Member Lifetime Value in Health Plans - Factors & Calculation RAVI SANKAR C J Head, Healthcare Solutions SAURABH GAUR Business Manager, Healthcare Solutions White paper April 2013 Copyright Notice This document contains proprietary information of HCL Technologies Ltd. No part of this document may be reproduced, stored, copied, or transmitted in any form or by means of electronic, mechanical, photocopying or otherwise, without the express consent of HCL Technologies. This document is intended for internal circulation only and not meant for external distribution.
TABLE OF CONTENTS Factors affecting MLTV 3 Approach to Calculation 4 About HCL 6 2
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. 3
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 Expected Tenure of the Member Revenues Retention Rate Operating Costs UNDERLYING VARIABLE Customer Satisfaction Premium change Premium Referrals Premiums Operating Quality Customer Satisfaction 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. 4
Define Start Member Product Cost Profit Define Objective Define the units of analysis Develop Member Tenure Cost and Revenue Attribution Discount Rate Methodology for LTV Modelling Model Assumptions Forecasting Regression HUC Segmentation Member Satisfaction Churn Operational Quality Deploy Develop Customer Models Model Testing Model Recalibration Model Integrating with Live Environment LTV $$$/ Segment Score Resource Allocation Retention/ Winback Loyalty Cross-Sell Segmentation Forecasting Refine 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. 5
ENGINEERING AND R&D SERVICES CUSTOM APPLICATION SERVICES ENTERPRISE APPLICATION SERVICES Contact: healthcare@hcl.com ENTERPRISE TRANSFORMATION SERVICES IT INFRASTRUCTURE MANAGEMENT BUSINESS PROCESS OUTSOURCING About HCL About HCL Technologies HCL Technologies is a leading global IT services company, working with clients in the areas that impact and redefine the core of their businesses. Since its inception into the global landscape after its IPO in 1999, HCL focuses on transformational outsourcing, underlined by innovation and value creation, and offers integrated portfolio of services including software-led IT solutions, remote infrastructure management, engineering and R&D services and BPO. HCL leverages its extensive global offshore infrastructure and network of offices in 31 countries to provide holistic, multi-service delivery in key industry verticals including Financial Services, Manufacturing, Consumer Services, Public Services and Healthcare. HCL takes pride in its philosophy of Employees First, Customers Second which empowers our 85,194 transformers to create a real value for the customers. HCL Technologies, along with its subsidiaries, had consolidated revenues of US$ 4.4 billion (23,499 crores), as on 31 Dec 2012 (on LTM basis). For more information, please visit www.hcltech.com About HCL Enterprise HCL is a $6.2 billion leading global technology and IT enterprise comprising two companies listed in India HCL Technologies and HCL Infosystems. Founded in 1976, HCL is one of India s original IT garage start-ups. A pioneer of modern computing, HCL is a global transformational enterprise today. Its range of offerings includes product engineering, custom & package applications, BPO, IT infrastructure services, IT hardware, systems integration, and distribution of information and communications technology (ICT) products across a wide range of focused industry verticals. The HCL team consists of over 90,000 professionals of diverse nationalities, who operate from 31 countries including over 500 points of presence in India. HCL has partnerships with several leading global 1000 firms, including leading IT and technology firms. For more information, please visit www.hcl.com