Transcript Slide 1

Confessions of an Insurance CEO
Michael Turpin
October, 2014
Houston, Texas
Confessions of an Insurance CEO
Michael Turpin | October, 2014 | Houston, Texas
© 2014 USI Insurance Services. All rights reserved.
© 2014 USI Insurance Services. All rights reserved.
| 2
The Stages of Death and Dying and Health Reform
| 3
Macro U.S. Healthcare Issues
Government health spending is devouring the budget
•
•
•
•
Social Security is $8T underfunded. By comparison, Medicare is $50T underfunded.
We are living well past actuarial assumptions for health premiums pricing in Medicare and
consuming almost 3x the premium collected to cover the claims costs we are likely to generate.
If the U.S. government was an insurer, it would be seized by regulators for inability to finance
future claims obligations.
What’s Next ? Retirement age of 70? Means testing for Social Security and Medicare? Further
cuts to Medicare and Medicaid reimbursements?
Demographics, social attitudes and consumption trends are working against us
•
•
•
•
•
The average retiree lives on $22,000/year of income. The true cost of coverage is $22,000 a year.
Seniors love Medicare because its unmanaged.
The average U.S. household earns $44,000/year in income. The gross cost family coverage for an
80/20 out -of-pocket plan design is close to $22,000.
Medicaid reimburses 60% on the dollar, Medicare reimburses 80% on the dollar and commercial
insurance reimburses 122% on the dollar.
People believe good healthcare equals open access, low out-of-pocket costs and “everyone in
the waiting room looks like them.”
Psssst….It’s Not Going Away!!
| 4
Charting A Social and Political Course
Political Landscape
•
•
•
•
•
Public exchanges are narrow network plans that reimburse doctors somewhere
between Medicare and Medicaid payment levels. To date almost 10M people are
purchasing through exchanges with 6M thought to be previously uninsured.
– That leaves 44M remaining uninsured.
Obamacare sold by CBO as costing $800B while raising $900B in revenues to “reduce”
the deficit over ten years by $140B.
– A large percentage of these revenues inure in later years and are driven by
Cadillac tax assumptions where as many as 40% of employers may be hit with an
excise tax.
– Third parties estimate the true cost of the ACA between 2020 and 2030 will add
over $1T additional debt to our current $16T.
2018 will be interesting as “Cadillac Tax” begins to erode the deductibility of benefits
for employers offering “rich” benefit plans
Congress is deadlocked and there is no momentum or credible challenge to radically
modify or change the legislation
Hillary may not run in 2016 as she is rumored to be sick. If she does not run, it will be
Andrew Cuomo taking on Joe Biden for the Democratic nomination. The GOP is a toss
up.
Sorry….It’s Not Going Away!!
| 5
Charting An Employer Course
Public and Private Employers Are Poor Fiduciaries of Their Healthcare Spend
•
•
•
•
Employers still don’t act like payers.
– They rely too much on their insurer and Human Resources
– Two groups whose incentives are not always aligned with the fiduciary obligations of
business
HR is overwhelmed, often under regarded and has no incentive to drive “disruptive
practices” that could reform reimbursement and change the trajectory of their company’s
medical costs.
– CFO’s have not focused enough on loss-control versus year-over-year costs.
– CEOs just want to know that Nexium is still on the formulary.
The most engaged employers have achieved a CAGR of medical trend in low single digits
over the last 3 years. They outperform peers by a full 10% each year as a result of their
strategies to focus on reducing consumption and getting value instead of cost shifting by
increasing contributions or devaluing the plan through benefit cuts.
In the next 5 years, every employer will need to chart a course between:
1. Offering a defined benefit plan design,
2. Providing a defined contribution solution set through a private exchange, or
3. Migrating subsidy-eligible employees to public exchanges.
Most employers have no strategy and don’t hold those in charge of
their plans accountable for good and bad results.
| 6
Charting A Market Course
Insurers
•
•
•
•
Public insurer stocks are at all-time highs. Insurers were adroit in negotiating minimum Loss
Ratio rules with government. Insurers profits are exceeding allowed limits simply through the
process of redefining administrative charges as “medical claims” and moving into provider
services such as pharmaceutical benefits management (PBMs), behavioral health services,
care management, disease management, and administrative services.
Non-profit Blues have been allowed to amass “war chests of reserves” well above statutory
requirements on the assumption that reform creates uncertainty. This has retarded a
traditional soft-market pricing cycle that has forced insured prices down as non-profits run
down reserves and for-profits follow. Non-profits using excess reserves (profits from
overpricing fully insured premiums) to finance acquisitions and market footprint expansion.
Insurers rapidly expanding into Medicaid and Medicare -based markets looking to capture
newly insured market share and position for possible future public policy changes.
Insurers are working to repair a highly damaged consumer brand and are positioning
themselves for a “defined contributions future” where consumers are more free to choose
between insurers and products.
Your insurer now administers 100% of your claims and delivers as
much as 40% of your provider services through owned and
affiliated third-party subsidiaries.
| 7
Charting A Provider Course
•
Healthcare systems will continue to merge and integrate as reimbursement reforms
shift from fee-for-service to value-based and bundled reimbursements. Hospitals
must plan for Medicare as a basis of reimbursement and become Accountable
Care Organizations (ACOs) willing to accept risk and becoming more like insurers.
•
Hospitals will shift to outpatient care and seek to reduce operating costs by as
much as 20% through technology adoption and process improvement. It will be
almost impossible for small, unaffiliated hospitals to survive in a post-ACA world.
•
Primary care physicians (PCPs) are selling their practices and affiliating with health
systems as employees. The need for alternatives to in-facility care and a void of
primary care is attracting private equity into including retail and on-site clinics,
urgent care, and center of excellence disease specialty. Home health,
telemedicine, nurse practitioners and physician assistants will serve as gate keepers
to triage care.
•
As new insureds enter the system, PCP shortages will occur in rural areas resulting in
higher ER use and sparking investments in urgent care. As many as 90M Americans
covered under Medicare, Medicaid and individual insurance will make new buying
decisions. The next decade will be touted as “the decade of the consumer.”
Healthcare stakeholders are preparing for an
explosion of consumerism and a contraction in
margins and they are scrambling.
| 8
Health Reform Will Fundamentally Alter Entitlements
•
•
169M non-elderly Americans fall within these FPL boundaries.
Over 75% are covered by some form of employer sponsored insurance
Persons in
family/household
100% FPL
400% FPL
1
$11,170
$44,680
2
$15,130
$60,520
3
$19,090
$76,360
4
$23,050
$92,200
5
$27,010
$108,040
6
$30,970
$123,880
7
$34,930
$139,720
8
$38,890
$155,560
For families/households with more than 8 persons, add $3,960 for each additional person
2012 FPL for 48 Contiguous States and District of Columbia. Dept. of Health and Human Services
http://aspe.hhs.gov/poverty/12poverty.shtml (as visited 11.7.12). See website for information on Alaska and Hawaii.
| 9
Who’s Driving Decisions at Your Firm?
Strategy Drives Structure
Your Financial Strategy Drives Your Benefits Structure – Whether
You Admit it Or Not
Benefit Philosophies will be influenced increasingly by financial performance:
o “No disruption”: Per capita medical spend < 20% of per capita profit
o “We’re open to doing more”: Per capita medical < 50% of per capita profit
o “We need to reduce costs”: Per capita medical < 75% of per capita profit
o “We want out”: Per capita medical ≥ 100% of PEPY profit
There is a growing tension between Finance and HR as the disruption and
administrative hassles of engaging employees clashes with the financial
realities of a low organic growth economy.
What is the cost of not taking more aggressive action?
| 11
The Executive Dashboard
HR Must Be “A Friend AND Fiduciary”
Per Capita Medical Costs
Healthcare Cost Impact on ABC Company
Annual Premium
$14,329,777 (1)
Annual Revenues
$ 720,000,000
Company Per Capita
Healthcare Costs (PEPY)
$11,473 (2)
Per Capita Revenues
$ 576,461 (1)
Peer Group #1 (PE advisor
group)
Healthcare Costs (PEPY)
$14,060
Per Capita Profit (17%)
$97,998 (2)
Average EE Share
21%
Peer Group #2 (law firm)
Healthcare Costs (PEPY)
$13,070
Average EER Cost
79%
Peer Group #3 (Consulting
Firm)
Healthcare Costs (PEPY)
$16,065
Net Employer Per Capita Cost
For Healthcare
$9,063
Healthcare as a % of Per Capita
Profit
9.2%
(1)
(2)
Includes claims, retention and reserves
Average per capita cost of ABC Company
1)
2)
Estimated annual revenue against April enrollment
Estimated profit margin against revenues
Assumptions:
• 1249 lives
• Annual premium is fully insured
• Solutions:
• Per Capita Projected Savings (2)
• Solutions Savings as a Percentage of Net Employer Costs:
•Revenue Required to Drive Additional EBITDA:
(1)
(2)
$ 1,859,331
$1,488
13%
$10,937,241
$ / .17 profit margin
savings estimates / # of employees
| 12
Health Plan Priorities Dashboard
“Show Me on One Page”
FINANCIAL LANDSCAPE
LARGE CLAIM REVIEW
FY 10/1-3/31/13*
Proj. 2013
FY 2012
Avg. Covered Emps
946
1,003
1,008
Conventional Premium
$6,477,921
$13,736,480
$13,720,275
Emp Contrib
$1,003,687
$2,196,570
$2,192,957
Total Paid
$5,879,441
$13,751,967
Net Actual Paid
$4,875,754
$11,539,910
$11,559,010
EE/ER Cost Split
17% / 83%
16% / 84%
16% / 84%
Gross PEPY
$12,430
$13,695
$13,643
Net PEPY
$10,308
$11,505
$11,467
Net PEPM
$859
$959
$956
*NOTE: Current plan claims are understated due to plan converstion
FY 2011
1,058
$11,272,990
$2,021,310
$13,641,852
$11,620,542
15% / 85%
$12,894
$10,983
$915
2013 RENEWAL SUMMARY
Calendar Year 2013
Spouse
EPO
Spouse
EPO
Emp
EPO
Emp
EPO
Spouse
POS
Child
EPO
Emp
POS
Emp
POS
History Breast Malignancy
Tachycardia
Lymphomas
CoronaryAtherosclerosis
CA GI/Respiratory Tract
Leukemia in Remission
Morbid Obesity
Brain/Spine CA
Total Large Claims:
Total paid CY 2013*
2013 (6mos)
8 Claims +50K
2012
$228,032
$153,582
$130,498
$59,991
$69,675
$340,160
$60,755
$74,279
$1,116,972
$2,521,305
44.30%
18 claims +50k
27.40%
Adopted incentives for Premium Designated provider network
Cost sharing plan changes (ded, coins)
19% increase in employee contribution penalty for non-compliant
2011
43 claims +50k
*Note: 2013 total claims may be understated
34.70%
(Annual physical) resulted in $61k of 'penalty' premium
PHM/CLINICAL OBSERVATIONS
19% of employees (164) are non-compliant
Favorable utilization of wellness exams and screenings
Musclosk eletal primary diagnoses primary driver of medical cost
MEDICAL/RX PLAN DESIGN OVERVIEW (CURRENT)
EPO
In-network
$20/$30/$40
Provider Copays
Deductible
(weight, physical inactivity) Increase orthopedic surgery utilization
POS
In-network
Out-network
$25/$35/$50
Ded/Coins
$300/$600
$400/$800
Coinsurance
90%
Out-of-pocket
$1500/$3000
RX
$100 ded; $10/$30/$60
Current Enrollment %
84%
Employee Contributions (Monthly)
Wellness Incentive
Penalty
Single
$95.55
$113.75
Emp/Sp
$191.10
$227.50
Emp/Ch
$152.43
$181.46
$250.25
$297.92
Emp/Fam
$1500/$3000 2014 PLANNING
90%
70%
$2000/$4000
$4500/$9000
$100 ded;$10/$30/$60
16%
$159.25
$318.50
$268.45
$382.20
$189.58
$379.17
$319.58
$455.00
YEAR OVER YEAR COST
PEPY COST
$12,894
$13,632
$13,695
2011
2012
2013
$15,742
$13,383
2014 (Projected 2014 HDHP
no cha nge)
50-85% of conditions associated w'/ modifiable risk s & preventable
High prevalence of diabetes (Diabetics cost $7,000 more in claims)
$14,412
2014 HDHP w/
50% HSA
fui nding
1) Introduce HDHP plan (savings of $1.2m - $2.2m): aintain choice
EPO: $1250 ded; $3000 OOP:
POS: In-net $1250 ded; $3000 OOP; Out: $3000 ded; $10000 OOP
2) Target communications, Q&A, work shops, webinars on CDHP
3) Educate members on reasons for UHC telephonic outreach and
importance of engagement
4) Continue on-site programs related to stress reduction, nutrition
and exercise
5) Communication plan around compiance with evidence-based
medical guidelines (all at-risk members are receiving appropriate
care to manage their condition)
6) Carve-out programs (Stop Loss, RX, Radiology network s)
7) Member Cost Savings Opportunities (Tele-health, Compass,
Bestdoctors.com, tourism and other clinical solutions
8) Continue with steerage to centers of excellence; performance
based network s with financial penalties
| 13
Five Levers to Manage Costs –
The Path of Least Resistance?
1.
Cost shift to employees through contributions, and/or benefit reductions – Over time most employers have
eroded the actuarial value of their plans by cutting benefits at the same time they are raising contributions
often adversely impacting younger employees and families.
2.
Reduce insurance cost through aggressive negotiations, financing and underwriting practices – It is cheaper
to retain risk than to transfer it. Carriers love insured programs.
3.
Reduce unit cost of services – review network discounts, engage employees for elective services to become
better consumers through use of high deductible plans, utilize cost transparency tools. Outsource and
unbundle discreet services such as RX, Stop-loss and Care/Disease management. Carriers all use creative
methods to estimate best discounts. Many misrepresent the truth.
4.
Reduce intensity of services during an episode of care through review and management (focus on
reducing waste and overtreatment) – Insurers have not done a strong job at managing the intensity of
services while individuals are hospitalized. Admissions are down but intensity will continue to rise. RX is a time
bomb!
5.
Reduce consumption of healthcare by improving employee and dependent health – focus on promoting
primary care, finding asymptomatic illness, reducing potential for at risk becoming chronically ill, stabilizing
chronically ill through gaps in care management to prevent catastrophic claims. Adopt incentive-based
biometric plans that includes health risk assessments. Healthy people have fewer claims.
It’s harder to modify behavior than contributions. However, low single-digit
renewals will only come from reducing consumption, which means “change”
and “disruption” to employees – two words HR hates.
| 14
Insurance Profit 101 – The Mushroom Theory
Unit Cost
Our PPO Network was more Expensive than You Think…
•
Many insurers maintain more than one PPO network. Some give their inferior
economics to self-funded clients using third-party administrators or to
smaller self-insured customers. How do you know you have the best
economics?
•
Narrow network plans should save more money. Criteria for highperformance networks vary based upon complex algorithms of optimization
over an entire “service episode of care” and “unit cost.” Are higher unit
cost providers in your High Performance Network?
•
There is huge variability in PPO network provider pricing. Two in-network
providers can have as much as 500% variance in their billed charges for the
same services E.g. radiology, most elective procedures…
Every insurer obfuscates their actual discount percentages and uses
weaker networks to negotiate favorable hospital contracts.
To quote a sage consultant: “The best disinfectant is sunshine!”
| 16
Target Marks
We loved small brokers and insured, smaller employers
•
Cottage Industries – 70% of employers are handled by broker/advisors whose benefits
revenues are less than $5M in revs.
− Smaller brokers tend to pick one favored carrier and work very hard for favored nation
status.
− Boutique benefit shops may favor fully insured, packaged products that represent the
highest margin for insurers and the largest compensation.
•
Lack of Transparency – Most clients do not know how much they pay their advisor and do
not review 5500 filings each year to relate costs to program outcomes.
− Outcomes / Cost = Value
− Insurers see intermediaries as “too big to ignore,” “loyalists” and “competitor advocates”
− When an advisor is small, they ask for favors. Favors create goodwill, which can be
called upon at later dates.
•
Margin is made in small and mid-market - Insurers make 2-3x the profit for insured business
than for self funded business. Insurers purposely try to steer clients and brokers from being
self-insured using a variety of tactics. HR is often scared by self-insurance administration and
Finance is worried about cash flow and maximum liabilities in the event of a bad year.
We liked a huge distribution of brokers and worried about the consolidation
occurring in the intermediary community. We would protect small, less
sophisticated brokers because they were loyal and could sell increases.
| 17
Insured Underwriting
Death By A Thousand Cuts
•
Nickel and Diming– Insured quotes had risk and profit charges of 5% built in
to rates. However, we would also receive rebates from RX contracts,
margin from pooling charges and capitation charges as well as charge
you a percentage of claims every time a member went out of network.
•
We’re betting against HR– We believed that HR could sell higher cost
increases in an attempt to limit the disruption of a carrier change. We
would delay delivering increases until the last possible period unless the
broker required early renewals.
•
My stated desired target loss ratio is 82%-85% on insured programs. My
actual loss ratio at 85% was closer to 78%-80%. This is due to hidden margin
in other areas. I could make money on a 92% loss ratio renewal.
Carriers depend on opaque pricing practices and hidden margin to
achieve profits that exceed reported margins. Nationally, carriers
have found a way to not rebate any profits from premiums that
exceed the ACA loss ratio requirements.
| 18
Cost-Shifting
Cost-shifting will be more prevalent under insured plans
Self-insurance could significantly grow in popularity as employers seek:
• Greater transparency of claims
• Question bundled insurer practices
– Capitation payments to subsidiaries such as pharmacy and
– behavioral health
– Capitation payments to providers
– Efficacy of disease management and medical management
– Discounts
• Avoidance of fees passed on by insurers
• Avoidance of state premium taxes
• Avoidance of state mandates
• Ability to contract directly with ACO’s?
The simple act of self insurance may reduce fully insured
costs by as much as 10% by 2014. Employers need to get
over their fear of financing their own risks.
| 19
Stop Loss: Games People Play
•
Insurer profits exceed those profits made by mono-line stop loss carriers
who compete for business. Carriers will try to argue that bundling stoploss makes more administrative sense. It does not.
•
Don’t get distracted by maximum liability and do not compare carrier
quotes by comparing aggregate stop-loss. A decent actuary can
predict claims within 3%-5% of expected costs. Maximum liabilities are
almost statistically impossible to be reached – which is why aggregate
stop-loss premium is so low and treated as a commodity.
•
Individual stop-loss is key. Be sure to negotiate out:
−
−
−
−
−
Specific lasers on large ongoing claims
Non renewal for bad claim experience
Immature Aggregate/Specific (12/12) written in consecutive years
Pharmacy excluded from specific stop loss coverage
Layering – Who really holds the risk on your large claims?
| 20
RX Economics: A Prescription for Profit
•
Opaque Pricing Rules Most RX Plans: The amount the PBM pays the pharmacy for
a drug is lower then what is charged as a claim to the employer. The discount
off avg. wholesale price (AWP) from the PBM determines the spread made by
the pharmacy manager.
•
Focus should be on lowest net cost per script, not rebates. Getting a rebate
check is the equivalent of habitually overpaying the IRS each year and then
expressing delight with your refund. Many RX purchasing co-ops include non
disclosed fees and rebate based reimbursement. Employer fixation with rebates
has led to mark-up/discount sleight of hand.
•
Talk About Heartburn: $ 260 per script Proton Pump Inhibitor cost of “Nexium”
versus over the $15 over the counter “Omeprazole”
•
Your insurer will use RX rebates to “buy-down” administrative fees to give the
appearance of competitive pricing – essentially using your money to appear
more aggressive. Insured employers typically cannot unbundle RX.
•
Employers should utilize a PBM with pass-through pricing that includes no spread.
| 21
What is More Disruptive:
Engaging Employees or Firing Them?
•
Who Is Really Disrupted When You Make Change?
− 20% of employees drive 80% of claims. 70% spend less than $500.
− If you need to find savings, what’s more disruptive – firing workers
or focusing on reducing claims consumption by changing
behavior?
•
Your large claims will arise out of:
o Asymptomatic illness going undetected
o Chronically ill employees not receiving treatment to stabilize their
conditions
o At-risk employees continuing lifestyle decisions that deposit them
into chronically ill bucket
In a period of low organic growth and double digit profit
expectations, expenses will be realized through lower per capita
healthcare spend or lower FTE counts.
| 22
Health Care Reform
Strategic HR/Finance Planning Questions
1. Does ACA represent a Challenge or an Opportunity for our organization?
2. Will ACA require us to make significant changes?
o How we offer benefits?
o To whom we offer benefits?
o What benefits we offer?
o How much the benefits cost?
o How we administer benefits, payroll, employee communication...?
o How will our employees and families be affected?
3. How do the revisions required by ACA fit within our own benefits philosophy/
strategy? How does the rate of growth of healthcare track with our pro forma
revenue and EBITDA assumptions?
4. What do we expect other players in our industry will do with respect to ACA?
o What impact will there be to our competitive position?
5. Should we consider changes to our benefits strategy and overall compensation
model?
6. Are we prepared internally to support the changes needed?
7. Do we understand how public exchanges will develop in our state and for all our
locations? Will plan designs vary dramatically from current commercial plans?
| 24
Private Exchanges
Consultants becoming brokers, brokers becoming consultants.
Dogs and cats living together…
•
Consultants and national houses all launching private labeled exchanges.
Public companies got market uplift from expectation that exchanges would
supplant employer defined benefit (DB)designs.
Pressure mounting in
consulting firms to convert traditional clients to owned platform creating
channel conflict and objectivity issues
•
2015 will be disappointing enrollment statistics for active employee
exchanges beyond those employers that needed to adopt a design.
Conversely, exchanges represent perfect fit for retiree medical outsourcing.
•
Belief is employers will not want to drop coverage and push people into
public exchanges but “cap” expenditures and tie future contributions to
profits. As DB pension plans became 401k, DC plans may penetrate a large
percentage of employer traditional benefits plans
Employers will have to try to navigate a crowded floor of self interested
advisors and vendors – all wanting to promote their B2B2C purchasing
facility. The term “exchange” will become a confusion of meanings.
| 25
Defined Contribution and Private Exchanges
A Trend or Hype Cycle?
An exchange is the nail, your strategy is the hammer –
not the other way around.
Source: Gartner Group Hype cycle indicators model adapted to exchange cycle.
| 26
Resources Required to Run the Race
Things just got more Complicated…
Communications – SBC requirements, exchange
education, plan changes -- what is your theme?
notification,
reform
Employee advocacy, engagement and education – Enrollment, plan
changes, issue resolution and support – Who will intervene on their behalf?
Actuarial / Underwriting – Contribution setting for plan options, scenario
modeling, plan option forecasting, budge assumptions and funding analysis
– Do you know what your trend goals are and how costs impact profits? Do
you understand self insurance?
HR Administration – Do you want to outsource, co-source or contract
elements of HR administration to third parties – Are you stuck being tactical
when you need to be strategic?
Pharmacy – Carrier and large PBM models are broken. Insurers using rebates
to offset their own administration costs – What is your true Rx trend?
| 27
Resources Required to Run the Race
Things just got more Complicated…
Compliance – HR and employment laws will continue to become more
complex. ERISA will change and be challenged – Who is your legal resource?
Healthcare reform modeling and scenario planning – Discovery of risk
exposures, review of financial exposures, modeling based on employment
and design changes – Will reform happen to you or for you?
Clinical – What are the controllable utilization trends in your health plans? Is your
carrier fulfilling their administrative duties to impact consumption trends? What
current and forecasted cost arising from?
Population health – Premium differentials, incentive plans – Can I change
behavior?
First quartile employers who desire low single medical digit
trends will need to redefine terms like “disruption”, “value”,
“social contract” and “loyalty”…
| 28
HR and Finance:
Hang Together or Hang Separately
•
Align incentives and people - Force your C-Suite to sit through a whole
healthcare strategy meeting. Pay HR to achieve better results. Communicate
to your entire senior management team on what you are doing as they are
often your biggest consumers, complainers and point of contact for
employees
•
Don’t waste a crisis – use the ACA and reform as air cover to drive
fundamental changes necessary to “preserve” your ability to offer employer
sponsored benefits
•
Create a roadmap and set goals:
o
o
o
Question the value of your vendors and hold them to measurable
standards. In a period of low healthcare consumption, a 6% increase is
nothing special. Your goal should be zero trend!
Your rate of healthcare cost growth cannot increase faster than your
revenues
If your organic growth is flat and margins are under pressure, remind HR
that it is more disruptive to fire employees than it is to make changes to
your plans that will force employee engagement and overdue
accountability for better consumerism
| 29