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Old 10-01-2019, 03:06 PM
Noonien Soong Noonien Soong is offline
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Default How is health insurance priced, using P&C phrasing

[I'm asking in a P&C forum because previous coworker explanations from L&H coworkers didn't help my understanding, but i understand the language of P&C]

So, I'll admit it. I don't at all get how healthcare is priced. Is there a simple example in the ether?

Auto insurance to me is pretty darn easy to intuitively understand how the pricing works. There's frequency, the # of claims per exposure unit, then there's severity, how much you pay per coverage each time there's an event.

So, for Property Damage when the insured is at fault, the severity is the cost to repair the struck vehicle...or whatever.

What i have no clue how is priced is healthcare insurance. A coworker with L&H experience stated that at some level the past is also predictive of the future for healthcare, so you might look at the overall claims experience of, say, a group of 100 insureds made up of a combination of employees, spouses, and their children.

What's hard to wrap my head around is that there are so many different medical treatments, specialists, medications, procedures and all of them are run by and priced differently by different hospitals, how could an aetna or a cigna come up with pricing for a smaller up to large employer?

Is there any health pricing 101 literature out there?
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Old 10-01-2019, 03:09 PM
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Is there any health pricing 101 literature out there?
SOA probably has syllabus material to help you
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Old 10-01-2019, 03:55 PM
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I would also suggest looking at Workers' Comp pricing and PIP pricing for additional insights.
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Old 10-01-2019, 04:45 PM
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In the main it's the same as this:

Quote:
There's frequency, the # of claims per exposure unit, then there's severity, how much you pay per coverage each time there's an event.
But rather than try to split all these factors apart by calculating the frequency of 1,000 different perils and the severity of 10,000 different sites of service, we just skip to the end and take the total claims paid in dollars and divide by the total number of exposures. Total claims is definitionally frequency times severity. An exposure is usually defined as a covered individual for one month. The total claims divided by the member-months gives us a total per-member-per-month (PMPM). The PMPM is the key metric in health pricing.

Now underlying that and trying to project forward for next year it does get more complicated for all the reasons you cite and more but the principle is the same.
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Old 10-01-2019, 04:50 PM
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The explanation your friend gave doesn't sound that hard to understand. I worked over in health for a short stint. We were using utilization rates (frequency) of a given sickness/procedure/doctor and then generally speaking the cost (severity) is known through either contracts with in-network doctors or a general idea of what an out-of-network doctor should charge. remove deductible estimates and apply a contingency factor on that and then expected expenses and profit just like P&C.

as your friend said and if you've been to the doctor and reviewed the EOB or bill, every single procedure is coded in their system, i think it's a pretty standard coding system across the industry. thus not too hard to figure out utilization.
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Old 10-01-2019, 05:40 PM
Noonien Soong Noonien Soong is offline
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But rather than try to split all these factors apart by calculating the frequency of 1,000 different perils and the severity of 10,000 different sites of service, we just skip to the end and take the total claims paid in dollars and divide by the total number of exposures. Total claims is definitionally frequency times severity. An exposure is usually defined as a covered individual for one month. The total claims divided by the member-months gives us a total per-member-per-month (PMPM). The PMPM is the key metric in health pricing.

Now underlying that and trying to project forward for next year it does get more complicated for all the reasons you cite and more but the principle is the same.
This is the crux of why it's complicated. I guess it's just accepted that no body will ever fully understand all the costs and services, we through our hands up and say, what was the overall result? Then go from there. Still, i suppose that allows for deductible level pricing for different types of services.

It also seems like medical inflation could easily be embedded into healthcare pricing.

Thanks!
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Old 10-01-2019, 05:41 PM
Noonien Soong Noonien Soong is offline
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SOA probably has syllabus material to help you
Good call! I'll check if there's anything in the SOA ether.
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Old 10-01-2019, 06:01 PM
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This is the crux of why it's complicated. I guess it's just accepted that no body will ever fully understand all the costs and services, we through our hands up and say, what was the overall result? Then go from there. Still, i suppose that allows for deductible level pricing for different types of services.

It also seems like medical inflation could easily be embedded into healthcare pricing.

Thanks!
No, we don't throw our hands up. We have sophisticated (and unsophisticated) models to figure this stuff out at component and detail level. My old company had one team just devoted Inpatient and another devoted to outpatient etc. It's complicated but it's not completely inscrutable and the principles of pricing are the same as you learned in MLC.
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Old 10-02-2019, 09:51 AM
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Quote:
Originally Posted by Childish Gambino View Post
No, we don't throw our hands up. We have sophisticated (and unsophisticated) models to figure this stuff out at component and detail level. My old company had one team just devoted Inpatient and another devoted to outpatient etc. It's complicated but it's not completely inscrutable and the principles of pricing are the same as you learned in MLC.


A lot depends on just how granular is the data you have access to.

Then determine a reasonable credibility measure to see to what level of aggregation do you need to go to for your core analysis.
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