Lessons Learned — US Health Care Experience Perspectives from an Actuary

1. Lessons Learned — US Health Care ExperiencePerspectives from an Actuary Anna M. Rappaport, F.S.A. 18 February 2003

2. Focus: US Healthcare System andThe Role We Play

3. Agenda  Environment Observations Lessons Learned What Next?

4. Some individual coverage, but expensive and hard to get if in poor health Over 40 million uninsured Americans EnvironmentUS sources of coverage Private Government Insurance & HMOs • Employer plans finance most health care for employed • About 45% of care is government financed • Medicare: Americans over age 65 • Medicaid: Poor - low assets and income • Military and some veterans • Government employees • Risk transfer • Administration

5. EnvironmentHow US health care is financed Private Common to both Medicare • Range: fully insured to self insured • Fee for service replaced by negotiated arrangements; e.g., fee schedules, discounts • Fee for service = traditional method of payment • Some providers take risk • HMOs paid on capitation basis - $/per month/per person covered • Physician groups, hospital systems also can be capitated • Traditional plans; Physicians paid based on schedules, fixed payment to hospitals based on diagnosis • Medicare + choice = risk contract

6. EnvironmentForces driving health care in the US More new technologies Consolidation Aging workforce Most savings maximized Prescription drug costs Employee contributions decrease Many providers unprofitable, unstable Medical errors

7. EnvironmentPrevention vs. cure Methods of Payment TreatmentSettings Types ofPractitioners CareGuidelines Decision Making and Information

8. EnvironmentCanada, UK health systems • Discussions with users shows • Diversity of opinion • Some feel systems are great, others feel they are not doing well • Government provided coverage for all • Resource strains on both systems • Wait for care can be considerable • Private supplemental benefits are provided in addition to government system (supplemental benefits are growing) Mercer Human Resource Consulting

9. EnvironmentSociety of Actuaries: troubled health care project - why? PENSION HC PAY

10. 14% 10% 9% 8% 7% 7% 7% 6% EnvironmentHealth care as a percentage of GDP Source: Table 1333, 2001 Statistical Abstract of the United States 16% 14% 12% 10% 1980 8% 6% 1998 4% 2% 0% U.S. Canada Japan U.K.

11. U.S. Canada Japan U.K. H.K. 1994 1995 1996 1997 1998 EnvironmentHealth care as a percentage of GDP Source: Table 3.6, Hospital Authority Statistical Report 2000-2001, Hong Kong Special Administrative Region 16% 14% 12% 10% 8% 6% 4% 2% 0%

12. Agenda Environment  Observations Lessons Learned What Next?

13. ObservationsSome key facts about the money • Fewer than 10% of the covered population account for a large proportion of the claims • Claims increase with rising age • Traditionally, very high claims in last year of life • Hospital care = biggest expenditure (34%) • Increases in costs “compound” • Health care costs have increased much more rapidly than the cost of living • Typical employee benefits insulate employees from costs • Money drives treatment patterns • Most expensive is not best Mercer Human Resource Consulting

14. $150/person 3% 19% 25% $20,000/person 53% ObservationsLarge claims significantly drive cost 50% 35% 10% 5% % of Employees % of Claims

15. $220 @ 15.0% @ 11.0% @ 7.0% $201 $200 $180 $175 $169 Illustrative Health Care Trend (in millions) $160 $152 $152 $141 $140 $132 $137 $132 $123 $120 $115 $123 $115 $111 $100 $107 $100 2003 2004 2005 2006 2007 2008 ObservationsCost trends drive projections Expected cost impact based on $100 million annual health care spending • If trend were reduced from 15% to 11% • the cumulative five year difference would equal $83m or $17m per year • If trend were reduced from 15% to 7% • the cumulative five year difference would be $157m or $31m per year NOTE: (1) Assumes level enrollment over five years

16. ObservationsAging and health care Some experts recognize need for better integration of chronic care and for integrated management “Reimbursement for clinical care in our state and country is designed for an acute care model and chronic care is very much an after thought. There needs to be a shift in the paradigm of care we offer to the frail elderly.” …. from a geriatric physician

17. Health care benefit trends Aging and health benefit costs Relative Costs by Age and Gender 3.00 2.50 2.00 Relative Cost by Age 1.50 1.00 0.50 0.00 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65+ Age Male Female Average employer cost = 1.0

18. CHRONIC CARE WOMEN ALONE INTEGRATION COST OF AGING CARE SETTINGS ACUTE CARE LONG-TERMCARE SUCCESS MEASURES END-OF-LIFE CARE ObservationsAging and health care issues

19. ObservationsResearch is not adequate Much research is financed by providers, drug companies; e.g., conflict of interest Often looks at treatments in isolation; e.g., December 2002 study on blood pressure drugs Largely focuses on conventional Western medicine Rarely considers economic and other non-medical issues Small samples produce inconsistent findings; e.g., new study on use of hormones for mid-life women

20. ObservationsAlternative medicine Definition: What is it? Research: A woeful lack Alternatives: What are they? What is best? Holistic health centers: Very limited in the US Public acceptance: High but limited data and payment by insurance plans

21. ObservationsA changing paradigm • Managed care based on controls, contracting, defined provider networks • Managed care sometimes used capitation • Managed care did not work FEE FOR SERVICE MANAGED CARE MANAGED CARE CONSUMER DIRECTED • Give the consumer more power • Give the consumer an economic stake in the result • Restructure payments and delivery to fit • Will it work?

22. New Ideas: More Consumer Influence Consumerism is a continuum Tiered Copays Hospital, MD, RX Consumerist Benefit Designs Consumer Directed Health Plan Increasing Consumerism New Tiered Network Models, High-Performance Network Delivery System Models True Defined Contribution (Vouchers)

23. Agenda Environment Observations  Lessons Learned What Next?

24. Lessons Learned Actuaries could play a bigger role • Situation • Actuaries have largely been involved with insurance and benefits • System not working well - U.S. society searching out solutions • Barriers • Unclear what “successful” treatment is • Data is not user-friendly • Opportunities • Many opportunities for cost-benefit analysis • Align interests of all parties

25. Lessons Learned Preventive care can have biggest payoff • Opportunities • Pre-natal care-very big payoff • Public health, sanitation have very big payoff • Individuals can influence their health • Barriers • But, insurance and benefits focus on paying for acute care

26. Lessons LearnedWhat is paid for drives behavior • Consumer BehaviorExamples: • During 1960s and 1970s, design of benefits and insurance drove care into hospital • During 1990s surgery moved out of hospital • Provider BehaviorExample: • Providers learn how to “game” the system (reconfiguration of diagnoses) Fraud is also an issue

27. Lessons LearnedAccepted practices can change radically • Hypertension study - older cheaper treatment is just as good, often better than new much more expensive drugs • Hormone study - drugs routinely used actually increase risk TWO RECENT EXAMPLES LONGER TERM • 50 years ago - US women stayed in hospital one week + for childbirth • Today - often go home same day

28. Agenda Environment Observations Lessons Learned  What Next?

29. Focus: US Healthcare System andThe Role We Play

30. What Next?How much care should we deliver? ? ? Will everyone be covered by the same system? Who makes the decision? ? ? How much care is familyexpected to provide? Guidelines

31. Life styledrugs Generic drugformularies Variable drug reimbursement Maternitystays In patient/out patient Medically necessary Diagnostictests Coronary by-passes Cosmetic Surgery End-of-lifecare Electivesurgery Hipreplacements Transplants Guidelines for medical practice/payment What Next?How much care should we deliver?

32. What Next?How much will it cost? • Providers • Nurse • Nurse practitioner • Contracted providers • Specific hospitals • Payment Methods • Unlimited fee-for-service • Fee schedules • Bundled fee schedules • Capitation • Who decides on provider and payment method? • Who controls quality? • Who sets the price?

33. What Next?How much will it cost? • Issue in many countries: • The role of • Government • Employer • Individual Do the sicker people pay more or does everyone pay? • What is the share of the • individual in cost and • how is it paid? • Premium • Co-payment • Payment for uncovered items Is participation in the system mandated?

34. Agenda Environment Observations Lessons Learned What Next?

35. Appendix

36. Basic Concepts • Prevention vs. cure • Better to keep well: greater payoff for preventive and early care • Maternity care: prenatal care = healthier babies = lower costs • Some systems focus resources heavily on sickest patients Methods of payment • Fee-for-service: pay for specific services offered • Capitation: pay fee for covered person per month • Salaried providers: in public system, may pay salary with no direct link to units of care or numbers of patients

37. Basic Concepts • Types of practitioners • Accreditation and licensing requirements • Physicians, nurses, physical therapists, etc. • Specialists vs. generalists (Challenge to manage care in face of specialization) Decision makers and decision input • Roles: patient, physician, guideline setters • Information sources • Second opinions

38. Basic Concepts • Treatment settings and system organizations • Health maintenance organizations (HMO): prepaid total care • Preferred provider organization(PPO): contracted network • Care guidelines • Specified by medical community • Definition of what financing program pays for • Specified by managed care organization • In-hospital vs. outpatient care • Pharmaceuticals • Group practice vs. individual practice