MHIG & MHIP: How Milliman Uses Health Care ETFs to Fend Off Rising Costs

SPEAKER_1 (0:00)

Adam Schenck is with us, FRM, Principal Managing Director of Fund Services at Milliman. Thank you so much for being with us. So we're going to talk about the rising costs of healthcare and ways to hedge against that. So let's get this conversation go and kick it off for us.

Adam Schenck (0:17)

Indeed.

Yeah. So in our latest measurement, healthcare costs are rising over 10 percent year over year, and that data has lagged by about five months, but that's a significant increase, and that's on the backs of really everyday Americans. So we really set out about three years ago to try to do something about this and develop strategies that both institutions and individuals could use to try to hedge that, because as we see in the latest CPI reports, that's over three times what's coming out at CPI, so over three times basic inflation. So it is a real issue, really up and down from individuals to institutions and trying to help mitigate that.

SPEAKER_1 (1:12)

So you're talking about how Americans protect themselves from the rising costs.

I'm sure there are multiple ways. Let's kick it off here looking at your ETF and how you hedge the health care costs with MHIG.

Adam Schenck (1:28)

Yeah. So the most direct link that you can create with the rising costs of health care, which is coming through in claims, so we measure, we actually measure health care claims, is the beneficiaries of those claims. So where does the money go? What ends up as revenue for companies in the health care system?

So the first step we take is to try to identify those companies, the heaviest beneficiaries of those claims, and then invest in those in the equity sleeve of the portfolio. But we can't just invest in equities. As we know, those come with risks, come with volatility. So we have treasuries and a protected gold strategy using options on gold. As the other two balancing forces to manage the volatility and the drawdowns of those investments, in order to create a smooth ride that seeks to meet the rate of health care cost inflation, both for everyday Americans and health plans across the nation.

SPEAKER_1 (2:37)

And just for clarification, MHIG versus MHIP, so people fully understand?

Adam Schenck (2:45)

MHIP is a similar strategy, but in that case, for investors with a higher risk tolerance, we actually overshoot the both. We actually target 2% above that running rate of health care cost inflation and do that by taking more risk in health care equities.

SPEAKER_1 (3:07)

But what's interesting is that you think that the growth that we've seen, the rise in health care costs is actually lagging. So you're trying to get ahead of that? Is that what that process is?

Adam Schenck (3:19)

That's right. Claims are paid on a delayed basis, right? So there's negotiation between the provider and the payer. So we have to use forecasting techniques in order to understand what the claim rate of increase in claims is likely right now.

And we also append that with pharmaceutical sales data on the pharmacy to understand every single month which companies are kind of winning the revenue battle when it comes to health care claims. So, yeah, there's a lot of science behind it, and there's a lot of complexity in the strategy, but it's necessary in order to meet that objective to keep up with rising health care costs.

SPEAKER_1 (4:01)

You also talked briefly about using bonds and gold too, right? Where does that fit in?

Adam Schenck (4:08)

Right, so bonds and gold, in particular, we have a treasury strategy. And if you look at those two together, they aim to keep up with the rise in wages and wage inflation in health care. So the wage inflation is obviously passed on to customers. So if you think about that as the baseline, and then we build the risk assets on top of that for a multi-asset portfolio that manages risk across the three.

SPEAKER_1 (4:39)

Adam Schenck, there's so much to talk about there. Really appreciate it. We have you as the Principal Managing Director of our Principal Managing Director Fund Services at Milliman. Thank you so much. Really appreciate it.