1 million purchasing power equivalent.
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Always use:
Earned premium
NOT collected or paid.
Earned = Collected + change in reserve for unexpired risk (unearned premiums reserve)
Incurred Claims
NOT paid.
Incurred Claims = Paid + increase in case reserves + increase in IBNR
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If data is poor?
Use Data on similar blocks of business
Buy a rate manual. Both Tillinghast and M&R have rate manuals applicable to U.S.
Miscellaneous Data sources Government
Other vendors
Sometimes data from other countries might be helpful. (“Rate relativities” by age and sex can be useful. For example, U.S. rates for males increase 4 times between age 20 & 60, and females increase 3 times). Male rates are slightly lower than females at ages 20-55 and slightly higher at 55-64.)
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Actuarial Help
The M&R and Tillinhast manuals apply to U.S. but the actuarial consulting firms have branch offices in other countries.
www.soa.org has data on health insurance.
World health organization has statistics on many countries.
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Basic Actuarial Formula
Pricing on medical insurance is usually done on Rs. “per member per month” PMPM.
For individual insurance the members include family members. (Children might be estimated using 2-3 children per family policy)
Formula: Annual Cost for 1000 members = # procedures per 1000 members x average charge per service
PMPM = annual cost for 1000 members / 12,000
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Example of computation.
1000 people average 224 hospital inpatient days per year Cost per day 2500 Rs.
PMPM = 224 * 2500 Rs / 12,000 = 46.67 Rs
1000 people average 8750 prescriptions per year Cost per prescription 280 Rs
PMPM = 8750 * 280 Rs / 12000 = 204.20 Rs PMPM
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“Utilization” needs to be defined
If you have 1000 members and someone tells you their utilization is 58, what does this mean?
58 members had surgery
58 surgical procedures were performed
58 members submitted their claim
58 claims received
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Definition of Benefit Amount
Some benefits are fixed – so many Rs per day in a hospital
Some benefits are tied to charges
billed charges
allowed charges
— sometimes another carrier is primary
— certain individuals are not covered
— some fees are in excess of the negotiated price
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Step 2. Restate premium to current level
Suppose: average annual premium = 1080 Rs
average claim = 1200 Rs
average expense = 200 Rs.
desired profit = 50 Rs
We are short 370 Rs.
But 1st six months average premium 480 Rs and 2nd six months average premium 600
Versus the 1200 annualized premium we are short only 250 Rs.
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Step 3. Project past claims
Look at
claim trends
policy changes
population changes
durational effects (for small group and individual)
“leveraging effect” of deductibles.
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Step 3. Applying Trend
Suppose Claims in Year 2004 are 1000 Rs /policy
Suppose claim costs increase at 10%.
We want to project claims to Year 2006.
From midpoint to midpoint we have 2 years
Projected Cost increase = 1.10 ^ 2 = 1.21 or 1210 Rs /policy
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Step 3. Leveraging effect of deductibles
Suppose claim before deductible of 100 Rs was 1000 Rs.
After two years claim before deductible is 1221.
Suppose deductible remains at 100 Rs.
Then costs increase from 900 Rs to 1121 Rs which is 24.55% not 21.1%
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Duration of a policy
Newly underwritten policies are “select”
Claim costs increase by duration for same attained age
Durational effects very important on life insurance and important on health insurance
(Life Insurance: selection last 15-25 years. 1st year select rates could be 30-40% of “ultimate” rates)
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Loss Ratios are affected by the durational effects
Suppose premium = 1000 Rs
First year claims = 650 Rs
Second year claims = 850 Rs
Third year claims = 950 Rs.
Fourth year claims = 1000 Rs.
The loss ratio first year is 65%, but the company needs to charge 1000 Rs to cover 4th & later claims
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Step 4. Compare projected versus desired
Once rates are determined one can apply them to the existing inforce to see if they cover past claims and projected future claims.
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Step 5. Apply regulatory constraints
Regulatory constraints include
Guaranteed renewability
Sometimes mandated benefits
Most individual health premium are “risk rated” premiums vary by age, sex and health
Sometimes Community rated (uni-age, uni-sex)
Sometimes Guaranteed Issue (uni health; take the sick)
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Underwritten Policies or “risk rating”
Premiums vary by age, sex and health condition.
Premium vary by area and family composition (as in community rating)
Many individual health policies are “guaranteed renewable” – price may go up with attained age and medical inflation but the insurer cannot cancel
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Sample Variation by Age and Sex.Connecticut Premiums .
age Co. X
Male
Co. X
Female
Co. Y
Male
Co. Y
Female
60 457 432 499 320
55 346 261 349 253
45 204 207 200 186
35 145 167 127 158
25 110 146 91 120
20 110 146 77 109
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M&R costs – relative costs
Male Female
60 170 200
55 150 160
45 70 100
35 55 80
25 50 70
20 50 70
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Community Rating
Rates are same by age and sex.
Those over 65 are excluded – covered by other insurance.
Rates vary by area
Rates vary by family composition:
single, 2 adults, 1 adult + children, family
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Guaranteed Issue
Policy must be issued to all that apply.
Typically pre-existing conditions are covered after 6-12 months.
May have greater effect on increasing rates than than community rating
Community Rating and Guaranteed issue was employed by some Blue Cross plans in 1930s 1940s
Community rating and guaranteed issue do not work well in voluntary markets
Younger and healthier just don’t buy policies
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Example Community Rating and Guaranteed Issue New York City monthly rates
Co. X
HMO
Co. X
POS
Co.Y
HMO
Co. Y
POS
Individual 671 809 583 1022
Husband/Wife 1341 1617 1166 2044
Parent & Child
1187 1431 1137 1993
Family 1994 2403 1749 3066
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Example Guaranteed Issue premiums but vary by age and sex, Aetna New Jersey Basic & Essential Plan
Age band Male Female
Under 30 638 (542 child) 1153 (542 child)
30-34 834 1153
35-39 1030 1153
40-44 1226 1165
45-49 1423 1226
50-54 1619 1337
55 up 1815 1472
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More Details on Pricing Underwritten Policies
For each sex separately determine the claim cost for each age group
Interpolate between the various ages
For example, suppose average claim rates are:
male, age group 40-49 = 204 Rs /month
male, age group 30-39 = 145 Rs/month
male, age group 20-29 = 110 Rs /month
For age 45 use 204 Rs; age 35 use 145 Rs; age 25 use 110 Rs;
For other ages use a linear or quadratic interpolation method.
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Example of durational factorsPercentage of duration 5
Duration Underwritten Open enrollment with pre ex
1 65 80
2 85 160
3 95 130
4 100 110
5 100 100
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Potential rating factors
Age
Sex
Area
Medical History
Smoker / Non smoker
Occupation
- be aware of the duration effects
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Rating
Individual medical - usually by attained age
Individual disability income – usually by issue age
Community rate (uni age, uni sex)
younger persons may drop out
Guaranteed Issue (uni – health)
healthier and younger persons may drop out
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Substitutional Effectsfrom community rating and guaranteed issue
younger persons might migrate to HMO which have gate keepers.
younger persons might go for a higher deductible
healthier persons may for “association groups”
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LARGE Group
Sometimes defined as more than 100 employees and sometimes more than 50 employees
If families are covered, the number of members might be double the number of employees
Usually the employer subsidizes the employee – to encourage participation
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Pie Chart Group Health 1999 data
Life-health Property-Cas.
Loss Ratio 77.84% 82.20%
Commission 5.84% 9.98
General Expense 13.68 10.87
Taxes & Fees 2.34 1.21
Combined Ratio 105.43 104.27
Earned Premium $71,151 mil $9,953 mil
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Investment Income
Investment income was about 4-5% -- which meant the companies broke even on group health
The group health includes group LTD, dental, vision, as well as group medical.
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Definitions and Goals
A. Group Insurance Characteristics
B. Key Principles
C. Large Group
D. Basic Goals for premium rating
E. Alternative methods for premium rating
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A. Group Insurance Characteristics
Insurance sold to a group covering its members
Most groups are employer groups
Rules are established to determine
Eligible members to be covered
Amounts of coverage
The group is intended and expected to produce a cross section of risks
Some are very healthy, others are not
Employers often screen new employees for health risks.
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B. Key Purpose of Group Insurance
The group was formed for purposes other than insurance
A large proportion of the eligibles are enrolled
Cost of insurance to each member is low relative to the value
Employer groups usually subsidize the cost
Transaction costs are minimized
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C. Large Group Characteristics
Groups is of sufficient size that individual medical underwriting is not needed or used.
Rating often considers the actual experience (claim cost) of the group.
Definition of large group
current (US) over 50 employees
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D. Basic Goals for Pricing the Group
Have adequate premium to cover
claim cost
operating expenses (commissions, enrollment, loss adjustment, taxes)
profit Margin
Stable rates and predictable gains new lives stabilize the experience
Competitive
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D. Basic Goals con’t.
Acceptable rate variations year to year
appropriate for group
explainable
stable over time
equitable
meet legal and regulatory requirements
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E. Pricing the Group
The initial price set by the insurance company might be based on a census by age, sex, area, even smoking class
Renewal rates might be based on experience
Very large groups often “self insure” most or all of the risk
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E. Type of Pricing
1. Prospective
2a. Retrospective
2b. “Dividend” or Bonus Plan
3. Administrative Services only
4. “Defined contribution”
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E. Pricing – seldom used
Community rating (uni age, uni sex)
Only variations by
benefit levels
geographic areas
family composition (single, 2 adults, 1 adult and children, family)
Problem: anti-selection
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1. Prospective Experience Rating
The projection of future experience is based on the group’s actual past experience
Use to set up rates
Past experience might be modified to remove “one shot” claims and for “credibility”
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2a. Retrospective Rating
The employer is charged
a basic premium plus say 120% of claims subject to a minimum and maximum charge
Certain claims might be excluded
The 20% of claims covers loss adjustment expenses
The basic premium covers the cost of the maximum premium charge plus the cost of excluding certain claims
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2b. “Dividend Plan”
The insurance company charges a premium up front
If experience is very good, then the group receives a bonus – also called an “experience refund” or a “dividend”
Sometimes the dividend is discretionary with the company
Dividend plans are common on workers compensation and sometimes used on group health
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3. Administrative Services Only
Very large groups might self insure and pay almost 100% of their own claims
ASO may be provided by a health insurance carrier
Sometimes ASO agreements carrier XL cover and/or provide “catastrophe” to the self-insured employer plan.
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4. Consumer Directed Plans
Health Reimbursement Accounts (HRA)
Health Savings Accounts (HSA)
The traditional group plan was a “defined benefit” plan
The newer versions are sometimes called “defined contribution” plans
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4. HSA policies
Under an HSA plan the employer gives each employee some funds which can be used to individual covers
buy wellness and diagnostic cover
buy a catastrophic plan (2500 to 5000 deductible for an individual)
fund a “health savings account” (about $2000) to cover the costs under the deductible.
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4. HRA
The employer earmarks some funds for each employee
Those that do not use medical services are typically allowed to roll the excess over into future years
The HRA fund remains with the employer when the employee leaves, while the HSA and the high deductible policy belong to the employ
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Indian version of HSA
A new drug program provides the poor with a passbook in which to buy drugs
The government funds the passbook each year
The person suffers if he/she is overcharged
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Tax policy is important
Employer group health coverages were deductible by the corporation and not taxable to the employee
The advantage (US tax model) is about 50.3%
tax rate federal Alternative minimum = 28%
tax rate state = 7%
Social Security = 15.3%
Total 50.3%
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India taxation
Employer deduction (section 36(1)(ib)
Some individual deductions 80D, 80DD, 80DDB – maximum limit from 10,000 Rs to 60,000 Rs.
Fringe benefit proxy tax applies to certain fringes, some of which have a “health benefit”.
Service tax (over 10%) on non life insurance premiums.