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So You Want to be a Health Actuary Daniel Schnur WellCare Health Plans, Inc. January 18, 2006

2. . About WellCare Health Plans, Inc.. Founded in 1985 Headquarters in Tampa, FL Highlights in 3Q 2006:Overall membership more than 2,100,000; 151% growthLaunched new health plans in Georgia, with over 475,000 membersPDP membership grew to over 910,000 membersThird quarter revenues grew 1

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So You Want to be a Health Actuary Daniel Schnur WellCare Health Plans, Inc. January 18, 2006

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    1. So You Want to be a (Health) Actuary Daniel Schnur WellCare Health Plans, Inc. January 18, 2006 We are well positioned for continued growthWe are well positioned for continued growth

    2. 2 About WellCare Health Plans, Inc. Founded in 1985 Headquarters in Tampa, FL Highlights in 3Q 2006: Overall membership more than 2,100,000; 151% growth Launched new health plans in Georgia, with over 475,000 members PDP membership grew to over 910,000 members Third quarter revenues grew 104% to $1.0 billion Medicare Advantage membership grew nearly 34% year over year Third quarter net income grew 166% year over year Stock performance (NYSE: WCG) IPO in 2004 = $17.00 1/17/07 close= $75.25 High close on 1/16/07 = $76.36 We are well positioned for continued growthWe are well positioned for continued growth

    3. 3 About WellCare Health Plans, Inc. Actuarial Department Located in Tampa Corporate HQ Some actuarial staff located in Atlanta, GA 20 full-time actuaries and students 7 FSA’s Don Zhang VP of Corporate Actuarial Actuarial Development Program Competitive exam assistance program Sponsored study-time Fees for books, exams, seminars Compensation increases for successful results Currently recruiting for Spring 2007 full-time employment Exam requirement – 1 SOA exam passed prior to consideration. We are well positioned for continued growthWe are well positioned for continued growth

    4. 4 WellCare’s Vision/Mission Vision–To be the leader in government-sponsored healthcare programs in partnership with the members, governments, and communities we serve. Mission—WellCare will: Enhance our members’ health and quality of life; Partner with providers and governments to provide quality, cost-effective healthcare solutions; Create a rewarding and enriching environment for our associates. We are well positioned for continued growthWe are well positioned for continued growth

    5. 5 Overview of Discussion Primary health insurance markets Roles for actuaries in health insurance Hot topics in health insurance Health actuarial application - product development Preparing to become a health actuary We are well positioned for continued growthWe are well positioned for continued growth

    6. 6 Primary Health Insurance Markets “Commercial” (State) Group coverage (i.e., through employer or association) Individual Medicare (CMS) Medicare Advantage (MA) Prescription Drug (PDP) Combination (MA-PD) Group retiree Medicaid (State, CMS) TANF SSI Dual-Eligibles CHP (State, CMS) Special Products (generally State) We are well positioned for continued growthWe are well positioned for continued growth

    7. 7 Roles for Actuaries in Health Insurance Product development Experience monitoring and assessment Financial reporting and reserving Reinsurance Provider contracting Underwriting Data warehouse and data integrity Financial planning and forecasting Corporate risk management Strategic planning We are well positioned for continued growthWe are well positioned for continued growth

    8. 8 Hot Topics in Health Insurance Risk Adjustment Predictive Modeling Consumer-driven plans and MSAs Disease Management Enterprise Risk Management Sarbanes-Oxley compliance (SOX) We are well positioned for continued growthWe are well positioned for continued growth

    9. 9 Hot Topics in Health Insurance Risk Adjustment Reimbursement from Government payers was traditionally based on a demographic rate table where rates vary by age/gender. Medicare phased in a payment methodology that assigns a risk score to each member based on the member’s health conditions identified in encounter data. More severe conditions contribute to a higher risk score. A higher risk score means more revenue per member. Therefore, it is very important for the insurer to obtain properly and to submit accurate and complete diagnosis information to CMS since this impacts the revenue each health plan receives. Many State Medicaid agencies have followed suit by implementing similar risk-adjusted payment mechanisms. Risk adjustment data has shown to be a more accurate predictor of cost than demographics alone. We are well positioned for continued growthWe are well positioned for continued growth

    10. 10 Hot Topics in Health Insurance Predictive Modeling Utilizes data from prescription drug or medical diagnoses to prospectively forecast the claim cost as a function of member health status. This becomes an important forecasting tool once entering into risk-adjusted payment methodology. Important to use predictive modeling across the entire population and not just to focus on high-cost claimants. Important to consider HIPAA, quality of data, and biases that may be in datasets. Also, forecasting tools vary and are still being enhanced. Many models still have relatively low R2. We are well positioned for continued growthWe are well positioned for continued growth

    11. 11 Hot Topics in Health Insurance Consumerism and MSA’s Consumerism movement focuses on transparency of health care cost so that consumers can better manage their health care choices when choosing providers and plans. The high deductible plan/MSA is one mechanism that provides the consumer the ability to better manage their cost: Savings account with tax advantages to handle routine or manageable costs (i.e., known RX costs, periodic office visits) supplemented with high deductible coverage for unexpected medical costs. Similar to the “old days” before HMO’s began covering “first dollar” medical costs. Consumers beginning to negotiate with providers what they are “willing to pay” for services. We are well positioned for continued growthWe are well positioned for continued growth

    12. 12 Hot Topics in Health Insurance Disease Management Focused on a single disease category, which is generally a chronic condition. Common programs include: asthma, diabetes, congestive heart failure. Uses best-practices to pro-actively manage symptoms: Results in higher on-going treatment costs than traditional care delivery system. Trade-off is to mitigate periodic high-cost episodes that require very high costs. Successful if overall net cost of healthcare decreases with no decrease in quality of patient’s well-being. Not all programs are successful. Such programs require long-term commitment, constant monitoring, and implementation of evolving best-practices. Insurers often use vendors to contract this service. We are well positioned for continued growthWe are well positioned for continued growth

    13. 13 Hot Topics in Health Insurance Enterprise Risk Management Must embed risk management in core management processes: Strategy Product Development Capital Planning Performance Measurement View risk in the context of balancing risk vs. reward. Look at the aggregate risk profile of the firm. Alignment of incentives Cost reduction through effective transfer/retention strategies. Assess, Control, Exploit, Finance, Monitor Implement at all levels of organization Not a checklist! We are well positioned for continued growthWe are well positioned for continued growth

    14. 14 Hot Topics in Health Insurance Sarbanes-Oxley (SOX or SOX404) Legislation passed in July 2002. Applies to GAAP financials filed with the SEC. Goal is to ensure that there are adequate controls in place to ensure company can prevent or detect material errors in any financial statements within a reasonable timeframe. Management must sign-off on effectiveness of internal controls. External auditor tests processes to determine whether Management attestation is correct. Significant impact in cost and time spent on documentation to processes such as reserve calculations (i.e., control should ensure Actuarial estimate of reserve appears correctly in financials). Impact on file access and protection, segregation of duties, version control, and back-up processes. We are well positioned for continued growthWe are well positioned for continued growth

    15. 15 Health Actuarial Application Product Development Work with cross-functional teams to support the strategic positioning and development of products. After development and launch, important to monitor experience since this becomes input for renewal or new product development. Requires understanding of marketplace, regulatory requirements, and product’s contribution to overall company success. We are well positioned for continued growthWe are well positioned for continued growth

    16. 16 Some terminology PMPM (per member per month) for claims PMPM= (U x C)/12,000 where: U = annual utilization per 1,000 members C = average cost per utilization for revenue PMPM= Total Dollars/Total Member Months MBR (medical benefits ratio. AKA “loss ratio”) percent of revenue that is paid out in claim dollars MBR = (claims/revenue) CF (completion factor) percent of estimated ultimate claims that have been paid used in reserving to estimate ultimate incurred claims incurred claims represent claims attributable as a liability for a particular time period different from paid claims which may be paid in a certain time period but are liabilities for multiple time periods We are well positioned for continued growthWe are well positioned for continued growth

    17. 17 Illustration of incurred-vs.-paid claims Incurred Months Paid Months June July August Sept June 250 July 500 275 Aug 200 450 225 Sept 100 215 475 280 The chart above is referred to “claims triangle” and illustrates the claim payment pattern observed over time. The payment runout in the claims triangle will differ by type of service (i.e., hospital, physician, RX) and business characteristics of population (i.e., Medicare, Medicaid). Paid claims for Aug are 875 (=200+450+225). Incurred claims (paid so far) for Aug are 700 (=225+475). Claims incurred and paid in Aug are 225. Triangle construction is used in reserving. We are well positioned for continued growthWe are well positioned for continued growth

    18. 18 Application – Product Development Actuaries play an integral role in product development by pricing the cost of medical benefits and understanding the underlying risk to the company. In developing products, actuaries use prior claims experience and benchmark data (i.e., from consultants or government) to estimate the underlying costs of the proposed benefit coverage. Benefit design is important to prevent adverse-selection from the member but must also be rich-enough to attract customers to chose the product. Some benefits are mandated by State or Federal government. Finding the balance between profitability and marketability is key! Actuaries may be conservative since they want to avoid under-pricing the product and costing the company too much. Marketing may want a lower price so it can sell more product. Conflict must be worked through to achieve consensus among all stakeholders to ensure a successful product launch. We are well positioned for continued growthWe are well positioned for continued growth

    19. 19 Application – Product Development Key elements in pricing a product: Underlying cost data (claims experience, benchmarks, etc.) Benefit design (benefit limits, member cost-sharing) Marketplace trends Contracted cost structure (fee schedule, capitation) Administrative costs Direct expenses Allocation of corporate overhead costs Distribution Costs (commissions and brokers fees) Profit and contingency load Reserve and capital requirement costs (Risk Based Capital) Actuarial will be expected to price the product competitively enough to meet sales targets, since certain sales thresholds are necessary to spread administrative costs effectively-enough to lower price to be competitive. (Yes, that is circular sentence.) We are well positioned for continued growthWe are well positioned for continued growth

    20. 20 Application – Product Development It is Spring 2007 and must submit a rate filing with State by June 1 for a new RX product for CY 2008. You have an existing RX plan in effect during CY 2006 and CY 2007. Endless hours of strategic meetings have focused has produced a proposed benefit design change that you are asked to price. 2006 and 2007 Benefits: Generic copay = $10/RX Brand copay = $30/RX 2008 Benefits: Generic copay = $5/RX Brand copay = $40/RX In addition, the State is now requiring for CY 2008 all health plans to fund the cost of teaching hospitals at 0.5% of medical expense (including RX coverage) that must be built into product design. The dispensing fee for each RX has dropped from $3 to $2 based on a new contract with your contracted pharmacies. We are well positioned for continued growthWe are well positioned for continued growth

    21. 21 Application – Product Development For CY 2006 and 1Q 2007 (January – April), your company’s actual RX experience is: Claim Count Net Paid Claims Generic 4,000 $ 80,000 Brand 2,500 $125,000 Member Months = 16,000 Marketplace trends on similar product designs run at 8% per year for utilization and 3% per year for unit cost for both generic and brand. The product requires the following administrative components (expressed as a percent of premium): Administration = 10.0% Capital Reserve Req. = 0.5% Premium Tax = 1.0% State Assessment = 0.5% (for teaching hospital) Profit / Contingency = 3.0% We are well positioned for continued growthWe are well positioned for continued growth

    22. 22 Application – Product Development First let’s assess the administration components: Administration = 10.0% Capital Reserve Req. = 0.5% Premium Tax = 1.0% State Assessment = 0.5% Profit / Contingency = 3.0% TOTAL = 15.0% so we will need to have 15% of premium to cover these expenses. Therefore, whatever we determine the expected claim cost to be must be increased by a factor of (1/(1.00-0.15)) = 1/(0.85) = 1.1765 to determine the premium needed to cover expected claims and necessary administrative requirements to meet profitability target. We call this a “retention load.” This implies an MBR of 85.0%. We are well positioned for continued growthWe are well positioned for continued growth

    23. 23 Application – Product Development In looking at the experience data, first note the experience period is Jan 06 – April 07, or 16 months. Therefore the midpoint of the experience period is 9/1/06. The rating period is CY 2008, which has a midpoint of 7/1/08. In order to translate our experience period costs into expected costs in the rating period we need to trend the utilization and unit cost by the assumed trend factors. The amount of trend is the difference between the midpoints of the rating period and the experience period, which is 22 months. We are well positioned for continued growthWe are well positioned for continued growth

    24. 24 Application – Product Development The amount of trend is the difference between the midpoints of the rating period and the experience period, which is 22 months. Given this, the trend factors to use would be: Utilization = (1.08) ^ (22/12) = 1.152 Unit Cost = (1.03) ^ (22/12) = 1.056 In addition, it has been determined that 1% of claims may still be outstanding, so a completion factor (applied to claim count) of 99% is used. Note— In practice RX claims complete very quickly. We are well positioned for continued growthWe are well positioned for continued growth

    25. 25 Application – Product Development Our projected utilization is: Claim Exper. Ann. Trend Completion Proj. Ann. Count Claims/1,000 Factor Factor Claims/1,000 Gen 4,000 3,000 1.152 0.99 3,4911 Br 2,500 1,875 1.152 0.99 2,182 Our projected net unit cost is: Paid Net Unit Paid Gross Trend Proj.Gross New Proj. Net Dollars Cost Copay Unit Cost Factor Unit Cost Copay Unit Cost Gen 80,000 $20.002 $10.00 $30.003 1.056 $31.684 $ 5.00 $26.68 5 Br 125,000 $50.00 $30.00 $80.00 1.056 $84.48 $40.00 $44.48 Our fee cost PMPM is: Proj. Ann. New RX Fee Claims/1,000 Fee/RX PMPM Gen 3,491 $2.00 $0.58 6 Br 2,182 $2.00 $0.36 We are well positioned for continued growthWe are well positioned for continued growth

    26. 26 Application – Product Development So our final claim cost estimate is: Proj. Ann. Proj. Net Net PMPM Add RX Final Net Claim Claims/1,000 Unit Cost Claim Cost Fee PMPM Cost PMPM Gen 3,491 $26.68 $7.76 $0.58 $8.34 Br 2,182 $44.48 $8.09 $0.36 $8.45 Total Net Claim Cost = $16 79 Our final required Net Revenue PMPM is : Net Claim Cost PMPM = $16.79 X Retention load = 1.1765 Net Revenue PMPM = $19.76 We are well positioned for continued growthWe are well positioned for continued growth

    27. 27 Application – Product Development Key observations and considerations: Note that the membership averaged 1,000 members per month. This may not a be sufficient basis for forecasting purposes. It may appropriate to do credibility-blend of actual experience with benchmark experience. The 16 months of experience data may skew results since certain months have will higher costs due to seasonality. A further adjustment to normalize the experience may be appropriate. Need to realistically determine whether the changes in benefits will cause a change in utilization patterns. For example, will reducing the copayment for generics cause an increase in generics usage? Will the utilization for brand change due to the increase in brand copay? Will they offset? Will the copayment changes have an impact on other services? For example, a change in physician copayment that causes increase in office visits may also cause a commensurate increase in RX prescribed by the physicians. Finally, will the consumer buy it? We are well positioned for continued growthWe are well positioned for continued growth

    28. 28 So how do I get there? Explore the different types of actuarial disciplines (health, pension, P&C, life, create your own) Technical skills Business acumen “Learn the business” Communication skills Exams We are well positioned for continued growthWe are well positioned for continued growth

    29. 29 Questions? Comments or Questions? Contact: Daniel Schnur daniel.schnur@wellcare.com We are well positioned for continued growthWe are well positioned for continued growth

    30. So You Want to be a (Health) Actuary Daniel Schnur WellCare Health Plans, Inc. January 18, 2007 We are well positioned for continued growthWe are well positioned for continued growth

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