Key Points. Large Claims What are they? Why are they here? Where are they going? Rob Bachler, FSA, FCAS, MAAA Milliman

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1 Large Claims What are they? Why are they here? Where are they going? Rob Bachler, FSA, FCAS, MAAA Milliman October 21, 2015 Key Points What are they - Disease Conditions - Type of Service - Geography - Demographics Why are they here - Leveraged trend vs. historical trend Where are they going - Key driver of future large claims

2 Make-up of a Large Claim 80% 70% 60% 50% 40% 30% 20% 10% Distribution of Costs by Claim Size 0% IP OP Rx Prof $250K-$500K $500K-$1M $1M-$2M $2M+ Make-up of a Large Claim As claim size goes up, inpatient becomes larger portion of claim Trend implications due to different trends by service type - Inpatient trend lower - Rx, Outpatient trend higher

3 Make-up of a Large Claim Market Perception - $1M claims Premature babies Cancer Extreme trauma Cardiovascular disease Burns Organ transplants Source: Munich Health Survey, 2015 Make-up of a Large Claim Distribution of Diagnoses by Claim Size 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Cancer Hemophilia Neonatal Transplant Other $250K-$500K $500K-$1M $1M-$2M $2M+

4 Make-up of a Large Claim Depending on the threshold, 55%-80% of large claimants key disease is one of the following - Cancer - Neonatal - Hemophilia and similar disorders - Transplant Distribution across these conditions differs by claim size Make-up of a Large Claim Allocation by service type differs by diagnosis category Distribution of Services by Diagnosis 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% IP OP Prof Rx Cancer Hemophilia Neonatal Transplant Other

5 Individual Claimants Top claims (typically 5) from 14 different portfolios <$1M $1M-$2M >$2M Cancer 27% 31% 18% Hemophilia 7% 0% 18% Neonates 0% 15% 36% Transplants 27% 23% 18% Other 40% 31% 9% - Concentration within four categories is consistent with industry data (60% of claims under $1M, 90% of claims over $2M) - Sample size is small (63 total claims, 22 over $2M) Individual Claimants Higher thresholds become more child-centric <$1M $1M-$2M >$2M Child 20% 42% 73% Adult 73% 42% 18% Unknown 7% 15% 9% Don t appear to be geographically concentrated - Top 10 claims come from 9 different states

6 Increase in Large Claims Market Perception 30% 27% 25% 23% 20% 18% 18% 15% 14% 10% 5% 5% 0% 16% 20% >20% 1% 5% 11% 15% 6% 10% No Impact Source: Munich Health Survey, 2015 Increase in Large Claims Leveraged Trend Actual vs Mathematical Actual leveraged trend - Claims in excess of $X during calendar year N - Divided by claims in excess of $X during calendar year N-1 Mathematical leveraging - Generate claim cost distribution for year N-1 - Multiply each point in the distribution by overall claims trend - Calculate claims in excess of $X before and after application of trend

7 Increase in Large Claims Example of Mathematical Leveraging Cost Excess of $50K Probability Original 5% trend Original 5% trend 50% % 5,000 5, % 25,000 26, % 60,000 63,000 10,000 13,000 1% 250, , , ,500 Total 340, , , ,500 Trend 5.0% 7.4% Increase in Large Claims Leveraged Trend Actual vs Mathematical Historical Trend Mathematical Trend Deductible ,000 25% 285% 20% 277% 500,000 35% 329% 24% 326% 1,000,000 42% *** 31% *** Ten year history - Historical trend very close to what would be expected due to standard trend. - Claim cost distribution for 2004 didn t include $1M probability. Recent history - Actual trend slightly higher than pure leveraging - Data not adjusted for change in limits; could be driver of excess trend

8 Changes in Large Claims $250K-$500K Claims Prof 17% 2014 Prof 16% 2009 Rx 13% IP 43% Rx 10% IP 47% OP 27% Inpatient costs have become a smaller portion of large claims Rx share has grown OP 27% Changes in Large Claims $1M+ Claims Rx 6% Prof 11% 2014 Rx 6% Prof 11% 2009 OP 10% OP 24% IP 59% IP 73% Inpatient costs have become a smaller portion of cat claims Outpatient share has grown

9 Changes in Large Claims $1M+ Claims 2014 Cancer 27% 2009 Cancer 17% Other 44% Other 44% Neonatal 8% Neonatal 6% Hemophilia 7% Transplants 14% Hemophilia 9% Transplants 24% Transplants becoming a smaller share of large claims Cancer and hemophilia are growing Changes in Large Claims Transplants - Not a driver Annual Trend Utilization Billed Total BMT Allo 0.0% 5.5% 5.5% Kidney 2.8% 4.3% 1.4% BMT Auto 0.8% 3.9% 3.0% Liver 3.6% 5.9% 2.2% Heart 0.7% 7.9% 7.1% Lung Double 4.4% 7.6% 12.3% Liver/Kidney 2.5% 7.7% 5.0% Kidney/Pancrease 4.2% 4.1% 0.2% Lung Single 8.8% 9.7% 0.1% Kidney/Heart 7.0% 10.6% 18.3% ~90% of total costs Source: Milliman Research Report U.S. Organ and Tissue Transplant Cost Estimates and Discussion (2008, 2011, 2014)

10 Yikes! And other Large Claim Expletives Alden Skar, FSA Vice President & Managing Actuary October 20, 2015 What are we going to talk about today? Trends in Large Claims Diagnoses of Large Claims Tools to manage and monitor Actual to Expected Projecting Claim Costs in Extremely High Layers

11 How many large claims should we expect? Relative Frequency (RGA Data) 400% 300% xs $1,000, = % xs $500, = % 0% Relative Claim Count (RGA Data) 1100% 1000% 900% 800% 700% 600% 500% 400% 300% 200% 100% 0% > $1 M > $2 M * 2014* *Completed

12 If you miss on trend leveraging, you might have some explaining to do Really? Two Million Dollars? Preterm birth and congenital anomalies 23 week preterm birth, 1 lb 5 oz, multiple congenital problems, inpatient for more than a year Hemophilia Routine surgery led to a 14 day stay and nearly $7 million billed of factor drugs Transplant Child needing heart transplant, new technology (VAD) approved for kids in Due to clotting, five VADs were needed before successful transplant, $9 million billed Trauma MVA in Mexico, head injury with a subarachnoid hematoma, leg amputation Cancer Child with leukemia. Chemotherapy treatment twice per week at $17,000 per dose. Contract with pharmacy changed to $76,000 per dose, or nearly $700,000 per month.

13 Diagnosis for Excess Claims by Population Type 100% Other Diagnoses 90% Liver Diseases 80% Hemophilia 70% 60% Renal / Kidney Disorders 50% 40% 30% 20% 10% 0% Comm Mdcd Mdcr Trauma and Burns Infections Cardiac/Pulmonary Diseases Preterm / Congen. Anomalies Cancers Diagnosis for Excess Claims by Layer 100% Other Diagnoses 90% Liver Diseases 80% Hemophilia 70% 60% Renal / Kidney Disorders 50% 40% 30% 20% 10% 0% 0 1M 1M 2M >2M Trauma and Burns Infections Cardiac/Pulmonary Diseases Preterm / Congen. Anomalies Cancers

14 Actual to Expected Claims by Layer (hypothetical data) Actual to Expected Claims over time (hypothetical $1M $1.5M Layer)

15 Indication of Overtrending in Pricing Indication of Undertrending in Pricing

16 In search of the Goldilocks trend rate Average claim size over Time ($1M xs $1M layer, RGA data) 2014 Avg all Years

17 Average claim size by Diagnosis ($1M xs $1M layer, RGA data) Relative Claim Costs for Medicare and Commercial Commercial 1 Medicare , , , , ,000

18 Projecting things you ve never seen Experience Projection ,000,000 4,000,000 16,000,000 64,000,000 Summary Large claims much more common today Large claim diagnoses vary by population Common them is unusual circumstances, so look for ways to control those circumstances Actual to Expected a nice tool to monitor claims by segment and layer Claim Costs in extremely high layers

19 Thanks for your attention Large Claims What are they? Why are they here? Where are they going? Rob Bachler, FSA, FCAS, MAAA Milliman (Part Deux)

20 Future of Large Claims Market Perception of Drivers Source: Munich Health Survey, 2015 High Cost Pharmaceuticals Cystic Fibrosis Approximately 30,000 Cystic Fibrosis patients in U.S. Orkambi approved July 2rd, Believed effective in close to 50% of all cystic fibrosis patients - Annual patient cost over $300K - Unlike Sovaldi, etc., Orkambi is symptomatic relief, not curative. It will be taken for a lifetime

21 High Cost Pharmaceuticals Duchenne Muscular Dystrophy Prevalence of 1-in 3,500 to 1-in-5,000 newborn males worldwide. Translarna (ataluren) - Expected FDA approval in US 4Q 2016 o Also in Phase III clinical trial for Cystic Fibrosis unknown launch date at this time Approved for use in Germany for treatment of Muscular Dystrophy: Cost in Germany estimated at 350K- 450K Two other drugs soon to be approved (cost unknown) Drisparesen expected approval date: 12/24/2015 Eteplirsen expected approval date : 2/26/2016 High Cost Pharmaceuticals Huntington s Disease Approximately 30,000 symptomatic individuals in the United States have Huntington Disease - Average age of onset of disease is 30 to 50 years of age with disease progressing over a 10 to 25 year period. - Described as having ALS, Parkinson s and Alzheimer s all at the same time

22 High Cost Pharmaceuticals Huntington s Disease Xenazine (tetrabenazine) Dosage mg tablets per day Annual cost ranges from $125K (2 tablets/day) to $250K (4 tablets/day) Austedo (deutetrabenazine) Extended release version of Xenazine. Expected to be FDA approved between May 2016 and June No estimated financials for this drug yet, but expect costs to closely mimic (if not exceed) the annual costs for Xenazine. Neither of these drugs treat the disease, they only the underlying symptoms. High Cost Pharmaceuticals Huntington s Disease Procysbi (cysteamine) - In clinical trials as disease-modifying therapy for Huntington Disease (slowing of disease progression) - Currently approved for another condition (cystinosis) - Estimated Annual Cost = $256,500 - Would be first disease-modifying therapy available for Huntington Disease - Results from 36 month trial (Phase II/III) due to be available in 2H Estimated approval date: 2016 or beyond.

23 High Cost Pharmaceuticals Other Considerations Orphan Diseases - Diseases affecting fewer than 200,000 people nationwide - Typically have therapies that cost in the range of $200k - $400k per person per year. Currently the most expensive medication available (annualized per patient per year) is: Soliris (eculizumab). - Indicated in the treatment of two rare genetic anemia disorders. - Annualized costs range from $508k - $688k (per patient) in High Cost Pharmaceuticals Other Considerations Underwriting - Typically conditions are identifiable through claims data, but drug efficacy is not Rebates - Historically a non-issue for stop loss carriers with regular pharmacy - Rebates for these drugs can be huge o Hep C believed to be as much as 30%-40% of drug o Depends on number of options, including foreign generics

24 Limitations Milliman makes no representations or warranties regarding the contents of this presentation. Similarly, users are instructed that they are to place no reliance upon this presentation that would result in the creation of any duty or liability under any theory of law by Milliman or its employees. Parties receiving this report must rely upon their own experts in drawing conclusions about the stop loss market, assumptions and trends. Any opinions expressed in this presentation are those of the presenter and do not necessarily reflect the views of Milliman.