There has been tremendous venture capital investment in the digital health market in the last few years. However, investors are concerned about the uncertainty surrounding return on investment (ROI) in these digital health start-ups. Actuarial expertise can help venture capitalists gauge the risk or benefit of a potential investment. Milliman’s Darin Muse, Jose Carlo, and Jason Cai provide more perspective in their article “‘A’ is for actuary.”
Here is an excerpt:
Actuaries play a number of key roles within this coalition. Our expertise in healthcare data analytics is currently being leveraged by digital health start-ups in developing business plans, products, and data analytics. Through our experience navigating the regulatory maelstroms of Medicare, Medicaid, and the Patient Protection and Affordable Care Act (ACA), actuaries have also become accustomed to reviewing and interpreting regulations as the landscape rapidly changes. Our familiarity working with state and federal regulatory agencies has matured from necessity, and we use this knowledge to help guide new companies in this space.
However, in order to maximize the funding dollars that are pouring into this industry, actuaries also need to be sitting on the other side of the (funding) table. Lisa Suennen, managing partner at Venture Valkyrie LLC, estimates that nearly 60% of companies that receive funding eventually go bust, yielding zero return on investment. She is certainly not referring just to digital health start-ups, but let us assume for the sake of argument that the $4.2 billion in 2014 digital health funding was funded uniformly across all companies. It does not take an actuary to determine that this results in roughly $2.5 billion that will soon cease its contribution to innovation due to start-up failure. It does, however, take an actuary to help determine how to shrink that number in the years to come.
Enter comparative analysis through the standardization of measurement and evaluation. The actuarial discipline has invested considerable resources in developing best practices to objectively evaluate healthcare intervention programs using vetted, standard measures. So how important are these studies to maximizing digital health funding? Assume you are the managing partner at a VC firm, and you have two digital health start-ups that have caught your eye for a potential seven-figure investment. Each of them has made it through a fair amount of due diligence already, and now you are comparing their purported returns on investments (ROIs). How do you know that the 5:1 ROI is truly better than the 3:1 ROI if the method of measurement is not the same—if it is not standardized in some way? The answer is that you don’t unless you have the time and expertise to dig into both numbers and the assumptions backing them.
Data released today for the S&P Healthcare Claims Indices shows that healthcare costs rose 3.5% in the 12 months ended February 2014 compared to the 4.9% rise for the 12 months ended February 2013. Medical costs—inpatient and outpatient hospitalization plus professional services—rose 3.1% and prescription drugs rose 3.5% over the same period. All but prescription drugs rose at a slower pace than a year earlier.
Among the key components of medical costs, inpatient fee-for-service rose 2.6% compared to 4.3% in the earlier period while outpatient fee-for-service costs rose 4.9% compared to 6.3% in the earlier period. Prescription drugs expenditures were up 3.5% versus 1.5% one year ago. These figures, which represent the most current data available, are based on expenditures incurred in the 12 months ended February 2014.
“With the exception of prescription drugs, healthcare expenditures are growing more slowly than a year ago,” says David Blitzer, Managing Director and Chairman of the Index Committee and S&P Dow Jones Indices. “The overall trends in healthcare costs are lower than that seen a year or two ago, but remain one to two percentage points above the overall rate of inflation. The greater growth in prescription drug costs reflects a combination of higher prices for both generic and branded pharmaceuticals and shifting market shares between generic and branded.
“Among the principal lines of business, expenditures for large and small groups and administrative services only (ASO) plans show stable growth rates. Individual plans, where a participant is not part of a group plan based on employment, are the smallest segment as well as the most volatile. While the growth in costs moved down through 2013, the most recent data suggests a jump in expenditures for this category. Because this is the segment that the will be most affected by Obamacare going forward, it is likely to be closely watched as the new healthcare law is implemented in coming years.
“The rise in total healthcare costs at 3.2% over the 12 months ended with February 2014 is slightly greater than the increase in current dollar GDP from the first quarter of 2013 to the first quarter of 2014 of 2.9%. Moreover, the 2014 first quarter GDP was weakened by unusually severe winter weather and a small decline in consumer spending on health services. With healthcare cost trends moderating, the share of GDP devoted to healthcare may be stabilizing as well.”
Milliman is conducting an Actuarial and Underwriting Training Seminar in San Diego, Calif., from June 9 to 12. The seminar will be held at the Andaz San Diego.
Each day will feature two distinguished speakers (one speaker on Thursday) with considerable experience in the following topics:
• Claim liabilities and trend analysis
• Underwriting principles
• Basic rating principles
• Healthcare reform—a wide-angle view
• Large group rating and underwriting
• Zooming in on healthcare reform
• Financial forecasting, reporting, and monitoring
Some faculty members will be available throughout the week to interact with attendees and answer questions. For more information about the seminar, including hotel accommodations, visit the registration site.
Data released today for the S&P Healthcare Claims Indices show healthcare costs rose 3.5% in the 12 months ended November 2013 compared to the 4.9% rise for the 12 months ended November 2012. Medical costs—inpatient and outpatient hospitalization plus professional services—rose 3.7% and prescription drugs rose 2.6% over the same period. All rose at a slower pace than a year earlier.
Among the key components of medical costs, inpatient fee-for-service rose 3.5% compared to 4.5% in the earlier period while outpatient fee-for-service costs rose 5.2% compared to 8.0% in the earlier period. Prescription drug expenditures were up 2.6% versus 2.9% one year ago. These figures, which represent the most current data available, are based on expenditures incurred in the 12 months ended November 2013.
Because of standard industry lags in invoicing claims and resolving disputed charges, it is not possible for the indices to be calculated without a lag. Trends in healthcare expenditures are calculated as the average index level in the 12 months ended November 2013 compared to the average index level in the 12 months ended November 2012 and stated as a percentage, in accordance with the usual practice with healthcare cost analyses.
“The growth in healthcare spending continues to slow,” says David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The key question in the slowdown is whether we are seeing a shift in healthcare cost trends that is sustainable or whether we are merely observing the slower pace of overall inflation and weak economic growth. One way to gain some insight is to look at unit cost measures for healthcare derived from the S&P Healthcare Claims Indices.”
“The data show that prescription drug trends tend to lag shifts in inflation while trends in inpatient unit costs don’t show any obvious relation to inflation shifts,” continues Blitzer. “The pattern in prescriptions may reflect consumer preferences towards generic drugs. While the general rate of inflation may affect trends in inpatient medical care, it is probably not the dominant factor. The current low inflation rate is a factor in slowing growth in healthcare expenditures, but low inflation alone will not control the growth in healthcare costs.”
Data released today for the S&P Healthcare Claims Indices showed that total medical costs rose 3.2% in the 12 months ended August 2013 compared to the 4.8% rise for the 12 months ended August 2012. Medical costs—inpatient and outpatient hospitalization plus professional services—rose 3.7% and prescription drugs rose 0.9% over the same period. All rose less than a year earlier.
Among the key components of medical costs, inpatient fee-for-service costs rose 4.2% compared to 4.4% in the earlier period while outpatient fee-for-service costs rose 5.7% compared to 7.9% in the earlier period. Prescription drugs expenditures were up 0.9% versus 2.9% in the 12 months ended August 2012. These figures, which represent the most current data available, are based on expenditures incurred in the 12 months ended August 2013. Because of standard industry lags in invoicing claims and resolving disputed charges, it is not possible for the indices to be calculated without a lag.
“The S&P Healthcare Claim Indices show healthcare expenditures rose less in the most recent period. This confirms other reports that the supposedly inexorable rise in healthcare costs is moderating,” says David Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices. “While the slower cost increases are most welcome, there is debate over the cause. For some categories there is sufficient detail to examine price and usage separately. For instance, in inpatient fee-for-service, one area showing relatively stable cost increases, the indices show that declining usage is contributing to the slowdown while unit costs rise at about 6% annually.
“One often cited source of moderation is the growth of generic pharmaceuticals, which compete with their branded counterparts on price. Among branded prescription drugs, prices continue to climb at more than 15% annually. Apparently the purveyors of branded pharmaceuticals chose to respond to price competition by increasing prices to offset declining usage. Compared to the branded, where usage is dropping by 15% annually, generics see consistent increases.
“It is too soon to credit the slower cost increases to Obamacare, going forward the indices will show whether the slowing of cost growth continues.”
Cancer patients receiving active treatment with chemotherapy incur four times the costs of cancer patients not receiving chemotherapy. The cost of patients receiving chemotherapy has been reported to vary by site of service, with higher costs when treatment is delivered in a hospital outpatient setting (HOP) versus a physician office visit (POV). Recent reports indicate an increasing portion of chemotherapy is being delivered in HOP settings and less in POV settings, which can increase costs for payors and/or employers.
This study provides new information by examining Truven MarketScan® commercial claims data (index years 2009 and 2010) to calculate the episode cost of chemotherapy delivered in the HOP versus POV settings for specific disease states. HOP costs were 28% to 53% higher than the POV costs depending on the cancer and adjuvant or metastatic stage. In particular, we noted significantly higher per-episode cost for chemotherapy drugs, radiation oncology, imaging (CT, MRI, and PET scans) and laboratory services in the HOP setting.
This report was commissioned by Genentech.