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Risk Segmentation in Consumer-Directed Health Plans. Wharton – LDI Seminar Series March 26, 2004 John Bertko, F.S.A., MAAA VP and Chief Actuary Humana Inc. Consumer-Directed Health Plans. CDHPs:

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Risk segmentation in consumer directed health plans

Risk Segmentation in Consumer-Directed Health Plans

Wharton – LDI Seminar Series

March 26, 2004

John Bertko, F.S.A., MAAA

VP and Chief Actuary

Humana Inc.

Consumer-Directed Health Plans

  • 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

Proprietary and Confidential Information

Common Types of CDHPs

  • 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

Proprietary and Confidential Information

Humana’s “Smart” Products • Two CDHP Designs

Level of Employee Engagement


Individual Plans

“Plan Components”

A la Carte Customization of Personal Plans By Key Features


Tailored Packages

“Component Plans”

Different Combinations of Traditional and Consumer Engaged Plans in Each Package

Traditional Products



Premium Costs

Co-pays, Deductibles, Co Insurance Levels







Prescription Drug Benefit Levels







Preference Factors -- Drs, Prescriptions, Hospitals



  • ASO or Fully insured

  • Has online or offline enrollment

  • Requires 60-day setup

Proprietary and Confidential Information

Humana • Example of One New Plan Design

CoverageFirst® -- Spending Account

  • 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 aftersatisfaction of the deductible

Proprietary and Confidential Information

Risk Segmentation Issues • Overview Part I

  • 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

Proprietary and Confidential Information

Risk Segmentation Issues • Overview Part II

  • 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

Proprietary and Confidential Information

Risk Segmentation Issues • Overview Part II

  • 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

Proprietary and Confidential Information

Humana’s Pilot • Results from a CDHP

  • 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

Proprietary and Confidential Information

Comments on Enrollment and Segmentation

  • 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

Proprietary and Confidential Information

Comments on Claims and Segmentation

  • 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

Proprietary and Confidential Information

Comments on Risk Stratification

  • 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

Proprietary and Confidential Information

SmartSuite • Claims Results

  • 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

Proprietary and Confidential Information