Health insurance is primarily in the business of receiving premium from policyholders and paying for their medical expenditure. To do that, the health insurance companies need to ensure that the premium charged is sufficient to pay for these medical and administrative costs.

Analysts new to health insurance might find these concepts difficult to grasp. Some familiarity with these metrics and how these are calculated can help the on boarding process enormously.

Technically/actuarially speaking, a health plan is solvent (has enough money) if it has sufficient reserves to cover most foreseeable expense amounts. It does this by a) setting up capital upfront, and b) charging ongoing premiums that surpasses the medical and administrative expenses.

Health insurance companies use a set of financial and operational metrics to track and manage the financial wellness of the health plans, to decide what premiums to charge in future years and to understand what aspects of expenses need to be controlled better.

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Per Member Per Month (PMPM)

You will hear this talked about ALL THE TIME at health insurance companies.

PMPM refers to the average medical expenditure per member per month. You can have total cost PMPM as well as PMPM of subsets of costs, e.g. drug cost PMPM, inpatient cost PMPM.

The reason this is a very useful metric is that it mirrors the monthly premiums. The monthly premiums are intended to pay for the total cost PMPM. If you divide PMPM by premium, you will be able to see the Loss Ratio.

Loss Ratio (LR)

LR is probably the most important financial ratio for any health insurance products. As long as this % is <100%, the plan is making money.

The typical ratio in mature health insurance products is around 95-97%, in other words, most established health insurance plans make profit of between 2.5-5% of total premium received.

Per 000 metrics

These Per 000 metrics help the health plan management to know what is driving the utilization and in turn costs to the plan.

Admits / 000: Average number of admissions into hospital per 1000 policyholders, usually per month.

Days / 000: Average number of days Inpatient days per 1000 policyholders, usually per month.

Average Length of Stay (LOS): the average number of days that a patient stays in hospital per admission.

Visits / 000: usually track the average number of visits to a doctor’s room that policyholders make, usually per month.

Scripts / 000: the average number of drug scripts that the policyholders fill, usually per month.

Word of Caution…

Although these are relatively simple metrics to define, getting them calculated right can be difficult.

For example,

• You would need to ensure the data is complete, does not have duplicates.
• You would need to ensure the membership information is up to date, so you are comparing the right member IDs for the right months with the correct premium amounts.
• Loss ratio calculations are subject to regulatory restrictions, so you cannot include all expenses in the numerator.
• You would need to know exactly what services were performed – sometimes inpatient claims are simple observations or ancillary services, and not real hospital admissions.

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