Premium Development Case

Last Updated: 03 Sep 2020
Pages: 4 Views: 124

New England Health Maintenance Organization (HMO) is a regional not for profit managed care company that has its headquarters in Boston, MA, with over 500,000 enrollees within 25 different plans including Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. A consortium of employers has shown interest in bidding on a managed care contract to be offered to the consortium’s 75,000 employees whom are locate in and around Nashua, New Hampshire. The consortium of employers includes companies such as IBM, Ford, and Prudential Insurance.

The approach that New England has to the premium development is that the premiums received from the employers must cover the cost of the providing required healthcare services, also known as medical costs, and the costs of administering the plan and of establishing reserves, also known as other costs. Reserves are necessary to ensure that funds are available to pay providers when medical costs exceed the amount collected in premium payments (3901-3-13 Health Insurance Reserves, 2010). Due to New England HMO being a not for profit corporation, there is not explicitly include any type of profit element within the premium.

A requirement to the reserve is set sufficiently high in order to ensure there are enough investments available to fund product growth and expansion. Therefore, part of the reserve requirements does constitute a profit. (Premium Development Case Study, 2007) A base per member per month (PMPM) is used in setting premiums by estimating the PMPM for each aspect of the plan’s coverage benefits. Setting the premiums also utilizes historical utilization as well as cost data. The co-payments are used a source of revenue to decrease medical cost and lessen the premiums.

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New England HMO adds fifteen percent to the total medical PMPM to cover any administrative costs that may incur and an additional five percent added for the reserve. The Individual Rate Factor is set at 1. 216 and the Family Rate Factor is set at 3. 356. The application of the given information allows the calculations to develop based on the levels of three co-payments, low, moderate, and high. The historical utilization and historical data for facility services is the same, regardless of the level of patient’s level of co-payment.

The average fees are as follows:

  • Inpatient Acute Care Services – Average daily free-for-service charge$1,200. 00
  • Surgical Procedures per case$1,300. 00
  • Skilled Nursing$430. 00
  • Mental Care - Average Daily Cost $540. 00
  • Emergency Room Care per visit$190. 00

The following services were calculated by dividing the cases, days, and/or the visits per year by 1,000.

Next, in order to attempt to find the base PMPM cost, the utilization data is multiplied historical cost. Once this is completed, the product is then divided by twelve. For instance, the inpatient acute care cost is calculation by multiplying $1,200. 00 by 0. 4, then dividing by twelve. The cost would equal $40. This process will be used to calculate the remaining inpatient services. Using the information provided by the consortium, substance abuse as a base PMPM cost of $0. 41, while the base PMPM for outpatient services is $3. 43. The facility services total cost is $54. 25.

Upon calculating the base PMPM costs, the patient co-payment adjustment factors must be determined. the co-pay cost adjustment factor is 0. 9642 and 0. 9200 for the co-pay utilization adjustment factor (additional inpatient services information is located within the Premium Development Case Study). Once all factors have been defined, the adjusted PMPM cost can be calculated by multiplying the cost by the historical data and the historical utilization by utilization, then multiplying the two products and dividing by twelve.

For example, for Inpatient Acute Care adjusted PMPM calculation is as follows: (1,200*1) * (0. 4*1)/12, which 40. The remaining inpatient services are calculated in the same manner, however the substance abuse adjusted PMPM cost and outpatient procedures adjusted PMPM cost is its base PMPM cost. In the end, once all adjusted PMPM costs have been calculated, the total is equal to $44. 74. Much of the information for the physician services is provided within the case study. In order to calculated the adjusted PMPM cost, the calculation is as follows: (3,400*utilization) * (175,000*cost)/1,000)/12

For example, (3,400*1. 8900/4000) * (175,000*1. 6834)/1,000)/12 = 39. 44. The adjusted PMPM for physician services equals to $27. 24. The inflation rate is five percent; this plays a significant role within the analysis as like any other business, costs rise over time. In order to calculate the inflation adjusted PMPM cost for inpatient services, the adjusted PMPM cost is multiplied by the sum of 1 and the inflation rate of five percent, or 0. 05. ; this equal to $50. 79. The same calculations are done in order to solve the adjusted PMPM costs for the physician services. The total of this is $114. 9. The total medical PMPM amount is the sum of the physician services inflation adjusted PMPM cost ($114. 39) and then inpatient services adjusted PMPM costs ($50. 79), which equals to $165. 18. All other expenses are calculated by multiplying the total medical PMPM amount by the administrative expense percent. Therefore, $165. 18 * 0. 15 equals $24. 78. In order to calculate the reserve, the total medical PMPM amount is then multiplied by the reserve percentage. Therefore, $165. 18 * 0. 05 equals $8. 26. These amounts combined will equal the total other expenses, which calculated to equal ($8. 6 + $24. 78) $33. 04. The inflation adjusted PMPM is calculated in the same manner as other services. This amount will equal $34. 69.

The total PMPM amount is equal to $199. 86. In order to calculate the final figure, the monthly premium rates, the total PMPM amount is multiplied by the premium factor rate, which is 1. 216 for single and 3. 356 for family. The single monthly premium rates will equal $199. 86 * 1. 216, which equals $243. 03. The family monthly premium rates will equal $199. 86 * 3. 356, which equals $670. 73.

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Premium Development Case. (2017, Apr 03). Retrieved from

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