NEW ENGLAND HEALTHCARE PREMIUM DEVELOPMENT CASE 1 NEW ENGLAND HEALTHCARE is a regional not-for-profit managed care company headquartered in Hartford, Connecticut. Currently, the company has more than 1 million enrollees in 25 different plans offered in Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. Recently, a consortium of employers-including major companies such as IBM, GE, and Prudential- contacted New England to bid on a managed care (health maintenance organization) contract the consortium will offer to its 75,000 employees and family members in and around Nashua, New Hampshire. New England's approach to premium development starts with the recognition that the premium received from employers must cover two different categories of expenses: (1) the cost of providing required healthcare services (medical costs) and (2) the cost of administering the plan and establishing reserves (other costs). Reserves, which are typically required by state insurance regulators, are necessary to ensure that funds are available to pay providers when medical costs exceed the amount collected in premium payments. As a not-for-profit corporation, New England does not explicitly include a profit element in its premium. However, the reserve requirement is set sufficiently high that income from reserve investments is available to fund product expansion and growth; in effect, a portion of the reserve requirement constitutes profit. New England uses a multistep approach in setting its premiums. First, a base per member per month (PMPM) cost is estimated for each covered benefit of the plan. When the premiums are initially established for a new subscriber group, the base PMPM costs are usually developed on the basis of historical utilization and cost data. If data are available on the specific subscriber group, as with the consortium contract, these data are used. Otherwise, the base PMPM costs are based on utilization and cost data from one or more proxy groups, which are chosen to match as closely as possible the demographic, utilization, and cost patterns that will be experienced under the new contract. In addition, any utilization or cost savings that will result from New England's aggressive utilization management program is factored into the premium. Second, the base PMPM cost is adjusted to reflect the dollar amount of copayments to providers as well as the estimated impact of copayment and benefit options on utilization and hence medical costs. Copayments, which are an additional source of revenue to the provider panel, reduce New England's medical costs and thus lower the consortium's premium. Furthermore, the higher the copayment, the lower the utilization of that service, especially if it is noncritical. Finally, limitations are set on the benefits package. The more restrictive the benefits package, the lower the costs associated with medical services. The result of these adjustments is an adjusted PMPM cost for each service. The costs are then summed to obtain the total medical PMPM amount. To estimate the total nonmedical PMPM amount, New England typically adds 15 percent to the total medical PMPM amount for administrative costs and 5 percent for reserves. The sum of the total medical and total nonmedical amounts -called the total PMPM amountis the per member amount New England must collect each month from the consortium to meet the total costs of serving the healthcare needs of the plan subscribers (the employees). After the total PMPM amount is calculated, it must be converted into actual premium rates for individual and family coverage. Using data provided by the consortium, New England estimates that 45 percent of subscribers will elect individual coverage, while the remaining 55 percent will choose family coverage. New England plans to offer the consortium a two-rate structure, under which employees may elect either single or family coverage. Data from the consortium indicate that family coverage, on average, includes 3.5 individuals; thus, all else the same, the premiums for family coverage should be 3.5 times as much as for individual coverage. However, children typically consume fewer healthcare services, on a dollar basis, than do adults, so the final premiums must reflect such differentials. Here are the factor rates for obtaining individual and family premium rates: Single factor: 1.216 Family factor: 3.356 In setting the specific premium rates, New England must ensure that the total premiums collected, which would be paid by both employer and employees, equal the estimated total calculated using the PMPM rate. The 75,000 members who would be served by the contract consist of roughly 12,000 individuals and 18,000 families. Thus, 75,000 Total PMPM amount must equal (12,000 Single premium) + (18,000 Family premium). (Note that all the data in this case are for illustrative purposes only and do not reflect current healthcare costs.) Exhibit 1.1 is a partially completed copy of the worksheet New England uses to establish the total PMPM amount and the premium rates on any contract. The worksheet is a relatively easy guide for implementing the procedures just described. Exhibit 1.2 contains the relevant cost and utilization adjustment factors for a variety of service and copayment options. Adjustment factors are the decisions made on the appropriate service and copay structure, which feed into the calculations for each service's medical PMPM amount, as shown in exhibit 1.1. EXHIBIT 1.1 New England Healthcare: Premium Development Worksheet L Medical Expenses Facility Services Inpatient: Acute Skilled nursing Copey Adjustment Factors Base PMPM Cost Cost Utilization Adjusted PMPM Mental health Substance abuse 041 1.0000 1.0000 0.41 Surgical procedures Emergency department Outpatient procedures 3.43 1.0000 1.0000 3.43 Total facilities Physician Services Primary care services Specialist services: Office visits Surgical services 9.00 23.67 0.9544 0.8659 1.0000 0.9100 8.59 18.65 All other services Total physicians Total medical PMPM amount II. Nonmedical Expenses Administrative Reserves Total nonmedical PMPM amount III. Total Expenses Total PMPM amount IV. Premium Rates Rate factor Premium rate Single Family EXHIBIT 1.2 New England Healthcare: Cost and Utilization Adjustment Factors Patient Copay Amount Copay Cost Adj. Factor Copay Utilization Adj. Factor Facility Services Inpatient acute $ 0 1.0000 1.0000 100 0.9851 0.9750 150 0.9777 0.9600 250 0.9642 0.9200 Skilled nursing $ 0 1.0000 1.0000 Mental health: 30-day limit $ 0 1.0000 0.9524 100 0.9805 0.9286 150 0.9707 0.9143 250 0.9532 0.8762 60-day limit $ 0 1.0000 1.2000 100 0.9845 1.1700 150 0.9768 1.1520 250 0.9628 1.1040 90-day limit $ 0 1.0000 1.2500 100 0.9851 1.2188 150 0.9777 1.2000 250 0.9643 1.1500 Surgical procedures $ 0 1.0000 1.0000 100 0.9231 1.0000 150 0.8846 1.0000 250 0.8077 1.0000 Emergency department $ 0 1.0857 1.0250 15 1.0000 1.0000 25 0.9429 0.9850 50 0.8000 0.9550 Primary Care Services $ 0 1.0352 1.0150 5 1.0000 1.0000 10 0.9472 0.9800 15 0.8593 0.9500 20 0.7713 0.9200 25 0.6834 0.8900 Specialist Services $0 PCP copay $ 0 1.0000 1.0000 5 0.8897 0.9730 10 0.7795 0.9590 15 0.6692 0.9450 $10 PCP copay $ 0 1.0000 0.9920 5 0.8897 0.9600 10 0.7795 0.9460 15 0.6692 0.9320 $20 PCP copay $ 0 1.0000 0.9680 5 0.8897 0.9360 10 0.7795 0.9220 15 0.6692 0.9080 The consortium has furnished New England with a significant amount of data on its employees' current utilization of healthcare services. The employees' inpatient cost and utilization data are as follows: Exhibit 1.3 shows the current cost and utilization data for other facility services, including skilled nursing care, inpatient mental health care, hospital surgical services, and emergency department care. The employees' utilization data for primary care services are as follows: Average daily fee-for-service $2,800 charge Current number of primary 3.4 per year per Utilization ($100 copay) 500 days per year per 1,000 members care visits ($5 copay) member Note, however, that a recent survey of New Hampshire hospitals indicates that most managed care contracts call for per diem payments in the range of $2,000 to $2,400. In addition, New England's experience with similar employee groups indicates that moderate utilization management would result in 400 to 450 inpatient days per 1,000 plan members. EXHIBIT 1.3 Consortium Employee Utilization and Cost Data: Other Facility Services Skilled nursing facility care Current average daily cost Inpatient mental health care ($0 copay) Current average daily cost Hospital-based surgery ($0 copay) Current costs 25.2 days per year per 1,000 members $650 64.4 days per year per 1,000 members $740 41.7 cases per year per 1,000 members $1,800 per case Emergency department care ($15 copay) 132 visits per year per 1,000 members Current costs $250 per visit (see note) Note: The emergency department cost is the total charge for facility services, some of which would be covered by the $15 copay. New England routinely pays primary care physicians a capitated amount based on an annual cost of $200,000. It assumes that one primary care physician can handle 4,000 patient visits per year. The employees' utilization and cost data for specialist office visits are as follows: Current number of specialist office visits ($0 copay) Current cost per visit 1.5 per year per member $92.65 Note that the total PMPM amount shown in exhibit 1.1 may be modified to reflect anticipated medical cost inflation. This adjustment is especially critical if the total PMPM premium is based on relatively old cost data. The cost data provided in this case can be assumed to be two years old: The data are from the previous year, and the contract would not be in place for yet another year. Also, note that the premium calculation in exhibit 1.1 does not include certain medical services, such as routine vision and dental care, chiropractic services, durable medical equipment, out-of- network services, and pharmacy benefits. The consortium specifically requests that the initial premium bid exclude such "rider" services. However, if New England is chosen to submit a final premium bid, the consortium will likely request pricing on one or more riders. Finally, with no guidance from the consortium regarding the level of services desired or the copay structure, New England intends to offer three choices to the consortium: low cost, moderate cost, and high cost. The low-cost (to the consortium) plan requires higher copays from employees and has more limitations on covered services. The high-cost plan has lower copays and fewer limitations. The moderate- cost plan falls between the two extremes. You have recently joined New England Healthcare as its marketing analyst. Your first task is to develop the bid presentation to the consortium.