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Member Lifetime Value in Health Plans - Factors & Calculation

RAVI SANKAR C JHead, Healthcare Solutions

SAURABH GAURBusiness Manager, Healthcare Solutions

WHiTe paper

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MeMber LifetiMe VaLue in HeaLtH PLans - factors & caLcuLation April 2013

TABlE OF CONTENTS

FACTOrS AFFECTiNg MlTV 3

ApprOACh TO CAlCulATiON 4

ABOuT hCl 6

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MeMber LifetiMe VaLue in HeaLtH PLans - factors & caLcuLation April 2013

The advent of consumerization in healthcare has opened up a world of alternatives for the members of health plans–they have more health plans to choose from and are therefore demanding better service from their existing Health Plans. What does this demand for better service mean for the Health Plans? They have to be more responsive and provide better service to meet evolving customer expectations, which means Health Plans have to contend with spiralling operational costs. To offset this additional operational cost they have to have a stronger focus on member retention.

Retaining members is critical for bringing down the overall costs because attracting a new member costs up to 5–10 times more than the cost of retaining an existing member. Furthermore, it is important to retain a member for a longer duration to recover the high one-time acquisition cost. Consequently, Member Lifetime Value (MLTV) becomes an important tool in determining the profitability of members or segments and evaluating the various decisions to service the health plan members. MLTV is defined as the net value of all the payments-from the start of the marketing effort targeted at a potential customer to the time when the customer definitely ceases being a customer of the company. The payments refers to the income attributable to the member and is calculated in terms of residual value after deducting all the expenses incurred in the period during which the individual is expected to be a member.

MLTV = Sum of all revenues (Premium + Referrals + Additional Products) – Sum of all Expenses(Acquisition, Claims, Customer Service, Marketing) over the member’s tenure

FACTOrS AFFECTiNg MlTV

1. Retention Rate

Retention rate measures the number of members retained over a given period -- usually during a fiscal or calendar year.

It is calculated as percentage change in Total number of members over a year relative to the number of members at beginning of the year. Example: If the numbers of members at the start of a calendar year is 362,100 and reduces to 321,000 at the end of the year, then the retention rate = 321,000/ 362,100 = 89%

2. Average Tenure

Average tenure is the average of how long members of a health plan stay with the plan. The tenure of a member is driven by customer satisfaction, premium changes and other related factors. It is generally observed that in healthcare, member profitability decreases over time as the age of the member increases.

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MeMber LifetiMe VaLue in HeaLtH PLans - factors & caLcuLation April 2013

3. Operating Cost

a. Acquisition Cost

One-time cost of acquiring a member along with the yearly renewal cost, which includes sales cost, broker commissions, and welcome kit.

b. Member Maintenance

Ongoing cost attributed to the member, which includes claims, customer service, marketing campaigns, and wellness programs.

4. Revenues

a. Premium Revenues – These are revenues generated for health plan premiums

b. New customer referrals – These are premium revenues generated from customers referred by existing members

ApprOACh TO CAlCulATiON

Retention rate, tenure, revenues/operating costs should be factored in when calculating the MLTV of a member. These factors are calculated from past data and used to forecast MLTV. The factors are expressed in terms of a regression equation, which defines the relationship of the factors with the underlying variables.

Sample Factor and Variables Table

FACTOR UNDERLYING VARIABLE

Expected Tenure of the Member Customer Satisfaction

Premium change

Revenues Premium

Referrals Premiums

Retention Rate Operating Quality

Customer Satisfaction

Operating Costs Health Risk of Member

Service Utilization by Member

The approach detailed below, specifies the process of identifying more underlying variables and establishing the relationship between factors and variables through analytical models.

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MeMber LifetiMe VaLue in HeaLtH PLans - factors & caLcuLation April 2013

StartDefine

Develop

Deploy

refine

Define ObjectiveMemberProduct

CostProfit

Member TenureCost and Revenue

AttributionDiscount Rate

HUC SegmentationMember

SatisfactionChurn

Operational Quality

ForecastingRegression

Define the units ofanalysis

Methodology for LTVModelling

Model Assumptions

Develop CustomerModels

Model Testing

Model Integrating with Live

Environment

ltv$$$/ Segment Score

Model Recalibration

ResourceAllocation

Retention/ Winback Loyalty Cross-Sell Segmentation Forecasting

The MLTV of various segments are calculated and used to customize the treatments for respective segments. The treatment design will accommodate the difference in MLTV for various segments and will help in adding value to high MLTV segments. MLTV can also be used to prioritize segments in various areas–from wellness programs to servicequality improvement. In addition, they will provide positive feedback and help in improving the retention rates of high MLTV segments.

As there is uncertainty over the quality of customers acquired, MLTV can be a key indicator of customer quality. Measuring segment characteristics at the time of enrolment will help in calculating the MLTV and the corresponding spend for servicing the member.

eNGiNeeriNG aND r&D SerViCeS

CUSTOM appLiCaTiON SerViCeS

eNTerpriSe appLiCaTiON SerViCeS

eNTerpriSe TraNSFOrMaTiON SerViCeS

iT iNFraSTrUCTUre MaNaGeMeNT

BUSiNeSS prOCeSS OUTSOUrCiNG

Contact: healthcare@hcl.com

ABOuT hCl

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