Figure 1 is a sample pricing model designed to show how the basic element of pricing and utilization impact cost. For illustration purposes, it shows the net savings an employer can expect when transferring from a hypothetical fee-for-service indemnity plan to a standard PPO. HMO and POS plans pricing also can be used in this model and they are discussed later. The model helps illustrate some of the basic pricing components used to evaluate the net cost advantage of establishing a managed care plan. An important caveat is that this is a hypothetical illustration and not intended to predict actual savings for any specific plan sponsor or health plan. Actual savings can be affected by factors outside the parameters of the model, such as catastrophic claims, changes in membership demographics, and so on.
Steps | Calculation | |
|---|---|---|
1. | 2004 recorded medical claims (indemnity) | $ 5,000,000 |
2. | Covered employees | 1,000 |
3. | Average 2004 claim cost per capita (lines 1/2) | $ 5,000 |
4. | Projected indemnity trend increase | ×115.6% |
5. | Projected 2005 claim cost per capita (lines 3 × 4) | $5,780 |
6. | Projected Aggregate 2005 Claim Costs (lines 5 × 2) | $ 5,780,000 |
Projected PPO In-Network Claim Costs | ||
7. | Average 2004 claim cost per capita (line 3) | $ 5,000 |
8. | Projected PPO trend increase | ×114.4% |
9. | Projected 2005 PPO claim cost per capita before adjustments | $ 5,720 |
10. | PPO claim cost adjustments | |
a. Increase value of in-network benefits (90 percent preferred) | ×107% | |
b. Average value of discounts from provider networks | ×88% | |
c. Average value of new utilization management controls | ×95% | |
11. | Projected 2005 PPO claim cost per capita after adjustments | $ 5,117 |
12. | Expected average PPO participation (75 percent in-network usage) | ×750 |
13. | Projected aggregate 2005 PPO in-network claim costs | $ 3,837,750 |
Projected Non-network Claim Costs | ||
14. | Average 2004 claim cost per capita (line 3) | $ 5,000 |
15. | Projected indemnity trend increase | ×115.6% |
16. | Projected 2005 claim cost per capita (lines 3 × 4) | $ 5,780 |
17. | Non-network claim cost adjustments | |
a. Increase value of in-network benefits (70 percent preferred) | ×92% | |
b. Average value of discounts from provider networks | n/a | |
c. Average value of new utilization management controls | ×97% | |
18. | Projected 2005 PPO claim cost per capita after adjustments | $ 5,158 |
19. | Expected average PPO participation (25 percent in-network usage) | ×250 |
20. | Projected aggregate 2005 non-network claim costs | $ 1,289,500 |
Summary Comparison | ||
21. | Projected aggregate 2005 claim costs for indemnity plan | $ 5,780,000 |
22. | Projected aggregate combined 2005 PPO claim costs (lines 13+ 20) | $ 5,127,250 |
23. | Projected aggregate claims savings (lines 21–22) | $ 652,750 |
% Savings (lines 23/21) | 11.3% | |
Note: Excludes additional costs of PPO network operations and UM administration. Assumptions: Plan sponsor with 1,000 covered employees under a standard nonmanaged indemnity health plan (80 percent coinsurance after $250 deductible) moving to a full-service PPO plan (90 percent benefit for in-network/70 percent for non-network, $250 deductible combined). All employees are in one location, with access to the PPO network; expect 75 percent total network utilization and 25 percent non-network usage. | ||
Figure 1: Sample Managed Care Pricing Model for 1,000-Employee Plan
The model uses a hypothetical plan sponsor with 1,000 employees incurring $5 million in recorded medical benefit costs in 2004, estimated to increase by 15.6 percent in 2005 in a completely unmanaged environment, to an estimated $5.8 million, as shown in steps 1 through 6.
With implementation of a PPO plan, the net expected plan costs would be a combination of in-network and non-network expenses. Steps 7 through 13 illustrate how the PPO in-network costs are projected. Using the starting point of historical indemnity claims, line 8 shows a lower expected trend of 14.4 percent, as compared with the 15.6 percent for non-managed plans, which produces a lower claims-per-employee cost, before PPO adjustments.
The PPO adjustments on line 10 include (a) an adjustment for higher in-network benefit level (90 percent versus standard 80 percent); (b) an adjustment for the estimated value of PPO network discounts; and (c) an adjustment to reflect the expected value of reduced utilization brought about by the precertification and concurrent review programs associated with the PPO.
These adjustments total an 10.5 percent reduction, which when multiplied by line 9, yields a net 2.3 percent increase in 2005 claims costs per employee in the PPO network. The expected average usage of the PPO network is 75 percent, so the claims of an average of 750 employees (and their covered dependents) will flow through the network side of the equation. (Note: The actual degree of network utilization will depend largely on the success of employee education about the PPO plan and the accessibility of network providers to employee locations.) While the illustration assumes 100 percent availability of PPO network providers, this assumption is generous, and in the majority of instances there will be some employees who live outside the available service area and therefore continue to receive indemnity benefits (80 percent after deductible).
However, that is only half of the story. The plan sponsor needs to understand that non-network benefits also are impacted, as shown in lines 14 through 20. Starting again with unadjusted 2004 claims per employee of $5,000, we apply the nonmanaged trend level (15.6 percent) to get a projected claims cost of $5,780 per employee before adjustments. The PPO non-network adjustments, on line 17, include (a) net benefit because of lower reimbursement levels and penalties for noncompliance (70 percent versus indemnity of 80 percent); (b) no adjustment for network discounts; and (c) a smaller adjustment for UM features, since the stand-alone programs generally are not as comprehensive as those integrated into the PPO plan operations. Assuming 25 percent non-network usage among eligible participants (line 19), the non-network plan costs are increased about 3.2 percent between 2004 and 2005 versus 15.6 percent in the indemnity plan.
On a composite basis, total projected 2005 PPO claims costs (network and non-network) are shown at $5,127,250 (line 22) as contrasted with the original projected indemnity claim costs of $5,780,000 (line 21), resulting in an estimated savings of $652,750 or 11.3 percent less than nonmanaged care. Instead of a 15.6 percent cost increase for 2005, the plan sponsor would see about 2.5 percent. As mentioned above, this pricing model is used here for illustrative purposes only. Actual network discounts and UM adjustments will vary among networks and vendors. The point here is to understand some of the components that impact the value of PPO plan pricing.
The results become more significant over longer periods. Assuming the above trend rates for indemnity and PPO plans, total costs for a non-managed plan would continue to outpace the PPO plan. For example, by 2010, the nonmanaged plan could reach per capita claim costs over $11,930 while the PPO plan would be about $10,048, a difference of 15.8 percent per capita. In addition, the PPO in-network usage would likely increase over time as more participants become accustomed to the network provider panel; this would only further differentiate the two costs.
Point-of-service plans also can be evaluated using the same model with essentially the same methodology. There would be higher expected UM savings, because of the addition of primary care referral management which would be significant, since referral management more directly controls utilization of medical services.
Health maintenance organizations' net savings are not as easily evaluated using the above pricing model, especially when capitation is the method of provider reimbursement; with provider revenues capped, the frequency of services (utilization) is a more direct concern for the provider. When capitation reimbursement is used, the traditional methods of evaluation shown in the pricing model become obscure. The fixed revenue of capitation translates into a fixed level of paid claims. In fact, if all providers within an HMO are capitated, the premium becomes one fixed prospective payment to providers plus administrative costs of the plan.
