Use of internal data in insurance
This briefing note gives a high-level overview of how insurers can make better use of internal data to gain insight and drive competitive advantage.
Ever wish life were simpler? In the United Kingdom, healthcare operates on a surprisingly uncomplicated premise. The mission and strategy: free healthcare at the point of delivery to anyone who needs it. No authorization of anything by anyone other than a medical professional. No copays, beyond dental and outpatient pharmaceutical. No consideration of ability to pay, just service at the point of need.
For the National Health Service (NHS), created shortly after World War II, there's no such thing as a benefit package. No one ever says to a patient, "You're entitled to free hospital care or free psychiatric care to a limit of 60 days a year." Instead, it's bone simple. Those who need care get it. If there's anything like a catch, it's that they may have to wait for treatment or that individuals' medical choices may end up affected by circumstances out of their control.
For example, primary care trusts (PCTs) are the administrative bodies that disburse government money, effectively paying for care within a specific region. (Most PCTs do not provide medical services, although some employ general practitioners, community nurses, and other physicians.) If a PCT budgets inaccurately—or, more likely, simply is not funded adequately—it may run out of money before the end of the financial year. When that happens, patients may not get the healthcare they need, denied on grounds that procedures are experimental or cosmetic, poor value for money, or otherwise not approved.
Something seems to be missing in a system that has worked well for some six decades. Recently the NHS in England identified that gap as accurate forecasting and managing of demand—in a term, risk management. Service capacity in the system may increase year over year, but without any real sense of drivers in demand, it's hard to know where to focus that capacity. Last-minute course corrections can be costly and inefficient, and often hasten funding shortfalls.
Most PCTs simply do not have the actuarial and risk-management skills required to overcome this problem. As just one example, in the United Kingdom there are perhaps two dozen healthcare actuaries specializing in the big-picture, real-world business of managing medical expenses. Other healthcare actuaries are focused on insurance contracts such as long-term disability and critical illness.
Compare that to the United States, where dozens of actuaries consult or work directly for a single healthcare insurer.
To address this discrepancy, the NHS in England has undertaken a request for proposals process aimed at attracting more sophisticated skills into its system. With this initiative the NHS is looking to private insurers and other private companies with skills in risk management, including specialized areas such as disease management and utilization management.
The NHS sees potential business needs for everything from small, defined actuarial services on a consulting fee basis through contracting and procurement functions and all the way to "end-to-end" outsourcing solutions. It is even possible that one day a PCT budget will be handed to one of these vendors to manage in its entirety.
One of the issues that the U.K. government must address in this process is how to measure and manage private insurers who are acting as public agents. When paying for healthcare, the key question for a government payer centers around "What is the opportunity cost to society of producing health gains for the population and how to balance this with other spending priorities both within health and against other government programs (social services, defense, transportation, and so on)?"
However, commercial health insurers have different questions to answer. Their fundamental question is "What will maximize my profits in a competitive market?" The focus of a private health insurer is on profits, attracting and keeping customers, maximizing perceived value and the price that can be charged, and minimizing the costs of providing service. Some of these will be implicitly linked to health gains for society as a whole, but many are not.
The government may try to impose rules and regulations to align the priorities of private vendors with public health goals. Time will tell how effectively this can be achieved.
Thus there is more than one way to look at prospects in England. The money available from the NHS provides obvious market-derived incentives for vendors to maximize efficiencies. But, unlike in the United States and other areas where the private sector dominates healthcare, the hands of vendors in England are tied in a number of ways. They can't bargain with hospitals because the government sets most of the prices. They don't have any say about the elements of a benefit package, because it doesn't exist, and they can't do any underwriting. Anyone in their geographical area is automatically included in their member pool.
Perhaps the single most daunting factor is that, historically, data throughout the NHS has not been captured in a manner that allows effective forecasting of demand—this privatization initiative is intended to solve this problem. Medical services in the NHS system are not paid for as they are typically in the United States. As payment in the NHS has not depended historically on individual services provided, there's very little in the NHS that compares to the claims data of U.S. payers, where a good deal of data is recovered. While data from inpatient care is routinely captured and sent to the PCTs for payment, data from outpatient care, primary care, and prescription drugs is not always available or cannot be linked together in a meaningful way.
Given that good statistical information is a fundamental of risk management, it's not hard to see that help will be needed in this transition. As responsibility for the risk begins to settle on whomever wins the bidding now under way, there will likely be guesswork and mistakes aplenty.
The successful player will need to have team members who can wear many hats and perform the following functions:
All this and more will be necessary to succeed in this giant transition—the ability to work with a whole orchestra of moving parts, responding and acting quickly. Actuaries, of course, are only one part of the successful risk management team that the NHS is now in the process of putting together. Other key roles include providers, accountants/finance professionals, economists, disease management specialists, epidemiologists, and even human resources professionals.
Long story short: The effort is afoot to retain the things people like about the NHS, while shoring up weaknesses by borrowing concepts that have worked in other markets. Getting these to mesh is going to be the tricky part.
Joanne Alder is a principal and consulting actuary in Milliman's London office.
Taking public risk private in the United Kingdom
Ever wish life were simpler? In the United Kingdom, healthcare operates on a surprisingly uncomplicated premise. The mission and strategy free healthcare at the point of delivery to anyone who needs it. No authorization of anything by anyone other than