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

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So You Want to be a (Health) ActuaryDaniel
SchnurWellCare Health Plans, Inc.January 18,
2006
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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

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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 FSAs
• 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.

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WellCares Vision/Mission

• VisionTo be the leader in government-sponsored
  healthcare programs in partnership with the
  members, governments, and communities we serve.
• MissionWellCare 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.

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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

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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)

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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

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Hot Topics in Health Insurance

• Risk Adjustment
• Predictive Modeling
• Consumer-driven plans and MSAs
• Disease Management
• Enterprise Risk Management
• Sarbanes-Oxley compliance (SOX)

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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
  members 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.

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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.

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Hot Topics in Health Insurance

• Consumerism and MSAs
• 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 HMOs began
  covering first dollar medical costs.
• Consumers beginning to negotiate with providers
  what they are willing to pay for services.

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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
  patients 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.

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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!

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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.

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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 products contribution to
  overall company success.

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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

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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 (200450225).
• Incurred claims (paid so far) for Aug are 700
  (225475).
• Claims incurred and paid in Aug are 225.
• Triangle construction is used in reserving.

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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.

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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.)

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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.

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Application Product Development

• For CY 2006 and 1Q 2007 (January April), your
  companys 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

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Application Product Development

• First lets 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.

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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.

22 months
rating period
experience period
7/1/08
9/1/06
4/30/07
1/1/06
1/1/08
1/1/07
12/31/08
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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.

22 months
rating period
experience period
7/1/08
9/1/06
4/30/07
1/1/06
1/1/08
1/1/07
12/31/08
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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

1 - 3491 (3000 x 1.152 ) / 0.99
2 20.00 (80000/4000)
3 30.00 20.00 10.00
4 31.68 30.00 x 1.056
5 26.68 31.68 - 5.00
6 0.58 (3491 x 2.00) /12000
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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

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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?

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So how do I get there?

• Explore the different types of actuarial
  disciplines (health, pension, PC, life, create
  your own)
• Technical skills
• Business acumen
• Learn the business
• Communication skills
• Exams

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Questions?

• Comments or Questions?
• Contact Daniel Schnur
• daniel.schnur_at_wellcare.com

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So You Want to be a (Health) ActuaryDaniel
SchnurWellCare Health Plans, Inc.January 18,
2007