actuarial research corporation1 inside the black box: adjustments and considerations for public...

Actuarial Research Corporation 1

Inside the Black Box:Adjustments and Considerations for Public Policy Proposals

AcademyHealth Annual Research Meeting: June 8, 2004Cathi Callahan, ASA, MAAA


Adjustments and Considerations

Issues of Pricing a Particular Plan Plan and population specific adjustments

Issues of Total Cost of the Proposal Who benefits and how


Adjusting for Public Policy: Pricing a Plan

Starting population / starting costs Benchmarking Adjusting for particular plan / program Adjusting for population targeted Adjusting for lack of prior insurance Adjusting for who takes up insurance


Where We Start

People with insurance Private sector (this discussion) Public sector

Medicaid SCHIP Medicare

Their costs Costs of the group over a given time interval Costs of a person / person’s group over a longer period


Premiums

Where do we get starting premiums from? Industry data

Biased by clients Survey data

Biased by respondents Public program data

Often dated / limited release


Adjusting the Premium: Benchmarking

Why Benchmark? Need to control to federal or state specific data Need to control level and / or trend


Adjusting the Premium: Plan Richness

What is the particular plan being proposed vs. starting data?

“Actuarial valuation” Adjusting benefits of a specific reform plan vs.

what is perceived as “average” (or starting point) coverage


Adjusting the Premium: Population

Who participates

Different underlying costs by different populations Prior Insurance Age


Adjusting the Premium: Induction

Changing spending habits based on richness of new plan Increased spending for previously uninsured Increased or decreased spending for previously

insured (plan dependent)


Induction Effects (the required actuarial slide)

Total spending for covered services is assumed to be proportional to:

1/(1 + *P)

where is the "induction parameter" and P is the average fraction of the cost of services paid by the consumer.


Adjusting the Premium: Selection

Persons who participate may be above average risk (cost)

How does this happen? Not all eligible participate Who does?

Some average risk Some above average risk

Not all experience selection Effects of subsidy schemes

Spread selection effects across entire group of participants


Selection Effects: Examples

Use claims distributions to look at differential assumptions 25% participating vs. 10% participating

The more who participate, the less the effect on the overall group


Selection Effects: Examples

Example 1 25% participation in an uninsured subgroup draws:

Half (12.5%) from top of distribution Half (12.5%) from rest of distribution

For Children, this is a 375% increase If subgroup were 10% of total population, this has effect of 1.275

Example 2 10% participation in an uninsured subgroup draws:

40% (.4*.1 = 0.04) from top of distribution 60% (.6 * .1 = 0.06) from rest of distribution

For Children, this is a 836% increase If subgroup were 10% of total population, this would be increase

of 1.736


Example of Premium Calculation Source information:

Kaiser Project on Incremental Health Reform, Kaiser Family Foundation

Premiums calculated for the proposal detailed in: “Extending Health Insurance Through Tax Credits”, Mark

Pauly, October 1999.


Example of Premium Calculation Pauly Plan:

Income Related Tax Credits Tax credit covering full cost for under 150% of

poverty Sliding scale to no credit at 500% poverty Insurance purchased in current market Reconciled on tax return

Choice of this or tax exclusion for ESI


Example of Premium Calculation Starting point: Average market premiums for

children, 2005 terms $2107 overall

Based on $1139 per child in 1998, inflated by NHE per capita change in private health insurance of 1.85


Example of Premium Calculation: Population Adjustment Participation by:

Uninsured children ~10% of participants at 0.5 * non group cost

Non-group children ~90% of participants at 1.0 * non group cost

No participation by Medicaid or ESI kids

$2002 per child


Example of Premium Calculation: Induction adjustment Previously uninsured only Proxy utilization replacing actual induction

equation

40% increase for the uninsured Approximately 2% overall

$2042 per child


Example of Premium Calculation: Induction adjustment (alternative calculation) Induction equation: Q= 1/(1 + *P) α = 0.555 Uninsured:

P = 1.0 (Person pays 100%)Q = 1 / (1 + (.555 * 1) ) = 0.643

Insured:P = .2 (Person pays 20%)Q = 1 / (1 + (.555 * .2)) = 0.900

0.900 / 0.643 = 1.40


Example of Premium Calculation: Selection For those not fully subsidized

Children > 150% of poverty Selection of 1.67 on partially subsidized uninsured Use 1.00 for all fully subsidized children Use 1.00 on those with current coverage

Coverage does not change Spread over all children who participate

$2124 per child


Summary of Adjustments

Starting per child cost: $2107 Population adjustment: $2002 Induction assumption: $2042 Selection assumption: $2124

Final premium: $2124


Considerations of Public Policy Plans Who benefits

The already insured who may not have access to current subsidies

The uninsured Long vs. short term uninsured Children, parents, working adults

How we spend tax dollars New vs. existing coverage


Issues with Tax Credit Proposals

Availability of Credit Prospective vs. Retrospective Cost of covering

All recipients of credits vs. Covering newly covered

Usually a small percentage with retrospective credits

actuarial research corporation1 inside the black box: adjustments and considerations for public...

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plan richnesswhat

specific reform plan

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