AQUARIUS

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Claim Reserving in Health Insurance Market

• Michael L. Frank
• Aquarius Capital
• ASNY Meeting October 2, 2003

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Topics of Discussion

• Type of Companies with Health Reserves
• Overview of Healthcare Market
• Reserving Methodologies
• Challenges in Industry

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Types of Companies with Health Reserves

• Insurance Carriers
• Health Maintenance Organizations (HMOs)
• Reinsurance Companies
• Retrocessionaires (Reinsurers Reinsurer)
• Captive Insurance Companies
• Medical Provider Groups (Risk Taking)
• All Services or Unique Set of Services
• Incl. Disease Management/Capitation Vendors
• Employer Groups/Trusts (Self-Funded)

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Overview of the Healthcare Market

• Health Plans
• Employer Groups
• Reinsurance
• Disease Management Companies

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Health Plans in the Marketplace

• Health Plans challenged to meet financial
  objectives
• - Limited long term ability to obtain rate
  increases above inflation
• - Continual changes in healthcare reform (state
  and federal)
• - Pressures to meet investor demands (profit
  and growth)
• - Managed Care Plans want to transfer more risk
  to providers
• - Insolvencies
• Significant Pressure to Limit Margins in
  Reserves for Bottom-Line Objectives vs Regulatory
  Need for Adequacy

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Health Plans Disease Management Cos.
Financial Difficulties

• Some Health Plans Going Insolvent
• Most Risk Bearing Provider/Disease Management
  Companies Going Insolvent
• Some Large Insurance Companies Exit Medical Lines
  of Business
• Sale of Division
• Closing/Running Off Existing Business (or Regions)

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Current Employer Practices Impact on Healthcare
Inflation

• Employers absorbing significant cost increases
  (annual trend in 14-15 range)
• More cost shifting onto employees
• - All Employees Higher employee contributions
• - Utilizers Only Higher benefit cost sharing to
  employees (increasing deductibles/coinsurance/out-
  of-pocket maximums)
• These plan changes will result in new trends in
  experience patterns and reserves

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• Whos accountable for reserves?

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Answer

The Actuary !
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Reserving Goals

• Convert Paid Claims to Incurred Claims
  Determine Ultimate Claims Liability (Report
  Financial Results)
• No Statutory Required Approach
• - Method depends on line of business and
  availability of information
• Goals
• - Accuracy
• - Efficiencies (Data, Knowledge Automation
  improving with time)
• - Timeliness (Must Fit in Financial Close
  Calendar)
• - Defensibility

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Reserving Methodology

• Technical Calculations
• - Reserving Cells
• - Reserve Methodologies
• Lag Development (Completion Factors)
• Expected Loss Ratio
• Definitions of incurred claims
• - Premium Deficiency Reserve

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Reserving Methodology (cont.)

• Types of Data
• - Historical Claims Enrollment Experience
  (per capital claims patterns)
• - Utilization Statistics
• Bed Days per 1,000 members
• Admits per 1,000 members
• Critical for completion factors that are not
  credible

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Reserving Methodology (cont.)

• Borrow Techniques from Other Disciplines
• Life (e.g., Medicare Supplement Active Life
  Reserves)
• Property Casualty (e.g., Stop Loss
  Reinsurance Claims)
• Utilize various reserving methods
• Chain Ladder
• By Risk Attaching Month
• Use Actual Rate Increases adjusted by Trend
• Never use solely Case Reserves
• Completion Factor Methods (Example)

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Employer Self Funded 1st Medical Claims
Sample Case 1
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Business Considerationsfor Reserving ( Pricing)

• Historical loss experience medical trend
• Sold premium rates premium trend
• Changes in underwriting practices
• Written premium volume and expected premium
  changes in rate setting
• Known Claims Actual Potential
• Available Data Inclusions/Exclusions (e.g.,
  capitation)

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Other Considerations

• Claim Backlogs
• System Definitions Edits for Incurred Paid
  Dates
• System Conversions
• Claims Paid at Different Pace (Faster?)
• Change in Case Mix
• Underlying Risk Attaching Business
• Immature Lines of Business
• Change in Risk Arrangements, Network Contracts
  or Claims Payors

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Special Considerations for Disease Management Cos.

• Similarities as Health Plans
• Availability Age of Data
• Reliance on Partners for Reserving
• Understand Experience Covered Items
• - Inclusions/Exclusions
• - Handling of Potential Litigious Items
  (Contractual Issues)
• Unique Characteristics of Claims
• - Prescription Drugs (Complete Faster)
• - Post Acute Services (Complete Slower)
• Later Discharge/Billing Dates

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Disease Management Co. Sample Case 2 (Post
Acute Services)
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Disease Management Co. Sample Case (Post Acute
Services)
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Completion Factor Approaches for Less Credible
Periods

• Use of Weighted Average Per Capita Cost for
  Current Periods Trend Adjustments
• Use Current Utilization Average Severity Data
• Utilization e.g., Bed Days per 1,000 members
• Severity e.g., Average Per Diems (Cost Per Day)

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Current Regulatory Impacts

• HIPAA Reform of 1996
• - Privacy of Medical Information
• - Compliance Required for 2002/2003
• Business Considerations
• - Shifting of Resources from Reporting (Data)
  Initiatives
• Develop Consistent Reporting/Claims
  Codification
• - Home Grown codes to be changed to standard
  industry codes
• - Larger business issues for specialty companies
  (e.g., home health)

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Reserves and COBRA

• Consolidated Onmibus Budget Reconciliation Act
• Formula Maximum of 102 of Fully Insured
  Equivalent Premium Rate
• Different Interpretation of COBRA pricing based
  on regulatory interpretations
• Inclusions of Reserves in Calculation?
• Use Incurred Claims vs Matured Paid Claims

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Disease Management Cos.

• Actuarial is ultimately responsible for
  Reserving
• Whos Actuary is Responsible or Accountable
  for Reserving?
• - HMO
• - Disease Management Co. (if they have one)
• - Outside Actuary
• Who Should be Responsible or Accountable?

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Reserves Transfers

• Health Plans/HMOs passing risk to
  Provider/Disease Management Companies need to get
  reserve credit
• Provider Groups/DM Cos. may not have best
  financials so will be require to securitize
  reserves amounts
• Amounts vary on who holds cash/pays claims
• Reserve Securitizations
• Letter of Credit or Cash Escrow
• Financial Guarantees/Keepwell Agreements
• Reinsurance Transactions

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Role of the Actuary

• More Analytics
• Obtain a better understanding of business
  considerations
• More of a need for conservatism today
• Management must accept lumpy results to be in
  business.

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Claim ReservingQuestions or Comments?
Thank you! Michael L. Frank Aquarius
Capital Phone [phone]Fax (914)
967-9099 E-Mail michael.frank_at_aquariuscapital.net
www.aquariuscapital.net