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28 Cards in this Set

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I recommend reading SN 202 before reading this chapter. Both chapters discuss the measurement of claim cost trends (trends in cost per member per month), but this chapter takes a different approach to the topic.
SN 202 recommends a standard actuarial model, where future claim costs are predicted by looking at historical claim costs. The actuarial model is the most common method used to predict future claim costs.
This chapter recommends a causal model, where the goal is to statistically measure correlations between claim costs and external, independent, macroeconomic factors.

The terminology used by the two chapters is also different.
Quick Startup Guide
You can cover 95% of the material in this chapter by just reading General–Trends, General–“Internal vs. External Data”¬, and the list below, entitled: “The Different Approaches To Analyzing Claim Cost Trends”.
A Health Insurer’s ability to measure its Medical Cost Trend is the single most important factor in its ability to maintain a financially viable insurance program.
This chapter describes the components of claim cost trend, and describes various methods for measuring the trend.
According to this chapter, a bad way for a company to analyze trends in claim cost is to analyze its historical claim cost in isolation (this is what SN 202 does).
A better way is to model the company’s trends by relating them, causally, to external, macroeconomic factors.
Terminology Used In This Chapter
 Claim Cost means “incurred cost per unit exposure”; that is, claim cost PMPM.
 The Market Force of Trend (or just Force of Trend) means the national average Claim Cost trend from all types of private payers of health benefits.
 It is well-known that fee-for-service payments are higher than capitation payments. Force Of Trend is just the average trend. Fee-for-service provider reimbursement will usually grow faster than the Force of Trend, while capitated providers’ reimbursement will usually grow more slowly than the Force of Trend.
How to Analyze Trend
 The traditional way for a company to analyze its Claim Cost trend is to split it into:
 Utilization trend
 Cost-per-service trend
 According to this chapter, the two components of a company’s medical claim cost trend are:
 the Market Force of Trend (macroeconomic factors)
 Company-specific factors (microeconomic factors).
It is important to distinguish between factors that affect the market force of trend and factors that just affect your company’s own claim cost trend.
 Macroeconomic factors affect the market force of trend.
 Microeconomic factors do not. But microeconomic factors can cause a company’s claim cost trends to appear substantially different from the market force of trend.
(“Components of the Market Force of Trend”)
(“Factors Affecting the Level of Consumption of Health Care”)
These are 3 ways of asking for the Macroeconomic Factors. They are:
 Demographic changes (aging of the population)
 Wealth
 General inflation
 physician supply (number of physicians)
 cost-shifting
 the proportion of physicians in specialty fields
 Spread of Managed Care
Managed Care changes the way physicians behave. The effect of managed care affects physicians’ behavior even toward their non-managed-care patients.
(Microeconomic Factors)
Risk Shifting
Managed Care Initiatives (Interventions)
Benefit Design and Leveraging
Type of Service
Random Fluctuations
 Antiselection can cause a plan’s observed cost trends to be greater than the true level of underlying medical cost trends.
 This is because in any plan with a low option and a high option, individuals will gradually optimize their own financial situations, thus costing the plan more and more money.
 Antiselection means disproportionately high claim costs (compared to the expected), for any given demographic cell.
 Antiselection does not include actual changes in the demographic mix.

(See numerical example, below)
 One type of Cost Shifting is: Reduced or negotiated payments to providers by HMO’s, PPO’s, and the Government (in Medicare Risk programs).

The results from an increase in provider discount are:
 A one-time decrease in medical cost trend (because the discount doesn’t keep increasing every year) . . .
 . . .usually followed by a recovery (increase) in cost trends, as providers raise their charges in order to make up for (and negate) the discount.
 however, if growth is occurring in the line of business that’s subject to discount, the downward cost trend may be prolonged.

(See numerical example, below)
Risk Shifting
 Financial contracts that shift risk to providers (namely, capitation, risk-sharing, etc.), tend to “immunize” an MCO to the market force of trend. However, the providers soon raise their charges in order to make up for their increased risk.
 Therefore, risk-shifting also causes a one-time effect.
Managed Care Initiatives (Interventions)
 The implementation of a Utilization Management program by an MCO will cause a one-time drop in its medical costs.
Benefit Design and Leveraging
 The patient cost-sharing level causes leveraging, which causes a company’s observed trend to be higher than the market force of trend.
See General–Leveraging for more information.

(See numerical example, below)
Type of Service
 Inpatient vs. outpatient
 Pharmacy trends are usually lower than medical trends
Random Fluctuations
 A major source of variation, especially for small blocks of business
since they are more statistically variable
 The company should use a method of claims analysis that isolates the random component (such as linear regression).
Medicare Reports
 A good history of claim costs for the Medicare population
 Data is distorted b/c of eligibility expansions and legislative changes over time

National Health Expenditure portion of the GDP
 None
 publication slow (not current enough)

HCI (Health Cost Index) and Medical CPI (Medical consumer price index)
 Up-to-date
 Widely used
 hospital/physician charges underweighted; vision/dental overweighted.
 It is based on billed charges and doesn’t recognize the impact of discounts.

Trend Surveys (Compiled by consultants)
 Easy to obtain
 statistical rigor varies
 purpose varies
Considerations in using External Data Sources:
 Must understand the:
 source of the data
 objective of the data
 differences between the different external sources
Advantages of Comparing Claims to an External Benchmark
 Lets a company notice its company-specific anomalies faster
e.g. when its trend does not match the benchmark trend
 Shows the general force of trend being experienced by competitors
Techniques not using external data (non-causal models)
“Historical Averages and Graphs”
1. Graph historical data experienced by your company and the competitors
2. Then use judgment, as well as competitive concerns, to project future trends
 Subjective
 Projected trend depends heavily on recent results
 Failure to detect trend reversals leads to the typical 6-year underwriting cycle. (See SN 210)
“Actuarial Model” method
This is the method we used in SN 202
1. Split PMPM claim costs into utilization and price components (U and C)
2. Also split up claims by category of service, type of contract, etc.
3. Project these components into the future based on “known impacts”
(e.g. changes to provider contracts; utilization control initiatives)

 Greater level of detail
 Hard to analyze “known impacts”, so the result is still mostly based on historical experience.
 Judgment is still used; no real improvement over the “historical” method.
Linear Regression (Applied to Historical Experience)
 can remove random fluctuations
 also removes seasonality effects, which the company is interested in.
Time Series and ARIMA models
 Only good for very short-term projections.
A technique using external data (Causal Model)(Promoted by this chapter)
(Promoted by this chapter)

1. Gather external (macroeconomic) indicators
 E.g. Medicare Trend, Medical CPI Trend, unemployment rate, most recent AOL version number, etc.
 Leading economic indicators are the best. (as opposed to concurrent or lagging)
2. Assume these indicators are a proxy for the market force of trend.
3. Collect your company’s sample data.
4. Determine the correlation between your company’s historic data and the external indicators
 Usually by graphing the relationships.
5. Use linear regression to develop a formula predicting your company’s claim costs as a function of the indicators.

 The following variables should be included in the model:
 Managed Care interventions in use by your company
 Seasonality
 Deviation Years
(historical years where there was no correlation between your company’s costs and the external indicator(s) – this variable is necessary because otherwise the model assumes that there always is correlation.)

 It has been shown that the HCI (Health Cost Index), Seasonality, and Deviation years are all significant in predicting a company’s trend.
(Common Problems In Trend Analysis)
Practical difficulties
 Lack of sufficient resources (detailed data, models, staff) to study trend
 Competitive considerations limit the ability to increase premium rates (that is, act on trend assumptions) even if it is justified.

Data difficulties
 Separating components like:
 Price trends & Utilization
 Macroeconomic factors & microeconomic factors
 and all the others
 immature claims data (between incurral and payment)
 Changes in claim payment speeds disrupt the measurement of incurred vs. paid claims
 Telling the difference between the observed claim cost trend (for your company) and the true Market Force Of Trend
 for example, Antiselection makes trends look bigger than the true underlying trend
 cost-shifting, leveraging too.
 Demographics keep changing
 Changes in data systems (and products) make data discontinuous
 terminations / new sales make data incomparable between experience periods
 Choosing the length of the experience period to analyze:
 A 12-month moving-average trend is stable, but less responsive to recent changes;
 A 3-month average is responsive, but makes trend too volatile to analyze.
 Distinguishing one-time changes in trend vs. ongoing changes in trend
 Recognizing / removing random fluctuation, catastrophic claims, and anomalies
 These should not be considered part of claim cost trend

Types of Anomalies:
 Pulse Outliers (one or more scattered points in a series that exceed normal ranges)
 Level Shift (an abrupt step, up or down, which is temporary or permanent)
(Changes in Trend Analysis under Managed Care)
When examining past results in order to choose future premium rates, an MCO must consider:
 Competitivity concerns
 Anomalies that occurred during the historical period and won’t reoccur, such as:
 catastrophic claims
 enrollment shifts between plan options
 interventions
 e.g. beginning a utilization management program
 e.g. stricter claims adjudication / processing
 a change in underwriting procedures
 Capitation payments must be analyzed separately from Ffs payments

Needed for:
 employers’ post-retirement liabilities for currently active ees
 Medicare Trust Fund analyses
 Long-Term Care insurance
Considerations in analyzing long-term trend:
 COLA guarantees on in-force policies
 historical trends vs. GDP
 medical trend has risen slightly faster than the GDP
 aging / demographics of the population