In 2008, the State of Florida implemented a Medicare feeschedule to help control skyrocketing medical costs. Per procedurecosts soon stabilized—still well above national benchmarks in areasbut seemingly on the way to effective and fair costmanagement.

Instead, over the next year the number of procedure units perclaimant began a steady rise, all but eliminating the economic costbenefit of the fee schedule. Certain procedures allowing multipleunits per encounter, like massage therapy, became an immediatestaple in auto injury claims.

Insurance carriers, lacking substantive data to measure thesechanges and specifically identify the important cost drivers, wereleft with few options—other than increasing the size of theiradjuster workforce inFloridato keep up with the claim handlingworkload.

Medical Price and Utilization Data

Payers—and providers for that matter—need access to better datato help them participate in a healthcare system that ensures fairpayment of claims and a rapid return of their claimants to ahealthy, productive lifestyle following an injury. Data areneeded to better forecast loss trends, manage effective claimsoperations, and intervene in hard and soft fraud.

Medical cost and utilization data derived from closed claims andbill review systems prove an excellent source of information tomine for operational and financial insights. To date, though,the complexity and fragmentation of these data have made themdifficult to exploit for analysis purposes. What has been needed isa clearstandard for structuring claims information and a method toaggregate data across the industry.

The Mitchell Medical Price Index (MPI) is a new tool derivedfrom national claims databases to help insurance carriers forecastloss development trends, enhance medical reserving practices—a/k/aincurred but not reported (IBNR)—and understand the specificmedical care drivers of cost. Carriers watch trends, such asthose shown in MPI, to predict the future growth rates of losscosts for claims that have been reported already, but the loss isstill developing and they need to know whether the developmenttrend will continue consistent with prior periods, is acceleratingor decreasing. Unlike existing internal sources, the MPIprovides not only retrospective insight, but also predicts futureloss trends using current industry trends.

In addition, the MPI is useful for better managing claimsoperations and controlling costs. By understanding andpinpointing the areas of medical care driving loss costs, claimsmanagers can better allocate resources, educate and informpolicyholders, and assist SIU and fraud investigations.

Medical Price Index

The MPI was developed to monitor non-hospital facility chargesincurred by auto casualty insurers for first party payments, PIP,and MedPay coverages. It enables insurance payers to easilycompare auto casualty, workers' compensation and personal healthinsurance markets at a national, regional and state level,monitoring medical charge trends by coverage state and medicalservice group. The MPI provides measures of cost perprocedure and reports summary statistics at a service group level,such as:

• Emergency services
• Evaluation and management
• Major radiology
• Minor radiology
• Major surgery
• Nerve testing
• Pain management
• Physical medicine.

Its main use is to monitor trends in medical charges by coveragestate and medical service groups so claims leaders have a morecomplete understanding of how billing and treatment patterns areimpacting expenses. Because the MPI is updated continuously,it is a unique signal detection tool for evaluating and acting onnew emerging cost trends. Figure 1 shows the state trends inmedical cost inflation from 2006 to 2010 as measured by MPI. Theresults track to Bureau of Labor Statistics Medical cost inflationmeasures, but also provide more specific measurement of changerates the service group and procedure code levels by controllingfor the effect of provider utilization independent of per procedurecharges.

The MPI is a unique resource because it leverages actualsummarized claim, bill, and bill line-level data covering the vastmajority ofUSauto casualty claims. This helps minimizemeasurement errors often encountered in traditional survey data andgenerates insight at an extremely detailed procedure level.

Figure 1. The MPITracks Medical Cost Inflation at Multiple GeographicLevels.

Note: BLS-All Urban refers to the CPI-U.S. Medical ServicesIndex, adjusted by Mitchell to reflect an Index of 100 for Q12006. Source for the CPI: U.S. Bureau of Labor Statistics,adjusted. Available athttp://data.bls.gov/cgi-bin/surveymost?cu

Medical Utilization Index

Used in conjunction with the MPI, the Medical Utilization Index(MUI) controls for per unit charge rates to better explain the roleof provider utilization in increasing costs. It is based on aclosed claim analysis set to a 2006 benchmark and is updatedquarterly. The MUI identifies the prevalence and frequency ofprocedures at small areas of geography and then aggregates thosedata to a regional level. Figure 2 shows the MUI results forutilization of services including massage therapy for first partyclaims inFloridafrom 2006 through 2010. It effectively confirms andquantifies a common perception that the Medicare Fee Scheduleupdate in 2008 resulted in an explosion in massage therapy acrossprovider types. This new ability to quantify trends helps explainunanticipated effects of regulatory changes and may be useful forinsurers and state agencies in predicting the impact of future feeschedule updates.

Figure 2. The MUITracks the Impact of Medicare Fee Schedule Changes on Cost andProcedure Utilization.

Using MPI and MUI in Finance andMedical Management

There are numerous opportunities to leverage medical priceinformation to enhance financial and operational performance. Beloware three examples.

• MPI for IBNR. A regional carrier sets IBNR based onastandard calculation implemented through an enterprise planningsystem developed by a systems integration partner. While thecalculator works well, the carrier felt an independent metric wouldprovide a secondary validation point and improve clarity andcredibility with auditors. The Medical Price Index was trended overthe prior five years, by quarter, to establish a benchmarkcomparison for loss trending.
• MPI for Operating Managers. A large multiline carrier wanted tounderstand why claim performance was substantially different acrossupstate and downstateNew Yorkcounties. The MPI data was segmentedat the procedure level and comparisons made across counties. Thedata clearly showed higher cost procedures geographicallyconcentrated around major medical centers.
• MPI for State and Industry. A state likeFloridathatconsiders regulatory change like implementation of a fee schedulecould use the MPI/MUI in combination to model the potential impacton health care insurance system costs. By examiningutilization estimates at a service group level against feeschedules, government analysts have a new tool to simulate andpredict the impact of their decisions during the planningprocess.

In conclusion, the use of medical claim data to map, track andattack loss trends can be of great benefit to insurancecarriers. Applying this insight can help to proactivelyanalyze trends and assess their impact on medical costs, animportant consideration in today's ever changing insurancemarket.