Message From An Actuary
Tim Luedtke, FSA, CFA

Welcome to the inaugural edition of The Actuarial View. With this newsletter we seek to provide owners, corporate executives, and benefits decision makers with a resource that provides a no nonsense perspective on employee benefit issues. As actuaries, we bring a bottomline focus to our analyses and findings.

We understand that running a successful business demands that all decision makers be empowered to control all production inputs from inventory to raw materials to wages to benefit costs. Successful businesses do not simply accept these input costs as givens. And with human capital almost always the most valuable input into any business' product, we seek to empower decision makers to make the best benefit decisions possible.

We kick off with a discussion of value-based insurance design. As employers increasingly engage employees in the direct management of their own health care costs, the risk increases that employees will forego beneficial services to realize short-term cost savings at the expense of long-term health improvements.


Tim Luedtke, FSA, MAAA, CFA
Principal & Consulting Actuary

Diane Luedtke, FSA
Principal & Consulting Actuary









Value Based Insurance Design
Better Health Benefits at Any Price Point
Tim Luedtke, FSA, CFA

The economy is in terrible shape! Unemployment recently surpassed 8.1% with Philadelphia and the surrounding area experiencing a 7.5% unemployment rate in January - up an astounding 47% from one year ago1. Employer-sponsored health insurance costs continue rise unabated with 2009 premiums nationally up 6% over 20082. What is an employer to do?

Employers are becoming increasingly creative by adding high-deductible plans, increasing employee contribution rates, eliminating coverage options, introducing HRA and HSA plans, and reviewing and implementing value based insurance design programs. These increased options provide employers and their CFOs with flexibility to design programs that make sense for their business and their financial bottom-line, especially where they are willing to pursue self-funding programs.

Value Based Insurance Design (VBID) is an interesting concept that is being increasingly implemented by the largest of employers. VBID’s stated objective is to design benefit plans that offer “more health at any price point”, by allocating more insurance dollars to high value health services and reducing insurance coverage for low value health services. In turn, we believe that benefit decision-makers can construct a benefits program that offers more benefits at any price point. You are no longer a captive stowaway on your company’s benefits ship but rather the captain piloting the ship.

VBID’s principle implementation today has been with prescription drug programs. Pitney Bowes focused on treatments for diabetes, asthma, and hypertension. Through selective reduction of copays, Pitney Bowes realized significant savings. While drug costs initially rose due to the reduced copays for diabetes supplies, asthma medicine, and statin therapy, over a three year period Pitney Bowes realized lower total care costs because of fewer clinically significant events, fewer emergency visits, and generally reduced morbidity and mortality as a result of improved medication compliance. Additionally, Pitney Bowes realized improvements in indirect costs as well with fewer short-term disability cases and lower costs, especially among their diabetic population. Compliance interventions at Pitney Bowes led to a projected savings of $40 million in avoided costs. Of that approximately one third was due to the company’s purchasing and plan design and two thirds due to the company’s preventative measures and chronic disease management program3.

Should your company elect to implement value-based insurance design concepts for your benefits program a few things you should consider are:


  • Employee population needs – Initially, an actuarial assessment should be performed of the employee population to identify the conditions that would benefit from targeted attention. Through an analysis of the employees’ prior medical and prescription drug utilization those employees that are noncompliant with prescribed standards of care and most likely to create significant near term claim spikes can be identified and plan design incentives created to improve compliance.

  • Cost Objectives – Traditionally, value based insurance design has been implemented by reducing barriers to receiving much needed care. These barriers are often cost related and may entail an initial investment through reduced employee copays or coinsurance. By targeting those conditions having the greatest potential value, the investment can be focused in areas most likely to generate the greatest return.

  • Education and Communication – Simply reducing cost barriers is not enough. Success requires coupling lower employee out of pocket costs with a concerted effort to communicate with and educate employees on their health improvement opportunities.

    1Bureau of Labor Statistics – www.bls.gov/cps.
    214th Annual National Business Group on Health/Watson Wyatt Survey Report - 2009.
    3“Value-Based Benefit Design: Using Predictive Modeling Approach to Improve Compliance”, John J. Mahoney, MD, MPH; Supplement to Journal of Managed Care Pharmacy, July 2008, Vol. 14, No. 6, S-b.

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