INTRODUCTION. July 8, 2009

(1)

Mr. Edward Zimmerman Director

Department of Practice

American Academy of Pediatrics 141 Northwest Point Boulevard Elk Grove Village, IL 60007-1098

RE: 2009PAYMENT RATIO STUDY

Dear Ed:

I

NTRODUCTION

On July 1998, the American Academy of Pediatrics (AAP) engaged Reden & Anders to complete an actuarial analysis of the state-specific utilization and cost of children’s health insurance. The intent of the original analysis was to provide benchmark information to AAP’s constituents seeking that type of information. Since then, the cost of children’s health insurance has changed due to several factors including; utilization patterns, the scope of covered services, advanced technology, shifts in demographics and the increased cost to provide medical and pharmacy services.

On November 2002 and then again on February 2006, the AAP engaged Reden & Anders to update its 1998 study and to supply updated actuarial pediatric medical cost models. The 2002 and 2006 models were predominantly based on detailed claim information incurred during calendar years 2000 and 2004, respectively, and with additional supporting summary data from calendar years 2001 and 2005, respectively. National utilization and unit cost assumptions for commercial and Medicaid/SCHIP were derived using the same underlying demographic assumptions as in the original study. Furthermore, the age/sex factors used to produce age/sex-specific per member per month (PMPM) rates were derived from total medical costs including pharmacy and did not vary by service category.

On October 2008, the AAP again engaged Ingenix Consulting (IC), formerly Reden & Anders, to produce a payment ratio study that illustrates state-specific commercial and Medicaid /State Children’s Health Insurance Programs (SCHIP) reimbursement levels relative to current Medicare fee-for-service (FFS) reimbursement rates. Payment ratios and per member per month (PMPM) cost estimates are supplied in two broad services categories: 1) All Physician Services and 2) Evaluation & Management (E&M) and Immunization procedures only, a subset of the former category. The remainder of this letter will describe the data and analysis

(2)

Mr. Edward Zimmerman July 8, 2009

Page 2

12125 Technology Drive │ Eden Prairie, MN 55344 │ingenixconsulting.com

S

COPE OF

A

NALYSIS

The payment ratio study is an analysis of state-specific reimbursement levels relative to current Medicare FFS reimbursement rates in two distinct child (i.e., ages 0 to 21) enrollee groups – commercial and Medicaid / SCHIP – and across two physician service categories – All

Physician Services and E&M and Immunization. The enrollee groups are distinguished by the source of reimbursement, whether private (commercial) or governmental (Medicaid / SCHIP). The service categories are distinguished broadly by the specialist that predominantly delivers the service, whether primary care physician (E&M and Immunization) or all physician specialty types (All Physician Services). To help understand overall physician cost PMPM, we have developed an actuarial cost model that enables its user to understand state-specific utilization and cost patterns. The study’s results will provide AAP constituents the opportunity to compare and contrast average physician utilization and reimbursement levels in a wide variety of

potential settings.

A

PPROACH

A

ND

M

ETHODOLOGY

Commercial Data Source

The PMPM cost estimates and payment ratios for the commercial children’s population were derived from data sources contained in IC’s research database, as well as other publicly available information used to generate Medicare FFS reimbursement rates. IC’s commercial database represents the calendar year 2008 medical claim experience of approximately 5.1 million members in the 0 to 21 age group. Nearly 100% of the data is produced in a FFS environment (i.e., not in a capitated environment.) Incurred claims are paid through April 30, 2009. IC maintained a consistent service scope (see definition below) when analyzing the databases. The relative FFS costs reflect allowed charges (i.e., after provider discounts have been applied but before member cost sharing) at a procedure level. Please note that IC did not audit or adjust service types that may be charged by the physician as a visit or some other unit rather than a procedure. We relied on what was embedded within the data.

The cost model supplies the functionality to AAP to input member cost sharing in the form of copayments (applied per procedure/unit) or coinsurance (percent of gross allowed charges.) Therefore, the net PMPM result is net of member cost sharing.

In certain geographic localities raw commercial claim information was not available. As such, we relied on other summarized commercial information included in our other research data repositories. The summarized information includes the experience of an additional 7.5 million member years of 0 to 21 medical and pharmacy claim experience. When we speak of

summarized information, we mean the claim experience was not available to us in raw form. Rather, the experience was already summarized at the service category level. We note that we

(3)

12125 Technology Drive │ Eden Prairie, MN 55344 │ingenixconsulting.com have adjusted the experience, as best as possible, to minimize service category definition differences.

Medicaid / SCHIP Data Source

The PMPM cost estimates and payment ratios for the Medicaid / SCHIP population were derived from data sources contained in IC’s research database. IC’s Medicaid / SCHIP database represents the calendar year 2008 medical claim experience of approximately 1.1 million members in the 0 to 21 age group. Incurred claims are paid through April 30, 2009. We note that the experience reflects a mixture of managed and unmanaged FFS claim experience. However, the proportion that is managed significantly outweighs the non-managed proportion (in certain states this proportionality does not apply). Furthermore, the Medicaid information represents a mix of both under age 22, TANF and SCHIP members. To the extent that each state’s coverage or reimbursement policy varies across cohort, service, geography or physician specialty type, the claim experience included in our study will reflect the average utilization composition within that state based on our enrolled member experience.

Actuarial Cost Model Utilization Assumptions

Utilization assumptions are a function of a service category-specific; state-specific relativity factor applied to a national set of baseline utilization assumptions, by service category. The product of the service category-specific relativity factor and the national baseline utilization rates produces the state-specific urban/rural/statewide utilization for that service category. The relativity factors were developed using summarized competitive managed care organization experience included in IC’s research database. Each state/urban/rural combination was calculated relative to an overall national average calculated using the 0 to 21 commercial memberships as weights. All utilization included in this analysis was incurred during calendar year 2008 and paid through April 2009.

In instances where IC’s research database did not include detail down to a particular service category level, we relied on relationships relative to a more predominant category. For example, if pulmonary specialist visit information was not available for a given state, we used our raw data to determine the relationship of pulmonary utilization with respect to the office visit utilization rate across all specialties. We tried to use relationships that are supportable from a clinical standpoint.

Payment Ratio Claim Analysis

Our general approach to completing the payment ratio analysis consisted of the following steps: Step One: Isolate Relevant Claim Data Sets and Membership Cohorts

IC applied the following inclusion criteria to isolate the relevant membership cohorts and claim experience for each study cohort (i.e., commercial and Medicaid / SCHIP):

(4)

Page 4

12125 Technology Drive │ Eden Prairie, MN 55344 │ingenixconsulting.com • Claim experience incurred during calendar year 2008 for members ages 0 to 21 as of

July 1, 2008 and;

• Claim records with a claim form indicator equal to CMS 1500 and; • Claim records with an allowed charge amount greater than $0;

• Member month counts for members ages 0 to 21 as of July 1, 2008;

Step Two: Assign Procedure-Specific RVUs and Medicare Fee

In order to generate a relative comparison to Medicare FFS reimbursement levels, geography-adjusted relative value units (RVUs) were assigned to each procedure within the relevant data set noted above. Work, Practice Expense (Facility or Non-Facility) and Malpractice RVUs were assigned. IC relied on the Centers for Medicare & Medicaid Services (CMS’s) Resource Based Relative Value Scale (RBRVS) RVUs, conversion factor and Geographic Practice Cost Indices

(GPCIs) from the 31 December 2007 Federal Register to assign appropriate RVUs and to

calculate applicable Medicare fees. Procedure-specific Medicare fees are calculated as the product of the procedure’s RVU, adjusted by its GPCI factors (factors are selected based on the geography in which the claim was incurred), and the Medicare conversion factor. Please note that 2008 RVUs reflect a Budget Neutrality Adjustment factor of 0.8806 applied to the work RVU component.

Step Three: Group and Summarize Experience By: Cohort, State and Service Category Procedure counts, allowed charges, geography-adjusted RVUs and Medicare fees were

summarized by study cohort, state and service category. IC used the following service category definitions defined by Common Procedural Terminology (CPT) code to group experience:

• E&M – Office Visit: 99201 – 99215 and 99341 – 99350;

• E&M – Preventive Visits / Well Baby Care: 99381 – 99387 and 99391 – 99436;

• Immunizations: 90291 – 90749.

E&M and Immunization service categories were combined into a single category to calculate respective payment statistics. The All Physician Services category included all cohort and state-specific experience.

Two sets of average fees were determined – one set using cohort-specific allowed charge experience and the other set using Medicare fees across all cohorts. Average fees are calculated as the sum of allowed charges (or Medicare fees) divided by the sum of procedure counts. Average fees are calculated for each cohort, state and service category.

Step Four: Calculate Payment Ratios and Summarize Results

The payment ratio is calculated as the quotient of cohort average fee and Medicare average fee. Payment ratios are calculated for each cohort, state and service category. Furthermore, a

(5)

12125 Technology Drive │ Eden Prairie, MN 55344 │ingenixconsulting.com United States’ (US) average payment ratio is calculated for each cohort and service category from the applicable experience included in the data set across all states. Table 1 summarizes Ingenix Consulting’s payment ratio study.

Related Topics

IC believes there a certain topics worth mentioning that are related to the payment ratio study. These are as follows:

Statistical Error in Ratio Estimates

Cohort, state and service category-specific payment ratios may not be reliable due to statistical error arising from low beneficiary counts. Based on a separate IC analysis, we have determined that a minimum population of 5,000 children is required in order to achieve a reliable estimate of the payment ratio. Three states (i.e., Alaska, Hawaii and Vermont), within IC’s data set, did not exceed the minimum beneficiary threshold; therefore, in Table 1, we have identified each state with the “+” symbol to denote that the payment ratio result may not be fully reliable.

Changes to Medicare’s RBRVS RVUs and conversion factor

Although IC’s payment ratio study relies only on 2008 Medicare fees to determine respective relative payment ratios in a pediatric population, we are including a high-level trend summary of the components that comprise the Medicare fee. The annual trends (below) reflect the changes in Medicare RBRVS RVUs and conversion factor from calendar years 2004 to 2008. We did not include the annual trend in GPCI / locality adjustment. The annual trends are as follows:

Annual Trend Rates (%)

All Physician Services E&M + Immunizations

Trend

Periods RBRVS RVU Conv. Fctr. Composite RBRVS RVU Conv. Fctr. Composite

2004 to 2005 _{0.18% 1.50% 1.68% 0.10% 1.50% 1.60%}

2005 to 2006 _{0.05% 0.00% 0.05% -0.07% 0.00% -0.07%}

2006 to 2007 _{-2.08% 0.00% -2.08% 4.76% 0.00% 4.76%}

2007 to 2008 _{-0.60% 0.50% -0.10% -0.81% 0.50% -0.31%}

Please note that the Budget Neutrality Adjustment factor, applied to the Work component RVU changed from 0.8994 to 0.8806 from CY 2007 to 2008. The change in RBRVS RVU, noted above, includes the effect of the Neutrality Adjustment.

Ingenix Lawsuit

In February of 2008, the New York attorney general (NYAG) held a press conference during which he announced that he was launching an investigation into Ingenix’ PHCS and MDR database products, and how they are used by health care payers. Due to the influences of the media along with statements made by influential trade groups, AAP became concerned that the

(6)

Page 6

12125 Technology Drive │ Eden Prairie, MN 55344 │ingenixconsulting.com same database products might be used by IC in its upcoming payment ratio study and;

therefore, may draw concern from its constituent body regarding potential study biases.

To clarify, the data used by Ingenix Consulting (formerly Reden & Anders) for AAP’s past analyses, or this payment ratio study, have not come from the databases targeted by NYAG (i.e., Ingenix’ PHCS and MDR databases).

Although Reden & Anders has become a part of the new entity called Ingenix Consulting, it still retains its own data assets for use in our consulting activities. The data we collect to populate our data assets are given to us freely and with full permission by our clients. In turn, we format and condition their data according to our own internal standards, then use the information to assist our clients in their decision-making activities. Only qualified and trained IC personnel can access the data assets. In addition, we have strict limitations regarding the use of the data by our consultants. All of these provisions ensure that we adhere to the highest ethical standards and codes of conduct.

C

HANGES

F

ROM THE

2006

AND

P

RIOR

S

TUDIES

AAP did not engage IC to perform the same comprehensive pediatric modeling exercise as in the past, largely due to recessionary pressures. Rather, it engaged IC to perform a more streamlined payment ratio study – a subset of the comprehensive modeling exercise – and develop a limited actuarial cost model. The following table summarizes the payment ratio study portion of past studies and presents it with the current study:

Payment Ratio Study – All Physician Services

Year of Study (Data Period) Commercial-to-Medicare Medicaid-to-Medicare

2004 Study (2002 data) 115% 65%

2006 Study (2004 data) 111% 70%

2009 Study (2008 data) 113% 72%

Please note that Medicaid/SCHIP professional PMPMs estimated by the model represent plan-to-provider payments in managed care, and may vary from state-to plan payments.

Although we did not produce a comprehensive actuarial cost model, we have included Tables 2a and 2b that illustrate the child (i.e., Ages: 0-21), adult (i.e., Ages: 22+) and overall PMPM costs and relativities for two respective periods (i.e., calendar years 2008 and 2004,

respectively). The costs included in these tables are associated with a comprehensive scope of services. Some evidence of the growing baby boom population is present in comparing the member distributions between the two tables. Furthermore, it appears adult costs are increasing more rapidly than child costs.

(7)

12125 Technology Drive │ Eden Prairie, MN 55344 │ingenixconsulting.com

S

UMMARY

Based on information from IC’s research database, as well as Medicare fees produced from published sources, we have developed a streamlined actuarial cost model and a payment ratio study for a pediatric population (i.e., ages 0 to 21) that varies by study cohort (i.e., commercial versus Medicaid / SCHIP), by state and by broad physician service category (i.e., All Physician Services versus E&M and Immunizations). The study we have developed enables AAP

constituents to compare their own experience against the normative measures. We have included screen shots of the national cost models for each cohort for your review.

Any questions regarding the analysis and results of the study can be e-mailed to [email protected].

Sincerely,

Scott Guillemette, A.S.A., M.A.A.A. Vice President, Actuarial Consulting

(8)

Table 1 Ingenix Consulting Payment Ratio Study

Medicaid-to-Medicare Commercial-to-Medicare Physician Payment Ratio Physician Payment Ratio

All E&M + All E&M +

Physician Immunizations1 Physician Immunizations1

State Name State Services Only Services Only

Alabama AL 87% 81% 107% 96% Alaska AK + 133% 143% 176% 185% Arizona AZ 94% 91% 108% 101% Arkansas AR 86% 82% 99% 103% California CA 62% 58% 114% 117% Colorado CO 83% 89% 122% 121% Connecticut CT 99% 99% 110% 114% Delaware DE 100% 103% 116% 116% District of Columbia DC 58% 50% 113% 108% Florida FL 66% 66% 105% 97% Georgia GA 86% 86% 109% 112% Hawaii HI + 73% 71% 104% 106% Idaho ID 105% 106% 109% 109% Illinois IL 84% 81% 114% 118% Indiana IN 68% 64% 119% 115% Iowa IA 97% 95% 107% 101% Kansas KS 89% 95% 113% 110% Kentucky KY 85% 83% 117% 110% Louisiana LA 87% 89% 102% 106% Maine ME 61% 55% 105% 99% Maryland MD 84% 84% 102% 99% Massachusetts MA 82% 76% 107% 108% Michigan MI 65% 64% 113% 111% Minnesota MN 77% 65% 103% 90% Mississippi MS 84% 86% 104% 109% Missouri MO 73% 66% 108% 103% Montana MT 102% 98% 132% 125% Nebraska NE 82% 81% 135% 136% Nevada NV 97% 93% 113% 103% New Hampshire NH 70% 70% 107% 101% New Jersey NJ 43% 49% 102% 100% New Mexico NM 101% 100% 116% 123% New York NY 47% 42% 107% 109% North Carolina NC 92% 96% 113% 115% North Dakota ND 94% 98% 113% 111% Ohio OH 72% 77% 117% 110% Oklahoma OK 99% 101% 120% 116% Oregon OR 91% 85% 126% 126% Pennsylvania PA 39% 44% 113% 108% Rhode Island RI 56% 52% 92% 95% South Carolina SC 91% 90% 114% 107% South Dakota SD 95% 86% 138% 128% Tennessee TN 82% 79% 108% 105% Texas TX 87% 90% 120% 114% Utah UT 83% 77% 105% 105% Vermont VT + 88% 86% 106% 102% Virginia VA 83% 84% 113% 108% Washington WA 93% 96% 115% 122% West Virginia WV 82% 79% 114% 107% Wisconsin WI 79% 80% 133% 133% Wyoming WY 133% 122% 135% 126% US Average2 72% 71% 113% 111% 1

Includes the following services:

E&M - Office Visits (99201-99215, 99341-99350); E&M - Preventive Visits/Well Baby Care (99381-99387, 99391-99436) and Immunizations (90291-90749).

2

US Average based on collective physician claim experience of children ages 0 to 21 within the Ingenix Consulting database.

State-specific results were derived from the same database used to produce the US Average. + State results may not be reliable due to statistical error arising from low (< 5,000) beneficiary count.

(9)

January 1, 2008 Medical + RX

Member Cost Age

Age Cohort Distribution PMPM Factor

Child (Ages: 0-21) 31% $ 131.00 0.50 Adult (Ages: 22+)1 69% $ 320.00 1.23 All Ages 100% $ 260.00 1.00

1

(10)

REDEN & ANDERS Table 2b

Child and Adult Medical and Prescription Drug Cost Per Member Per Month (PMPM) Commercial Population

Effective: January 1, 2004

January 1, 2004 Medical + RX

Member Cost Age

Age Cohort Distribution PMPM Factor

Child (Ages: 0-21) 32% $ 109.00 0.53 Adult (Ages: 22+)1 68% $ 252.00 1.22 All Ages 100% $ 206.00 1.00

1

(11)

Additional Options: Include All Services: Physician Services:

Surgery - Non-Maternity Procedures 357.34 $219.55 $6.54 $0.00 $6.54

Surgery - Maternity - Non-Deliv Procedures 4.59 229.45 0.09 0.00 0.09

Surgery - Maternity - Deliveries Procedures 3.24 1,703.58 0.46 0.00 0.46

Venipuncture Procedures 159.38 3.76 0.05 0.00 0.05

Anesthesia Visits 67.06 246.35 1.38 0.00 1.38

Radiology Visits 558.43 79.38 3.69 0.00 3.69

Pathology/Lab Visits 2,109.49 21.60 3.80 0.00 3.80

E&M - Office Visits Visits 1,479.94 80.87 9.97 0.00 9.97

E&M - Preventive Visits/Well Baby Visits 810.81 104.70 7.07 0.00 7.07

E&M - Inpatient Visits Visits 197.79 159.51 2.63 0.00 2.63

E&M - Consultations Visits 143.96 182.25 2.19 0.00 2.19

E&M - Emerg Room/Crit Care Visits 192.82 117.87 1.89 0.00 1.89

E&M - Miscellaneous Procedures 5.93 146.17 0.07 0.00 0.07

Immunizations Procedures 1,594.49 40.35 5.36 0.00 5.36

Injections/Infusions/G-Codes Procedures 230.05 34.03 0.65 0.00 0.65

Psychiatry/Biofeedback Procedures 317.01 122.03 3.22 0.00 3.22

Dialysis Procedures 0.62 128.72 0.01 0.00 0.01

Gastroenterology Procedures 1.08 175.01 0.02 0.00 0.02

Ophthalmology - Exams Procedures 56.95 115.32 0.55 0.00 0.55

Ophthalmology - Services Procedures 45.54 72.84 0.28 0.00 0.28

Otorhinolaryngology Procedures 213.46 46.57 0.83 0.00 0.83

Cardiovascular - Surgery Procedures 1.33 190.70 0.02 0.00 0.02

Cardiovascular - Other Procedures 88.18 88.73 0.65 0.00 0.65

Non-Invasive Vascular Diagnostics Procedures 2.57 188.23 0.04 0.00 0.04

Pulmonology Procedures 88.27 35.98 0.26 0.00 0.26

Allergy Tests Procedures 21.85 7.85 0.01 0.00 0.01

Allergy Treatment Procedures 175.97 21.02 0.31 0.00 0.31

Neurology Procedures 32.18 107.47 0.29 0.00 0.29

Chemotherapy Procedures 3.30 151.71 0.04 0.00 0.04

Dermatology Procedures 2.82 47.52 0.01 0.00 0.01

Physical Medicine Procedures 348.32 35.73 1.04 0.00 1.04

Other Medicine Procedures 66.58 40.88 0.23 0.00 0.23

Drugs (J-Codes) Procedures 101.76 91.00 0.77 0.00 0.77

HCPCS not included elsewhere Procedures 42.57 97.24 0.34 0.00 0.34

Total Physician Cost $54.76 $0.00 $54.76

(12)

Ingenix Consulting Pediatric Medical Cost Model

Service Area National/Statewide Line of Business Medicaid/SCHIP

Cost Share:

Include Flat Member Type of Util/ Cost/ Gross Copay Net

Type of Service Svc? Copay Coins % Util 1,000 Unit PMPM PMPM PMPM

Additional Options: Include All Services: Physician Services:

Surgery - Non-Maternity Procedures 281.97 $130.37 $3.06 $0.00 $3.06

Surgery - Maternity - Non-Deliv Procedures 22.57 160.70 0.30 0.00 0.30

Surgery - Maternity - Deliveries Procedures 15.13 914.78 1.15 0.00 1.15

Venipuncture Procedures 117.57 3.03 0.03 0.00 0.03

Anesthesia Visits 63.19 165.53 0.87 0.00 0.87

Radiology Visits 627.92 32.53 1.70 0.00 1.70

Pathology/Lab Visits 2,640.88 11.31 2.49 0.00 2.49

E&M - Office Visits Visits 3,173.33 46.27 12.24 0.00 12.24

E&M - Preventive Visits/Well Baby Visits 941.10 67.79 5.32 0.00 5.32

E&M - Inpatient Visits Visits 198.74 79.61 1.32 0.00 1.32

E&M - Consultations Visits 163.86 113.68 1.55 0.00 1.55

E&M - Emerg Room/Crit Care Visits 562.56 56.27 2.64 0.00 2.64

E&M - Miscellaneous Procedures 6.07 81.11 0.04 0.00 0.04

Immunizations Procedures 1,351.00 24.95 2.81 0.00 2.81

Injections/Infusions/G-Codes Procedures 194.92 20.96 0.34 0.00 0.34

Psychiatry/Biofeedback Procedures 924.41 68.97 5.31 0.00 5.31

Dialysis Procedures 0.35 69.27 0.00 0.00 0.00

Gastroenterology Procedures 1.00 57.47 0.00 0.00 0.00

Ophthalmology - Exams Procedures 86.02 83.30 0.60 0.00 0.60

Ophthalmology - Services Procedures 115.73 40.18 0.39 0.00 0.39

Otorhinolaryngology Procedures 220.72 24.34 0.45 0.00 0.45

Cardiovascular - Surgery Procedures 1.14 185.33 0.02 0.00 0.02

Cardiovascular - Other Procedures 101.49 48.46 0.41 0.00 0.41

Non-Invasive Vascular Diagnostics Procedures 3.66 88.48 0.03 0.00 0.03

Pulmonology Procedures 129.38 15.71 0.17 0.00 0.17

Allergy Tests Procedures 14.93 4.23 0.01 0.00 0.01

Allergy Treatment Procedures 92.04 13.10 0.10 0.00 0.10

Neurology Procedures 33.60 65.04 0.18 0.00 0.18

Chemotherapy Procedures 3.00 93.63 0.02 0.00 0.02

Dermatology Procedures 1.24 30.84 0.00 0.00 0.00

Physical Medicine Procedures 166.19 22.33 0.31 0.00 0.31

Other Medicine Procedures 92.05 19.75 0.15 0.00 0.15

Drugs (J-Codes) Procedures 68.04 33.15 0.19 0.00 0.19

HCPCS not included elsewhere Procedures 52.76 38.66 0.17 0.00 0.17

Total Physician Cost $44.37 $0.00 $44.37

2008 Medical Cost