Mental Health Connection of Tarrant County

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1 Mental Health Connection of Tarrant County Health Insurance 101: Understanding the fundamentals of health insurance and the implications for health care reform Presented by: Tim Lee Fellow of Society of Actuaries Member of the American Academy of Actuaries Houston, TX November 8,

2 Health Care Delivery System 2

3 How Do We Finance Health Care? Govt. assistance (Medicare + Medicaid) 3 November 15, 2010

4 Health Care Financing System Insurance is one financing mechanism 4

5 Why Do We Buy (Need) Health Insurance? 5

6 Why Do We Buy (Need) Health Insurance? 6

7 The Main Product Insurance Companies Sell is: 7

8 What Is The Risk People Need To Transfer? The possibility that one will incur significant health care expense that would result in financial hardship or catastrophe 8

9 How Do They Transfer That Risk To Insurance Companies? Pay a small, certain amount (a premium) into a pool of funds with other people who have a similar risk to transfer Everyone s expected pay-in (premium) is the same Everyone s expected pay-out (benefit) is the same So it is perceived as a fair solution to the risk problem 9

10 What Is The Expected Benefit? Say your chance of having a severe head injury in a year is 1 in 10,000 But if you have that injury it will cost $100,000 to make you well Your expected cost is $100,000 x 1/10,000 = $10/yr But your actual cost will either be $0 or $100,000 10

11 Say There Are 20,000 People Just Like You They decide to pool their risk and buy insurance Total Premiums = 20,000 x $10 = $200,000 Expected Number of Claims = 20,000 x 1/10,000 = 2 Expected Benefits = 2 x $100,000 = $200,000 Insurance company takes the risk that there are actually more than 2, or less than 2, claims 11

12 Now, a 200 member local motorcycle club hears about your insurance pool and wants to join They don t wear helmets when they ride, but they do drink lots of alcohol Their chance of having a severe head injury in a year is 1 in 100 A biker s expected cost is $100,000 x 1/100 = $1,000/yr They think $10 is a reasonable premium, so they buy your insurance, too 12

13 So Now There Are 20,200 People In The Insurance Pool Total Premiums = 20,200 x $10 = $202,000 Expected Number of Claims = (20,000 x 1/10,000) + (200 x 1/100) = 2+2 = 4 Expected Benefits = 4 x $100,000 = $400,000 Needed premium rate is $400,000/20,200 = $19.80 Much more than $10.00 A 98% rate increase for everybody. 13

14 Or, The Insurance Company Could Classify The Policyholders According To Their Risk Level Premium: $10 Expected Benefit: $10 $1,000 $1,000 14

15 Two Insurance Companies Good Hearted American (doesn t underwrite) Premium: $19.80 Enrollment: 200 motorcyclists Profit-Driven National (does underwrite) Standard Motorcycle $10 $1,000 20,000 standard risk people 0 Not a sustainable system for Good Hearted American 15

16 Other Common Risk Classifications (because expected costs vary and applicants know this) Age Gender Geography Smoking Height/Weight 16

17 How Do Medical Costs Vary By Age & Gender? If Annual Average = $4,000 per Member Age Male Female 0 1 $ 6,000 $ 6, $ 1,500 $ 1, $ 1,900 $ 4, $ 2,600 $ 4, $ 4,100 $ 5, $ 6,900 $ 7, $10,800 $10,000 17

18 How Do Medical Costs Vary By Geographic Area? If National Annual Average = $4,000 per Member Texas Average = $4,080 Area Cost Lubbock $5,080 Tyler $4,880 Houston $4,360 Dallas $4,080 Ft. Worth $4,000 San Antonio $3,840 Waco $3,400 18

19 Now Only One Insurance Company: Profit-Driven National Premium: Enrollment: Standard Risk $10 20,000 Motorcycle Risk $1,000? Tough Choice For the Biker: Is it worth $1,000 to transfer the risk of a possible $100,000 expense? 99% chance he will be fine and it would be a waste of money $1,000 will buy a lot of gas - and alcohol 19 November 15, 2010

20 Now We Have 200 Uninsured Bikers As expected, two of them (Wyatt and Billy) have severe head injuries that will likely cost $100,000 each They immediately apply for insurance with Profit-Driven National They are denied insurance - they have a pre-existing condition 20 November 15, 2010

21 Maybe Profit-Driven National Can Accept Them And Just Spread the Cost Among All Policyholders Original exp. benefits = 20,000 x 1/10,000 x $100,000 = $200,000 Additional benefit cost = 2 x $100,000 = $200,000 Needed premium rate = $400,000/20,002 = $20.00 Premium Rates Double for Everyone Else 21

22 ?? Where Does The Premium Go? 22

23 Benefit Plan Design Traditional Indemnity Plan Deductible Deductible + Coinsurance = Out-of-Pocket Maximum 23

24 Benefit Plan Design Typical HMO 24

25 Benefit Plan Design Consumer Directed Health Plan with Health Savings Account (HSA) 25

26 Where Does The Premium Go? 100 Employee Group Break-Down Of Medical Claims 35% 30% 13% 4% 18% 26

27 What Does the Insurance Company Do With Its Part of the Premium? 100 Employee Group Break-Down Of Administrative Expense and Profit $54 6% Claims Processing 4% 3% 3% $0 2% 27

28 Where Does The Premium Go? Individual Insurance $360 $300 $240 70% Medical Claims Provider Relations/Member Services/Financial Mgt. Claims Processing Commissions Profit Premium Tax $180 $120 $60 30% $0 28

29 Where Does The Premium Go? Individual vs. Small group vs. Medium group vs. Large group Administrative Expense & Profit Medical Claims $360 $320 $280 $240 $200 $160 70% 75% 82% 91% $120 $80 $40 30% 25% 18% 9% $0 Individual 10 Employee Group 100 Employee Group 10,000 Employee Group 29

30 Annual Claims per Member Who Gets Health Benefits From Insurance? $20,000 $18,000 $16,000 $14,000 For a $3,000 deductible plan with 40% network discounts: 76% of all insureds will not meet the deductible Annual claims for the remaining 24% will average $2,800 after the deductible Claims above the deductible represent 68% of total costs $12,000 $10,000 $8,000 $6,000 $4,000 76% of all insured s will not meet the deductible $3,000 Deductible $2,000 $0 % of Members With Health Care Expenses Less than Annual Claims Amount 30

31 Annual Claims per Member Who Gets Health Benefits From Insurance? $20,000 $18,000 $16,000 $14,000 For a $10,000 deductible plan with 40% network discounts: 91% of all insured s will not meet the deductible Annual claims for the remaining 9% will average $1,800 after the deductible Claims above the deductible represent 44% of total costs $12,000 $10,000 $8,000 $6,000 $10,000 Deductible 91% of all insured s will not meet the deductible $4,000 $2,000 $0 % of Members With Health Care Expenses Less than Annual Claims Amount 31

32 Where Does The Premium Go? Conclusions: Administrative costs are relatively minor and inflexible Portion spent on administration shrinks as groups get larger Insurer profits are a very small piece of the total premium 32

33 What Causes Premiums To Increase So Fast? 33

34 34

35 Money Flows Into the Pool After About 2 Months it Flows Out of the Pool 35 November 15, 2010

36 What Drives Health Care Costs? Type of Service (eg. do surgery or treat with drugs?) Frequency the Service is Used (eg. length of hospital stay (# of days); follow-up office visits; lab tests) Charge for Each Service (negotiated between payer and provider) The Physician usually decides Type and Frequency of service 36

37 New Types Of Services 37

38 Cost of Healthcare Utilization x Charge = Cost Hospital Inpatient Annual Days Per 1,000 Average Charge Per Day Annual Cost Per 1,000 Cost Per Member Per Month Medical 100 $6,000 $600,000 $50.00 Surgical 90 $12,000 $1,080,000 $90.00 Maternity 35 $4,500 $157,500 $13.13 Psych and Substance Abuse Inpatient Surgery (including asst. surgeon and anesth.) 45 $1,500 $67,500 $5.63 Annual Procedures Per 1,000 Physician Average Charge Per Procedure Annual Cost Per 1,000 Cost Per Member Per Month 61 $3,500 $213,500 $17.80 Office Visits 3,000 $70 $210,000 $17.50 Physical Exams " " 280 " " $300 " " $84,000 " " $7.00 " " 38

39 How Do Medical Costs Vary by Insurance Product? Type of Delivery System Unmanaged.3 days x $6,500 = $1,950 0% Discounts (PPOs).3 days x $3,250 = $975 50% Discounts and Utilization Management (HMOs).2 days x $3,250 = $650 67% 39

40 Who Becomes The Uninsured? 40

41 Uninsured Segment Matrix High Ability To Pay Low Motivation To Buy High 41

42 Characteristics of the Four Segments High Ability To Pay RELUCTANT: 16.2% Majority Male Disproportionately Young Unlikely to Have Dependants Urban Good Health Professionals; Few Blue-Collar Workers Have Never Had Health Insurance Prefer Other Benefits to Health Insurance Say they Don t Need Health Insurance COMPLACENT: 19.4% Men and Women Youngest Group Less Likely to Have Dependants Sub-Urban Second Healthiest Group Retail Trade, Manufacturing; Few Professionals Most Unlikely to Have Ever Owned Health Insurance Prefer Other Benefits to Health Insurance Cost is a Major Barrier Acceptant of Free Clinics PREPARED: 28.3% Males and Females Oldest Group Have Dependent Children Urban Poorest Health Professional and Blue-Collar Workers Many are Not Employed Most Have Previously Owned Health Insurance Seek Health Insurance on Their Own Cite Confusion or Other Barriers HINDERED: 36.1% Female Over 40 Years Old Most Likely to Have Dependants Relatively Bad Health Manufacturing, Contract-Labor, Small Employers Have Previously Owned Health Insurance Cost is a Major Barrier Do Not Like Public Clinics Low Motivation To Buy High 42

43 Characteristics of the Four Segments Ability To Pay HIGH PREPARED: 28.3% Males and Females Oldest Group Have Dependent Children Urban Poorest Health Professional and Blue-Collar Workers Many are Not Employed Most Have Previously Owned Health Insurance Seek Health Insurance on Their Own Cite Confusion or Other Barriers RELUCTANT: 16.2% Majority Male Disproportionately Young Unlikely to Have Dependants Urban Good Health Professionals; Few Blue-Collar Workers Have Never Had Health Insurance Prefer Other Benefits to Health Insurance Say they Don t Need Health Insurance Men and Women Youngest Group COMPLACENT: 19.4% Less Likely to Have Dependants Sub-Urban Second Healthiest Group Retail Trade, Manufacturing; Few Professionals Most Unlikely to Have Ever Owned Health Insurance Prefer Other Benefits to Health Insurance Cost is a Major Barrier Acceptant of Free Clinics HINDERED: 36.1% Female Over 40 Years Old Most Likely to Have Dependants Relatively Bad Health Manufacturing, Contract-Labor, Small Employers Have Previously Owned Health Insurance Cost is a Major Barrier Do Not Like Public Clinics HIGH Motivation To Buy 43

44 Characteristics of the Four Segments RELUCTANT: 16.2% Majority Male Disproportionately Young Unlikely to Have Dependants Urban Good Health Professionals; Few Blue-Collar Workers Have Never Had Health Insurance Prefer Other Benefits to Health Insurance Say they Don t Need Health Insurance PREPARED: 28.3% Males and Females Oldest Group Have Dependent Children Urban Poorest Health Professional and Blue-Collar Workers Many are Not Employed Most Have Previously Owned Health Insurance Seek Health Insurance on Their Own Cite Confusion or Other Barriers Ability To Pay COMPLACENT: 19.4% Men and Women Youngest Group Less Likely to Have Dependants Sub-Urban Second Healthiest Group Retail Trade, Manufacturing; Few Professionals Most Unlikely to Have Ever Owned Health Insurance Prefer Other Benefits to Health Insurance Cost is a Major Barrier Acceptant of Free Clinics HINDERED: 36.1% Female Over 40 Years Old Most Likely to Have Dependants Relatively Bad Health Manufacturing, Contract-Labor, Small Employers Have Previously Owned Health Insurance Cost is a Major Barrier Do Not Like Public Clinics HIGH Motivation To Buy 44

45 Characteristics of the Four Segments RELUCTANT: 16.2% Majority Male Disproportionately Young Unlikely to Have Dependants Urban Good Health Professionals; Few Blue-Collar Workers Have Never Had Health Insurance Prefer Other Benefits to Health Insurance Say they Don t Need Health Insurance PREPARED: 28.3% Males and Females Oldest Group Have Dependent Children Urban Poorest Health Professional and Blue-Collar Workers Many are Not Employed Most Have Previously Owned Health Insurance Seek Health Insurance on Their Own Cite Confusion or Other Barriers Ability To Pay COMPLACENT: 19.4% Men and Women Youngest Group Less Likely to Have Dependants Sub-Urban Second Healthiest Group Retail Trade, Manufacturing; Few Professionals Most Unlikely to Have Ever Owned Health Insurance Prefer Other Benefits to Health Insurance Cost is a Major Barrier Acceptant of Free Clinics Female HINDERED: 36.1% Over 40 Years Old Most Likely to Have Dependants Relatively Bad Health Manufacturing, Contract-Labor, Small Employers Have Previously Owned Health Insurance Cost is a Major Barrier Do Not Like Public Clinics LOW Motivation To Buy 45

46 Characteristics of the Four Segments Ability To Pay HIGH RELUCTANT: 16.2% Majority Male Disproportionately Young Unlikely to Have Dependants Urban Good Health Professionals; Few Blue-Collar Workers Have Never Had Health Insurance Prefer Other Benefits to Health Insurance Say they Don t Need Health Insurance PREPARED: 28.3% Males and Females Oldest Group Have Dependent Children Urban Poorest Health Professional and Blue-Collar Workers Many are Not Employed Most Have Previously Owned Health Insurance Seek Health Insurance on Their Own Cite Confusion or Other Barriers LOW Motivation To Buy COMPLACENT: 19.4% Men and Women Youngest Group Less Likely to Have Dependants Sub-Urban Second Healthiest Group Retail Trade, Manufacturing; Few Professionals Most Unlikely to Have Ever Owned Health Insurance Prefer Other Benefits to Health Insurance Cost is a Major Barrier Acceptant of Free Clinics Female HINDERED: 36.1% Over 40 Years Old Most Likely to Have Dependants Relatively Bad Health Manufacturing, Contract-Labor, Small Employers Have Previously Owned Health Insurance Cost is a Major Barrier Do Not Like Public Clinics 46

47 Summing up Health insurance premiums are expensive because health care is expensive. The Health Care Reform law is essentially focused on insurance market reforms, not the drivers of health care costs. Some of the market reforms are contrary to some key principles of insurance risk pooling and appear likely to cause increases to premiums for most people who currently have insurance beyond what they would otherwise have seen. 47

48 Questions? 48

49 Instead Of Underwriting, Could Exclude Motorcycle Accidents From Coverage Good Hearted American (no exclusions) Profit - Driven National (exclude motorcycle accidents) Premium Rate $19.80 $10.00 Enrollment 200 motorcyclists 20,000 non-motorcyclists Total Premium $3,960 $200,000 Total Claims $200,000 $200,000 49

50 Four Functions of Insurance Catastrophic Coverage Wellness Incentives Wholesale Pricing Income Redistribution Insurable events Unpredictable High-cost Catastrophic coverage High deductible Coinsurance Protects assets Limits moral hazard (coverage does not induce demand) Preventive services Desirable for all Low-cost: vaccines, pap smears, child wellness visits Coverage encourages use Core of managed care Health coverage limits prices paid to providers and producers Contracted fees Medicare/ Medicaid administered pricing Discounts are valuable even under the deductible No one wants to pay retail prices Predictable need is highly skewed for Non-preventive Non-catastrophic Chronic illness Coverage mechanism transfers funds from chronically healthy to chronically ill Desirable but induces huge moral hazard due to discretion Source: James C. Robinson, PhD., U.C. Berkeley 50

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