Want to know the truth about medical carrier cost performance analytics? Read more about why we urgently need a better way….

1. Why we urgently need a better way
The truth about medical carrier cost performance analytics during RFPs
By Andy Hiles, F.S.A., M.A.A.A., Aetna Vice President, Actuarial and Underwriting, National Accounts, and
Peter Reilly, F.S.A., M.A.A.A., Aetna Head Actuary, National Accounts
Why try to give this issue a big shove right now?
Well, in short, it desperately needs it. We’ve seen all sides of (and, in some cases helped to develop) the methodologies
used to determine which medical carrier will provide the best total cost solution for a plan sponsor during a Request for
Proposal (RFP). We both have substantial experience in the analysis process (over 50 years between us at a combination of
insurance companies, and benefits and management consulting firms), and to put it simply…we know the industry can do a
lot better.
The performance of your benefits program — cost management, worker productivity, talent attraction — hinges on your
ability to assess and choose the right partner. So, in the RFP process, you need to be very clear about what the consultant
evaluation methods are really telling you to help ensure you’re making the right choices. Take a look at the issue from our
perspective, laid out here, and see if you agree. We’d love to have the power of your influence to help us speed up changes
already in the works in the industry. A more holistic evaluation method for your future RFPs could be closer than you think!
Understanding where we’ve been
Despite there being multiple methods and home-grown
tools out there, consulting firms predominantly rely on
one approach to projecting the total cost performance
of potential medical carriers…a method based on
evaluating provider discounts. This method is called
the net effective discount method (NED for short…our
apologies to anyone named Ned). NED is today’s
industry standard. But, as you’ll see, NED has issues.
How does NED work?
• Provider discounts are examined at the market level
• The provider’s submitted charge is compared against
the allowed charge that is negotiated with the provider
— the percent difference is the discount (so, with a
$1,000 submitted charge and a $500 allowed charge,
the discount is calculated as 50%)
• Both in- and out-of-network claims are included in NED
• A broader network has an outsized impact on NED
results (more on the following pages)
©2015 Aetna Inc.

2. So where’s the shortfall with the
current NED methodology?
1. To start, NED accounts for some elements of pricing
of services (discounts off retail prices), but doesn’t
recognize quantity differences. This might work well
enough if all the benefits carriers you’re assessing manage
utilization of health services identically. But, they vary
widely. Consider the impact one carrier, strong in
utilization management practices, can have on preventing
and managing medical claims versus another, whose
practices are not as effective.
Preventing and managing claims effectively can impact
your costs dramatically, so we need to find ways to look
beyond simple discount comparisons for solid cost
management evaluations. To complicate matters, the
quantity part of the equation is impacted by much more
than just utilization management…for example, each
carrier’s unique network of providers (with their own
billing and treatment practices), each carrier’s unique
claims policies, and care management and engagement
programs…the list goes on.
The carriers’ approaches are
vastly different, some more
effective in reducing unnecessary
or avoidable utilization of
medical services, some less so.
The bottom line: The NED
assessment method focuses
entirely on the pricing
of health care services, but
that’s only part of the cost
equation. Quantity of services
matters a lot, too. A carrier’s
ability to manage utilization of
health services also has a big
impact on your overall costs.
Selecting the best carrier partner, based on the limited
view of NED, can result in a less-than-ideal choice.
2. Another key issue with NED-based assessments…the
“price” used for comparison is only one element of the
overall price for services. So we talked about the
importance of the quantity of health services in the
analysis, but remarkably, we don’t always do a great job
calculating the price element that is included. The price is
never the “list price” (i.e., billed charges minus the
discount). Rather, it’s a specific, negotiated discount
percentage, and the evaluation tools used by consultants
treat them as such. So if you think about it, a discount of
50% off a submitted charge of $1,000 sounds great —
resulting in an allowed charge of $500. But a much smaller
10% discount off a submitted charge of $400 results in an
allowed charge of $360. Wouldn’t you rather see that
entire picture instead of basing your decision on the
seemingly great 50% discount? We bet you would.
Need an example?
We know this can be confusing (or maybe just “too math-ish”
for some of us), but this simple example may help. The chart
below illustrates how — using today’s partial-picture NED
methodology — a greater discount percentage might point you
toward one carrier as lower cost. However, higher costs actually
result. We used two common medical services as examples to
make the point — MRI and colonoscopy.
Provider B’s
discount is better,
but Provider A’s
cost (allowed
charge) is lower.
Provider X’s
discount is much
higher, however,
Provider Y’s cost is
about half that of
Provider X.
2.
MRI
Examples: Facility
Submitted
Charges
Allowed
Charges
Resulting
Discount
Provider A
Provider B
$3,056
$5,399
$2,312
$3,563
24%
34%
Colonoscopy Provider X
Provider Y
$3,900
$823
$1,600
$801
59%
3%
So, what’s
better?

3. • Par methodology (in network
only) computes a 2% difference
in projected carrier network
cost performance between
Vendors A and B.
• NED methodology (using the
same data, but a different
approach that incorporates
network breadth) computes a
nearly 7% difference between
the two vendors.
• Why is the result different?
The broader network for
Vendor B distorts the employer
savings projection due to
lower out-of-network claims.
Consider this: Should the few
percentage points of out-of-
network utilization make the
gap between these two carriers
seem so great?
3. The NED approach to evaluating cost-effectiveness is both backward-looking and applied
without regard to the type of network, broad, narrow and everything in between. In other
words, NED is looking at data from months ago (over a year in some cases), plus, the efficiency
and design of the networks sometimes aren’t considered. These foundational assumptions can
be applied by evaluators regardless of whether the carrier’s network is very broad (including
virtually all providers in a market, for example) or trimmed down to focus on those providers
who’ve demonstrated practices consistent with efficiency and evidence-based quality health
care. Using older data becomes more problematic as new forms of performance-based
provider reimbursement become prevalent (such as PCMH, ACO, etc.).
Let’s get technical — the chart below highlights the impact of moving from a par
analysis (used before NED became popular) to the currently used NED methodology.
Why should you care? Well, first consider medical carriers who strategically work to
exclude providers with egregious billing practices. And, those who exclude providers who
refuse to follow evidence-based medicine. Those efforts would lower your costs, but these
impactful network strategies and their resulting savings work against the NED analysis.
Shortfall with NED methodology…continued
3.
Out of Network
Wrap Network
In Network
• 0% discount
• 5% of claims
• 25% discount
• 5% of claims
• 50% discount
• 90% of claims
Out of Network
Wrap Network
In Network
• 0% discount
• 1% of claims
• 25% discount
• 2% of claims
• 51% discount
• 97% of claims
Vendor A: More efficient network Vendor B: Greater network breadth
Vendor A
Vendor B
How these two compare: Old par analysis Current NED analysis
50%
51%
46.3%
50.0%
Vendor B claims relative to Vendor A .98 .93
Projected claim cost “savings” with Vendor B 2.0% 6.9%
4. The NED methodology gives too much “credit” for network breadth, yet, consumers are
moving in the reverse direction…choosing narrower high-performing networks. Prior to the
widespread adoption of NED, consultants mostly focused on the discounts of in-network
providers (participating provider analysis or “par”), believing that employees should use — and
carrier analysis should focus on — doctors and hospitals evaluated and accepted as part of the
carrier network. Network size was measured (access) but was not part of the calculation of an
overall discount. So, ironically, just as consumers began embracing smaller, more efficient
networks, the NED methodology, with its over-emphasis on network breadth, became the
standard for RFP evaluations. As you will see in the technical example below, a somewhat
larger network gets exaggerated credit solely as a result of its size.
(1 – .51) ÷ (1 – .50)
(1 – .50) ÷ (1 – .463)

4. Ways to adjust NED calculations to make
them more accurate
While we support a more accurate and
reliable method of evaluating carrier total
cost management performance (discussed
later in this article), NED calculations can
be improved. The methodology still presents
some shortcomings to address, but these
adjustments could help improve its accuracy:
• Encourage in network utilization with
high value providers and focus your RFP
analysis on par discounts supplemented
with geo-access analytics (a measure of
potential employee disruption with
current health care providers)
• If network breadth is most important to
you, use the traditional NED methodology
but take steps to adjust it to better meet
your needs. For example, evaluate and
make RFP adjustments that recognize the
cost implications of including some
providers whose billing practices may be
inconsistent with your cost management
objectives (e.g., egregious billing
practices, an unwillingness to comply with
carrier claim edits and other cost
management practices).
5. We also see mistakes with how the NED approach is often
applied to historical claims to project future employer
savings…and this further skews your cost savings assessment.
The approach is flawed as we’ve noted already, but because
NED is based on “allowed charges,” there’s no real breakout of
how much of those allowed charges are paid by the employer
versus the employee.
Why should you care? Well, for a few reasons:
• First, we already mentioned the way NED represents
discounts more favorably for broad networks than it does
more focused approaches (regardless of whether or not
they really are priced better). The NED results for a carrier
with a broader network will capture a higher proportion
of in-network claims, inaccurately inflating the carrier’s
discount position.
• Second, the use of allowed charges doesn’t incorporate the
employer’s lower cost from out-of-network usage…it’s
combining the employer and the employee costs together,
yet your out-of-network costs should be much lower.
The result from both of these NED limitations means that the
projections of future costs across carriers will not be accurate
from the employer’s view, but rather a mix of employer and
employee costs muddled together.
Shortfall with NED methodology…continued
On the right path, but still facing challenges
We applaud the benefits consulting firms that have moved to address these shortcomings in the NED calculation. These
firms wisely show NED to clients in two ways. The original version of NED we described (let’s call it “nominal NED”) has
been the industry standard for the last several years. It combines employer and employee savings from carrier discounts,
and will continue to be important to companies that value the broadest of networks. However, we recommend also
showing “real NED” — the actual projected employer cost from various medical carriers recognizing that out of network
claims are reimbursed at a lower level. This is the most accurate approach to projecting employer costs.
Our analysis has shown that the difference between nominal NED and real NED can reach 100 basis points or more,
depending on the breadth of the network. This leads to a difference in employer claim cost projections of 2% or higher —
more than enough to change carrier performance rankings in many RFP situations. Further, including an adjustment for the
medical efficiency of higher-efficiency networks could lead to an overall 3-4% adjustment to nominal NED financial results
to account for both the correction to real NED and the greater efficiency of smaller networks. Only after these
adjustments are made will you have a true apples-to-apples comparison of the future cost performance of various
medical carriers. Adding these adjustments to a review of potential provider disruption and possible balance billing to
employees on out of network care creates a complete picture of the quantitative aspects of carrier performance, which
can be combined with a qualitative review of features, like customer service, capabilities of the customer service team, etc.
4.

5. Andy Hiles, F.S.A., M.A.A.A., is the VP of Actuarial and Underwriting for
Aetna’s National Accounts segment. Prior to joining Aetna, he held a variety of
regional and national roles at major benefits consulting firms. Most recently,
Andy was the National Benefits Leader for McKinsey & Company.
Peter Reilly, F.S.A., M.A.A.A., is the Head Actuary for Aetna’s National
Accounts segment. Prior to his current position, he was the Company’s valuation
actuary, overseeing fully insured pricing for two of Aetna’s operating regions.
He has held numerous other roles during his Aetna career since 1998. Prior to
joining Aetna, Peter was a Principal at Milliman & Robertson.
5.
A number of the major consulting and brokerage
firms are working to develop a PMPM methodology solution, but
the power is in your hands! Ask for it! There’s no time to waste. We hope that each
of the major consulting and brokerage firms will adopt this superior methodology. High
demand from our customers (you!) will certainly help. We will likely see a transition period
where both the existing NED and the new PMPM methodologies are used, before PMPM is
fully adopted in medical carrier RFP evaluations. Ask your consultant/broker about this!
Let’s take a big step forward together
A more sophisticated solution is in the works. It increases accuracy and will help empower you to
make a more informed decision about total cost performance of medical carriers during an RFP.
The risk-adjusted Per Member Per Month (PMPM) methodology is a better all-around solution.
How does it work?
It combines carrier discounts with performance in other important areas of cost
management, such as medical management, the application of claim edits
and the application of evidence-based medical guidelines.
The PMPM risk adjustment is designed to normalize demographic and
other morbidity differences to create a fair comparison
of carrier financial performance.

6. Aetna is the brand name used for products and services provided by one or more of the Aetna group of subsidiary
companies, including Aetna Life Insurance Company and its affiliates (Aetna).
This material is for information only and is not an offer or invitation to contract. Not all services are covered. See plan
documents for a complete description of benefits, exclusions, limitations and conditions of coverage. Plan features and
availability may vary by location and are subject to change. Providers are independent contractors and are not agents of
Aetna. Provider participation may change without notice. Aetna does not provide care or guarantee access to health
services. Health information programs provide general health information and are not a substitute for diagnosis or
treatment by a physician or other health care professional. Information is believed to be accurate as of the production
date; however, it is subject to change. For more information about Aetna plans, refer to www.aetna.com.
www.aetna.com