health watch, may 2008, issue no. 58 - member | soa · education, public health is the foundation...

Issue No. 58 | May 2008

“For Pro fess iona l Recogn i t ion o f the Hea l th Actuary”

A bout mid-way through the HealthPolicy Summit held on Nov. 1, 2007in Washington, D.C. in honor of

Health Affairs’ 25th anniversary, it hits me:this is a big deal. Here’s how you know: J . D. Kleinke, a nationally recognizedspeaker on health care innovation, a contrib-utor of a dozen or so Health Affairs articleshimself, and an author whose books(Bleeding Edge: The Business of Health Care inthe New Century and Oxymorons: The Myth ofa U.S. Health Care System) are considered“required reading” by many in the field, isattending the conference as…a member ofthe audience. Just like me. At most gather-ings of this sort, Kleinke would be thekeynote speaker, but here he’s just one of thecrowd. That’s because the auditorium at theRonald Reagan Building is filled with somany other health care luminaries that atleast a few of that elite company can just sitback and enjoy the proceedings.

For me and all the other health policyjunkies in the room, it’s like being at abanquet where they’re serving 20 or 30 five-star, world-class, gourmet-level entrees.And we don’t even have to pick and choose;there’s room on the plate (but just barely) for all we can eat, even if it’s a littlebit of everything.

The day begins with the presentation ofawards “for bipartisan health policy collabo-ration” to Senator Max Baucus (D-MT) andSenator Chuck Grassley (R-IA). As thecurrent and former chairman (respectively)

of the Senate Finance Committee, these twohave held more influence over the Medicareand Medicaid programs than all but a hand-ful of government officials over the last fewyears. Like most members of The world’sgreatest deliberative body, Senators Baucusand Grassley are far too busy to stick aroundfor long—which is why the awards presenta-tion has been squeezed into an 8 a.m. timeslot, prior to the official “Introduction andWelcome” presentation.

With the senatorial awards taken care of,Leonard Schaeffer and James Robinson cannow come out and officially welcome us tothe Health Policy Summit. Schaeffer, thefounding chairman and former CEO ofWellPoint, is the principal sponsor—person-ally, not through his company—of today’s

The 2007 Health Policy Summit:Celebrating 25 Years of Health Affairsby Grady Catterall

Health Watch

(continued on page 26)

Grady Catterall, FSA,

MAAA, is senior staff

actuary at Kaiser

Permanente in

Rockville, Md. He can

be reached at

Grady.C.Catterall@

KP.org.

2 | M a y 2 0 0 8 | Health Watch

CONTENTS

5 CERA

14 2008 Health Spring Meeting

22 2008 DI & LTC Insurers' Forum

32 SOA Boot Camps

35 Research

40 Health Section Announcements

ANNOUNCEMENTS

FEATURES

3 Chairperson’s CornerActuaries Advancing Public HealthJim Toole

6 National Health Care Reform: The Case for a Public SolutionLawrence Gostin

8 The Crisis in American Health CareIan Duncan

12 Reflections on Health Care Financing and Benefitsin the U.S.Anna M. Rappaport

15 Letter from the Editor ... Are We Over Treated andOver Dosed by Our Health Care Industry?Gail M. Lawrence

OPINION

Published by the Health Section Council of the Society of Actuaries

475 N. Martingale Road, Suite 600Schaumburg, IL 60173-2226

ph: 847.706.3500 • f: 847.706.3599 •Web: www.soa.org

This publication is free to section members. Current-year issues are available from the CommunicationsDepartment. Back issues of section publications havebeen placed in the SOA library and on the SOA Website: (www.soa.org). Photocopies of back issues maybe requested for a nominal fee.

Facts and opinions contained herein are the soleresponsibility of the persons expressing them andshould not be attributed to the Society of Actuaries, itscommittees, the Health Section or the employers ofthe authors. We will promptly correct errors brought toour attention.

2008 SECTION LEADERSHIPJim Toole, Chairperson Jennifer Gillespie, Vice–Chairperson Susan Pantely, Secretary/TreasurerDaniel Bailey, Council MemberJoan C. Barrett, Council MemberGrady Catterall, Council Member Beth K. Grice, Council Member Jodie L. Kercheval, Council Member Barbara P. Niehus, Council Member Sudha Shenoy, Council Member John Stenson, Council Member

Gail Lawrence, Editorph: [email protected]

Ross Winkelman, Editorph: [email protected]

Jill Leprich, Project Support Specialistph: 847.706.3645f: 847.706.3599j [email protected]

Angie Godlewska, Graphic Designerph: 847.706.3548f: [email protected]

Kathryn Wiener, Staff Editorph: 847.706.3501f: [email protected]

Meg Weber, Director, Section Servicesph: 847.706.3585f: [email protected]

Steve Siegel, Research Actuaryph: 847.706.3578f: [email protected]

Copyright © 2008, Society of Actuaries All rights reserved. Printed in the United States of America.

1 The 2007 Health Policy Summit: Celebrating 25Years of Health AffairsGrady Catterall

16 Medicare Advantage—Future BenchmarksDaniel Bailey

18 Timing’s Everything: The Impact of Benefit RushJoan C. Barrett

20 Navigating New Horizons: An Interview with CoriUccelloSarah Lawrence

23 SOA Releases New Long-Term Health Care CostTrends Resource ModelSteven Siegel

24 Soundbites from the American Academy ofActuaries Health Practice CouncilHeather Jerbi

Health Watch | M a y 2 0 0 8 | 3

The Society of Actuaries is an educational,research and professional organizationdedicated to serving the public and

its members. Putting the interests of the publicfirst is one of the attributes of a profession; find-ing volunteer outlets to serve the public is one ofthe manifestations. The Actuarial Foundationprovides opportunities for actuaries to volunteerteaching math to kids. But we are more thanmathematicians. We are business professionalsspecializing in the analysis of risk. Doctors,lawyers and CPAs have all developed sophisti-cated, highly organized mechanisms to donate their professional time pro bono. In whatways can we as actuaries give back using our special gifts?

There is no denying actuaries give selflesslyto the profession, but we lack a formalized structure to give back to our communities. As individuals, many of us are actively involvedin our schools, our houses of worship, ourcommunities at large. With our numericalacumen and ability to communicate same, weoften find ourselves playing leadership roleswithin these organizations. Yet we struggle togive back in ways that more directly take advan-tage of the full range of our professional skills.

But more to the point, in what ways does thehealth discipline serve the greater public, not justthe insured public? Doctors, nurses and pharma-cists all have scores of choices to donate theirtime locally or globally. How many of us get touse our skills to improve the health of ourcommunities?1 Right around the corner is a build-ing most of us have probably never thought to visit filled with dedicated professionals thatserve as ground zero for promoting the health of the largest, most diverse risk pool around.

No, it isn’t the hospital. It is your local publichealth department.

What is Public Health?Public health is the science of protecting and

improving the health of populations througheducation, promotion of healthy lifestyles, andresearch into disease and injury prevention.Public health helps all members of a community,not just those who are less fortunate, achieve a healthier lifestyle. In contrast, clinical profes-sionals such as doctors and nurses focusprimarily on treating individuals, aafftteerr theybecome sick or injured.

There is an old adage—what is not addressedin public health ends up in health care. Publichealth approaches the problem from two angles:creating the conditions for people to be healthy,and maintaining the structures that supporthealth improvement. Through prevention andeducation, public health is the foundation of indi-vidual health. Some of the biggest public healthchallenges today surround preventing and reduc-ing the consequences of chronic diseases such asdiabetes, asthma and cardiovascular disease.

Public health research is critical for theadvancement of health. The impact of publichealth is and has been far reaching. Despite ourfascination with the delivery of high-tech, inter-ventionist health care, public health efforts havebeen responsible for more than 80 percent of the longevity gains in the United States in the 20th century.

Just as the interstate system is the backboneof commerce, public health is the infrastructureupon which the health of the nation rides. Notunlike our transportation grid, our public health

Chairperson’s Corner

Actuaries Advancing PublicHealthby Jim Toole

1 Yes, there is an “Actuaries without Boarders,” but could you really imagine a country wanting to import our health care system?

Jim Toole, FSA, MAAA,

is a managing

director, life & health,

for MBA Actuaries in

Winston–Salem, N.C.

He can be reached at

jim.toole@

mbaactuaries.com.



infrastructure has long been neglected. At 1 to 2cents on the health care dollar, spending has notkept up with the needs for proper maintenance,much less investing enough to counter the healthchallenges of the new century. The cumulativeresults of a myriad public health decisions in thelast 50 years can be seen writ large in the explo-sive rise of chronic diseases including asthma,obesity, and diabetes.

How Can We Help?Actuaries, of all professionals, surely under-

stand the value of prevention. Present value isour stock in trade. Whereas policymakers aresometimes unable to get past the up-front invest-ment in prevention to understand its long-termbenefits, health actuaries can clearly demonstratethe business case for public health in terms ofmoney saved down the road. Study after studydemonstrates the link between health, educationand productivity. Clearly, cost savings are not justto the public sector; hospitals, health care plansand ultimately the business community all bene-fit when we invest in community health.

The health issues facing each community areunique. There are no one size fits all solutions. Ittakes dedicated teams of professionals andcommunity volunteers to identify, scope andimplement programs and policy change. Manypublic health departments in mid-size or smallmunicipalities do not have the budget to keep anepidemiologist on staff. Communities place theirfaith in good epidemiological research to identifyissues and trends, and the effective allocation ofresources by informed policy makers to addressthem. Unfortunately, too often the research isunder funded and the policy makers are poorly(or willfully) ill-informed.

This is where actuaries add valuable perspec-tive. Dr. Bobbie Berkowitz, director of theNational Institute of Health (NIH) funded Centerfor the Advancement of Health DisparitiesResearch at the University of Washington, definespublic health competencies that clearly overlapwith actuarial competencies, including:

• Analytic assessment;• Communication;• Policy development & program planning;• Financial planning & management skills;• Leadership & systems thinking.

Actuaries are respected in the businesscommunity. Merely becoming involved sends themessage that public health is an importantendeavor. A public health message delivered bybusiness professionals can carry great weight inthe community. Actuaries are experts at commu-nicating complex issues to the insuranceaudience; effectively communicating the meaningand implications of research results to morediverse community stakeholders is a challengeactuaries should welcome to improve broadercommunication skills. Margaret Stanley, executivedirector of the Puget Sound Health Alliance,speaks about the “neighbor test.” If you can’texplain it to your neighbor, you probably need tohone your message.

Why Should We Help?The primary objective is to help improve the

health of our communities, but there are numer-ous benefits for the discipline to becominginvolved at the base of the U.S. health caresystem. From a purely selfish standpoint, this isan opportunity to inform the public healthcommunity, as well as the community at large, asto the value-add that actuaries bring to the table.No less important, this is an opportunity for us toget an education on the other piece of the picture:the needs and challenges facing the underpin-nings of the health of our communities. This broader knowledge will of course inform ourability to perform our work, to the benefit of the

ACTUARIES ADVANCING PUBLIC HEALTH ... | FROM PAGE 3

... health actuaries can clearly demonstrate thebusiness case for public health in terms ofmoney saved down the road.


system overall. Most important, the disciplinefulfills its role of serving the public first, not justthe insured public.

The health discipline is somewhat introspec-tive in that we focus almost entirely on theinsured population. In that respect, we are moreoften supporting the corporate interests than thepublics’. This is an opportunity to educate theprofession of the need to be perceived as abalanced participant in the health care system inthe United States rather than biased players with a single focus.

Healthy populations are a critical componentof reducing the cost of health care. Employeesatisfaction can be enhanced and insurance costslowered through programs incorporating popula-

tion-based health care strategies. Actuaries canhelp build partnerships among public health,health care and private sector professionals withan eye towards a prevention agenda for healthimprovement. We have the knowledge. The ques-tion is do we have the courage and can we musterthe passion? I encourage each of you to open adialogue with public health officials in yourcounty, city or state in the next year. I will hopeyou will share your experience with me and theprofession. Actuaries can make a difference, onecommunity at a time. h

ACTUARIES ADVANCING PUBLIC HEALTH ...

Is the U.S. health care system in crisis?Conservative commentators say “no” becausethey can always find ways to minimize the

severity of the unconscionably large number ofAmericans who have no health insurance. But itis important to put yourself in the position of aperson who lacks full access to health care. It isall too easy for an individual of high socioeco-nomic status, with a full set of health benefits, todiscount the pain caused by the lack of access tohealth care. But if they put themselves in theposition of vulnerable persons they would under-stand that to these Americans, there is a crisis: themother with a preexisting condition such ascancer, diabetes, or heart disease who cannotobtain coverage; the child in a low-to-middleincome family who is not eligible for SCHIP; theunemployed man or woman with no employerbased health coverage and ineligible forMedicaid; the underinsured who has only barebones health coverage but has costly chronicconditions. For these, and many moreAmericans, the health system is in a crisis. And itis just too flippant to say they can go to an emer-gency room, which we also starve of funds.

If conservative commentators cannot win onthis argument, they usually try scare tacticswhere they associate any attempt at comprehen-sive reform as, you name it: socialized medicine,big government, Hillary Care, illegal immigrationor anything that will frighten Americans intothinking that they will lose the privileges associ-ated with their current health care insurance.This is so despite the fact that there are manysuccessful examples of these kinds of “socialized”systems in the United States. For example, theVeterans health care system is akin to a nationalhealth service, Medicare is akin to a single payerprogram, and so on.

Americans have been taught that they shouldnot have to give anything up so that the lessadvantaged can have more. But the hard truth isthat we will have to give something up inexchange for a humane compassionate society. I am sorry if that sounds too “liberal,” but thetruth is that there are hard tradeoffs entailed, andthis country can afford to provide health care toits entire population.

There is a third hobbyhorse of conservatives.The story usually goes something like this:“Everyone comes to America for high qualityhealth care.” But this is not quite true. Actually,the world’s rich also go to major hospitals inEurope, where countries do guarantee health careto all. And Americans themselves now go toplaces like India to get good quality care at moreaffordable prices. We can’t be so jingoistic as tothink that we are the best and cannot learn fromother countries. The truth is that America is theoutlier in the world—the only developed countrywithout a national health system. I am notmaking the claim that the United Kingdom,Canada, Germany, Japan, and many other countries have perfect systems, but we couldlearn from them.

So, the central question is, how can we trulymeasure the American health care system so that


National Health Care Reform:The Case for a Public Solution1

by Lawrence Gostin

1 My thanks to Michael Gottlieb, O’Neill fellow for national and global health law, for superb research and writing assis-tance. For an examination of many of these issues, see Lawrence O. Gostin, National and Global Health Law: A ScholarlyExamination of the Most Pressing Health Hazards, Georgetown Law Journal (2008) 96: 317-329.

Lawrence Gostin is

associate dean and

the O’Neill professor of

global health law at

Georgetown University

Law Center in

Washington , D.C. He

can be reached at

gostin@

law.georgetown.edu.

NATIONAL HEALTH CARE REFORM ...


we can have a rational debate in this country?The key measures of any health care system areaccess, fairness, cost, quality, and choice.Americans like to think that we have the besthealth care system in the world. But the UnitedStates health care system, by these measures, isnot meeting the health needs of the population.The data are all too familiar, but the underlyingindicators of success have been stubbornly resist-ant to change: nearly 50 million uninsured,including more than eight million children; theuninsured population rising by nearly six millionfrom 2001 to 2005; and 16 million adults underin-sured. The high rates of the uninsured andunderinsured have profound implications forsocial justice, disproportionately affecting thepoor and vulnerable: 73 percent of the underin-sured have annual incomes below 200 percent ofthe federal poverty level. Low socioeconomicstatus (SES) Americans are also much more likelyto be ill and die young. And the poor, particu-larly ethnic and racial minorities, receive lowerquality care, with poorer health outcomes.

Such health disparities are well documentedand affect African Americans, Hispanics, AsianAmericans, and Native Americans. Minoritygroups in the United States have a higher inci-dence of chronic disease, mortality, and poorhealth outcomes as compared with whites.Cancer incidence, for example, is 10 percenthigher among African Americans than whites.

Consuming $2 trillion, or $6,700 per person,total health care spending represents 16 percentof the gross domestic product (GDP), and isprojected to rise to $4 trillion, or 20 percent ofGDP, by 2015. Part of these costs is attributable todiscretionary private spending, but the economicburden still adversely affects the Treasury, withgovernment bearing 44 percent of total coststhrough public programs. And 30 percent ofhealth care dollars—more than $1,000 percapita—is spent on administration. Total healthcare costs, as well as administrative costs, areconsiderably higher in the United States than inother industrialized countries. Canada andFrance, for example, spend roughly half of whatthe United States spends per capita on health carewith excellent results.

Private insurers, moreover, spend large sumsfighting adverse selection, trying to identify andscreen out high-cost customers. Systems such asMedicare, which covers every American 65 orolder, or the Canadian single payer system, whichcovers everyone, avoid these costs. In 2003,Medicare spent less than two percent of itsresources on administration, while private insurance companies spent more than 13 percent.Paperwork imposed on health care providers by the fragmentation of the U.S. system costsseveral times as much as the direct costs borne by the insurers.

Despite the enormous amount spent in theUnited States on health care, there is l ittleevidence of higher quality care compared to otherdeveloped countries, and even compared to some developing countries. The World HealthOrganization ranks the U.S. health care system37th in the world, and Americans’ overall health72nd among 191 member states. Comparativedata also show that the United States ranks low

among OECD countries in critical areas such aslife expectancy and infant mortality. And theInstitute of Medicine estimates that medicalerrors cause as many as 98,000 avoidable deathsannually. Hospital capacity continues to decline—with nurse shortages impacting both the qualityand economics of care—while demand continuesto surge. The CDC reports a 26 percent increase inER visits from 1993 to 2003. In those same 10years, the number of available ERs nationwidehas decreased by 12.3 percent and 90 percent ofhospitals are considered at or beyond capacity.


The high rates of the uninsured andunderinsured have profound implications for social justice, disproportionately affectingthe poor and vulnerable: 73 percent of theunderinsured have annual incomes below 200 percent of the federal poverty level.

At the recent SOA Annual Meeting inWashington, D.C., I participated in apanel discussion about the crisis in

American health care. I was asked to represent aposition that there is no crisis. The following arti-cle is taken from my prepared remarks.

I am delighted to participate on this panelabout American health care. I represent severaldifferent perspectives:

1. I am a health actuary who works with clientsin the area of managed care outcomes, inseveral different countries.

2. I actually purchase health care on behalf ofmy employees.

3. In my career I have lived in four differentcountries under four different health carefinancing systems. So I have a broaderperspective than most individuals.

4. I was trained as an economist before I becamean actuary, and I am interested in the powerof markets to provide signals that optimizebehavior and maximize satisfaction.

5. Finally, I was recently honored to beappointed by Governor Deval Patrick ofMassachusetts to the Board of theCommonwealth Connector Authority, the government agency charged (underGovernor Mitt Romney’s reforms) withassuring the provision of affordable health-care to the previously-uninsured who arenow required by law to purchase coverage. I am also on the board of a New York HealthInsurer that has been particularly successfulin providing coverage to independent workers, 60 percent of whom previously hadno health insurance.

I say all this to establish my bona fides, since Iam defending a position that I suspect has

relatively little support, especially among the wider public.

Let’s begin with the title of this panel: thecrisis in American health care. I agree that thereare some serious issues in American health care,but these are issues that the system could correcton its own, without wholesale, radical change.Stop and think a moment: what exactly do wemean when we say that there is a crisis? Turns out, when you examine the proposition,there isn’t a consistent view of what “the crisis”is. There are many different problems to whichcritics point—access, affordability and the unin-sured. But crisis is not a collective noun for a lotof problems. Crisis is an overworked word—there has certainly been a dumbing down of thecrisis concept in my lifetime. Back in 1938—before I was born and when the word was usedmore sparingly—Munich was labeled a crisis,because the world was on the verge of a worldwar. The Cuban Missile Crisis, which I doremember, was a very scary time (adultsappeared to be upset and whispered a lot). Thatdeserved the crisis label. But now, everything is acrisis. There's Hurricane Katrina, obesity,diabetes, poor school performance, the sub-primemortgage defaults, and the list goes on. The BBChad a headline recently on their Web site:“Obesity Crisis: The New Global Warming?”which manages to capture two crises for the priceof one. This hysterical approach may help to sellnewspapers (an industry that, due to fallingcirculation is in, well, crisis!) but doesn’t make forsober substitution of facts for appearances. So we should examine what causes a problem to escalate from just that—a problem—to the level of a crisis.

I said I was glad to be invited to speak on thepanel as an employer. As an employer, I have todeal with many costs in my business. And theyare all a problem. But my health plan expense issmall in comparison to other expenses. If youwant to talk about problems, let’s look at some ofthose that I face. First, I employ actuaries, who


The Crisis in American HealthCareby Ian Duncan

Ian Duncan, FSA, FIA,

FCIA, MAAA, is

president of Solucia,

Inc., Hartford, Conn.


iduncan@

soluciaconsulting.com.


are not a cheap resource. Then, there are all theother services like computers and internet andcommunications. These are expensive resourceswith which you receive differing degrees of badcustomer service when things go wrong, whichthey invariably do (not the actuaries, of course).But all of my business expenses pale in compari-son to the different government departments thatI deal with. At least when I deal with myvendors there is competition and I can get avendor’s attention because the market gives mealternatives. Not so with government.

The single biggest monthly expense in mybusiness, after salaries, is government in its manyforms. We hear a lot about the crisis in healthcare expenses facing employers; I don’t under-stand why we don’t hear more about rising taxes,because for me the latter is a bigger issue. To meit contrasts sharply with my health care expendi-tures. In neither case do I like paying the bills.But at least I get a tangible benefit for my healthcare expenditures. I have bargained with myemployees for a health plan that they are willingto live with, and a level of expense that I canafford to absorb in the business. When my carriercomes back at the end of the year and asks for apremium increase, I have the flexibility to changeplans, carriers, and contribution strategy—I havea lot of flexibility. Contrast that with the prob-lems I have with expenses over which I have nocontrol and no room to negotiate, like taxes. Myemployees have a lot of flexibility too—they cancome into my office and ask for different benefits.Ultimately, if they don’t like my plan, they canquit and go work for an employer who offers amore attractive plan. That, I would submit is thegenius of the U.S. system. It offers employers andemployees flexibility, leading to a negotiatedresult that isn’t necessarily what each party wants ideally, but is a compromise that eachparty can live with.

One of the crises we hear about that is easy todismiss is the percentage of the gross domesticproduct (GDP) that is spent on health care. This is largely a crisis manufactured by those

with a political objective of trying to change thesystem, since the percentage of GDP spent onhealth care doesn’t have much effect on the aver-age worker or the average employer. The principle of revealed preference says that ifU.S. consumers and employers choose to spendrelatively more of their incomes on health andrelatively less on widgets, this decision will raisethe percentage of GDP going to health. The market determines the percentage and, whilewe may not agree with individual preferences forexpenditures, the market achieves equilibrium.“But,” I hear you saying, “the United Statesspends so much more than other western democ-racies!” The difference between the United Statesand all other systems when it comes to healthcare expenditures is that all other countriesimpose artificial caps, to a greater or lesserdegree, on their expenditures. The UnitedKingdom has starved its National Health Serviceof investment for years, because the governmentas funder has so many other calls on its revenue.The result is patient dissatisfaction, long waitinglists, dismissal of thousands of junior doctors, etc.The United Kingdom has recently increasedsignificantly the funding of its health service inresponse to public pressure. However, one differ-ence between the United Kingdom and United

THE CRISIS IN AMERICAN HEALTH CARE ...


States that actuaries will appreciate is that healthservice workers in the United Kingdom are allemployees of the government and therefore, eligi-ble for the government’s unfunded pensionscheme. As the number of workers retiringincreases, the call on the extra funding to pay forpensions will increase more than proportionally.Contrast this with U.S. (private) health careproviders who generally fund their pensionplans. Canada is an example of a country thatactually forbids its citizens to spend their ownmoney on health services (for which there isclearly a pent-up demand). Did you know, forexample, that Canadians can purchase MRI’s fortheir pets but not themselves?1 So I would submitthat the hysterical commentary one reads aboutthe percentage of GDP spent on health care has itexactly wrong: the United States provides a guideas to what a free market would result in, whileother countries are spending at less than the optimal level.

“Compulsory” insurance doesn’t guaranteecoverage or access any more than the electivesystem we have today. For example, auto insur-ance is compulsory, yet nationally something likeeight percent of drivers are uninsured. The number of citizens in Massachusetts withouthealth insurance prior to the passage of manda-tory coverage was slightly over six percent.

We hear a lot about the problem of access toservices as a source of the crisis. Let me illustratewith another story. A company that we consultwith performs case management and secondopinions. A patient who had had neurosurgery toinsert a brain stent suffered an event thatappeared to require further neurosurgery. His family asked for a second opinion. My clientassembled a team of leading specialists who iden-tified two non-invasive alternatives: one wasgamma-knife surgery, and one was use of a

linear-accelerator. Oh, one key fact I overlooked,the patient lives in Canada. My client tells methat there is only one gamma-knife available inall of Canada, and no linear accelerators.Unfortunately the gamma-knife belongs to thePrincess Margaret Hospital in Toronto (where mydaughter was born, coincidentally). The hospitalran out of money after buying the equipment so itisn’t used. My client referred the patient to theUnited States where there are plenty of thesedevices, as well as linear accelerators. Why is thisstory interesting? Well, the international compar-ison illustrates that access is a major problem in systems other than the United States. More importantly, it illustrates another strengthof the U.S. system—the flexibility that comesfrom the market and multiple players. The wayfinancial incentives work in the United States, a gamma-knife wouldn’t be purchased withoutsome assurance that it would provide a return,and it certainly would not be allowed to standidle. Our providers have a degree of certainty offinancing that results from the private bargainingbetween participants in the system. Providersknow that they have a reasonable expectationthat they will have patient volume and financingif they decide to invest in a device like a gamma-knife. And anyone interested in discussingproblems of access in Canada should call GaryMooney, an FSA formerly from Toronto, whoretired a couple of years ago and moved toKingston, Ontario. Gary had to spend two yearswaiting for a physician practice that had a vacancy and was willing to accept him as a patient. The same thing happens with thegovernment-funded sector in the United States.Those of you who work in Medicaid will knowthat states cap their budgets arbitrarily andsimply stop paying claims when they reach thebudgetary limits. This happened a couple of

1 0 | M a y 2 0 0 8 | Health Watch

THE CRISIS IN AMERICAN HEALTH CARE ... | FROM PAGE 9

1 During the panel discussion, one of the speakers challenged this statement and said that, while historically true, this is nolonger the case. It is my understanding that the laws that prevent private payment for publicly provided services are stillin place, and that the Chaoulli decision found that patients had a right to services. A waiting line for services was found tobe unconstitutional. The decision appears to have been interpreted in some places to allow patients to pay for their owncare, but law in this area is very unclear.

Health Watch | M a y 2 0 0 8 | 1 1

years in a row in a state that had better remainanonymous, until election year when the legisla-ture miraculously found $1.2 billion in additionalfunding, and providers couldn’t submit enoughclaims to use up the budget.

I would agree that there are problems in U.S.health care. But the system is resilient, flexibleand allows for negotiation between parties whocan make alternative decisions if they don’t likean outcome. And the U.S. system is the largestdriver of innovation in the world. Many of thewonderful advances in medical care that we see--huge improvements in survival rates for heartpatients, for example—are the results of U.S.innovation. And rates for things like survivalafter diagnosis with different types of cancer arehigher in the US. So, when it matters (i.e., whenyou are seriously ill) the U.S. system delivers thebest care in the world.

There is one area of potential concern thatmay deserve the title crisis, though. But this areais not limited to the United States, rather, it is ofinternational concern. That is the growing cost ofentitlements, primarily (but not solely) to thesenior population. Even a casual look at thedemographics predicts a looming future problem--possibly even a crisis—because politicians havemade promises that their budgets cannot deliver.One reason that the economics of health care,particularly health care for the elderly, are trickyis that they involve what are essentially personalservices—often of highly-skilled (and thereforeexpensive) resources. Anyone with experience ofconsulting will know that an hourly rate forprofessional services (and what are clinical staffwhen they deal with patients, if not consultants?)can be several hundreds of dollars. Looked atfrom the perspective of hourly billing rates, italways mystifies me why people are surprised at

the cost of the health care system. Combine agrowing senior population with non-scaleablepersonal services, and it is no wonder that healthcare costs are growing fast. Other industries haveundergone cost and efficiency revolutions in mylifetime. Think of banking, or computers, orsupermarkets. All of these are examples of indus-tries in which the model used to be personalservices, but which have shifted significantly toautomation and self-service. We have yet to finda way to do this in health care. Other than drugtherapy, the system is not scalable in its presentform. So as demand grows, the cost rises propor-tionally. Until we solve this problem, this area isa looming crisis for all countries, not just theUnited States. But the solution will probablycome from the U.S. system because we providefunding and incentives for innovation. In theprivate system, the ability of employers, employ-ees, providers and insurers to bargain togetherallows us to come up with a compromise that,while no agent may be entirely happy, is at leastacceptable to all.

So concerns and problems? Yes. Crisis? No.The word is over-used and should be struck fromour vocabulary. Let’s leave the system to get onand fix itself, because tinkering by regulators andpoliticians simply creates more problems. h

THE CRISIS IN AMERICAN HEALTH CARE ...

I would agree that there are problems in U.S.health care. But the system is resilient, flexibleand allows for negotiation between parties whocan make alternative decisions if they don’t likean outcome. And the U.S. system is the largestdriver of innovation in the world.

Introduction

Ihad the privilege of attending the NationalAcademy of Social Insurance (NASI) annualconference “Getting to Universal Health

Insurance Coverage” on Jan. 31-Feb. 1, 2008. The conference was multi-disciplinary andincluded leading academics, policy experts, andrepresentatives of various stakeholder groupsincluding employers, workers, insurers andhealth care providers.

As someone very concerned about retirementsecurity, I have increasingly been aware that theretirement challenges of the nation are closelylinked to the health care challenges. Americanscan have a secure life and retirement only if wemake the health care system work. Drew E.Altman stated in “The Real Health ReformDebate We Need to Have,” that health care costsare the single most important economic issuefacing individuals and families. While there is alot that is good to say about the system, there isalso a lot that is not working. This articleprovides some ideas, opinions and observationsheavily influenced by the discussion at theconference. I encourage those of you who want tolearn more to look at the presentations.1 I alsohope to encourage a dialogue on this topic.

As we discuss health care, we can focus onfinancing or the delivery of care—we shouldthink of these two things as being separate.Either or both can be controlled by a governmen-tal unit. The conference was mostly aboutfinancing and insurance, and this article moves inthe same direction. The views presented here aremine and not those of any organization.

Directions for ChangeThere are three bbaassiicc sseettss ooff ““ssoolluuttiioonnss”” as

people think about moving closer to universalcoverage or helping the uninsured:

• Maintain employer/government system withgovernment playing key roles throughMedicare and Medicaid, and fill in the gapsin various ways—advocated by theDemocratic candidates for President. (Note that at the time of the Conference—1/31-2/1—there were stil l multiplecandidates on both the Republican andDemocratic sides)

• Have individuals choose health insurance,rely on the market, and give individuals taxcredits to help them buy health insurance—advocated by Republicans recently.

• Single payer system (like Canada or theU.K.)—not on the table for discussioncurrently in the U.S. political debate—involves governmental control over thepayment system, but not necessarily overhealth care delivery.

Note that satisfaction with Medicare is veryhigh and some people do not believe it is agovernment solution. Overall satisfaction with Medicare is higher than with other healthinsurance available. Americans aged 55 and up often can not wait until they qualify forMedicare. A reviewer of the draft of this article suggested that Medicare for all would be agood solution. And while it would be hard toagree on such a solution, it would be relativelyeasy to implement.

As I thought about this, I became verydistressed that single payer is not a primaryoption in the discussion. At several points duringthe conference, discussants made this point.Doug Andrews, an actuary from the University ofWaterloo in Canada, made comments from thefloor of the meeting focusing on the need to


Anna M. Rappaport,

FSA, MAAA and past

president of the SOA,

is an independent

consultant with her

own firm, Anna

Rappaport Consulting.

She can be reached

at anna@

annarappaport.com.

Reflections on Health CareFinancing and Benefits in the U.S.Observations and Opinionsby Anna M. Rappaport

1 Presentations can be found at: http://www.nasi.org/publications2763/publications_list.htm?cat=Conference%20Proceedings%20%26%20Books.

http://www.nasi.org/publications2763/publications_list.htm?cat=Conference%20Proceedings%20%26%20Books


consider single payer and its virtues. One of the conference sessions was a debate on this topic “Point-Counterpoint: Is a single payer planthe best option?”

My opinion is that the solution set that offersthe best possibility for real control of costs issingle payer and not the solutions currently advo-cated by candidates. However, it is probably themost difficult politically. Some actuaries from theUnited Kingdom and Canada see single payer asthe obvious best choice. Putting band-aids on thecurrent employer system will surely cost more. A market based approach with tax incentives willleave out the people who are poor risks, or it willinclude many regulations and subsidies, movingit away from a real free market system. The entiresituation is very difficult.

These directions are based on the financingstructure of the health care system. Anotherdimension of the problems is that our focus islargely on acute care and not preventive care.More focus on wellness or prevention can reducethe need for acute care a great deal. IBM hasrecently issued a white paper2 focusing on theimportance of wellness and offering ideas abouthow to improve in that regard. A focus on well-ness and prevention could be joined to any ofthese three financing alternatives because itrelates to what we cover rather than how insur-ance is organized.

What We SpendBy any measure, the United States spends far

more for health care than any other country. It isnot clear what value is derived from that in termsof better health, longer life, health status, etc. The United States generally does not measure upwell on comparative health measures.

Why we spend more is very complex.Whether we can afford to spend even more isopen to debate, but it seems likely that we can.However, the more we spend, the more it will

affect the rest of the economy. Uwe Reinhardt, a very well known health economist fromPrinceton, gave the keynote. His presentation isavailable as a webcast.3 He demonstrated clearlyhow much more we spend as a percentage ofGDP than any other country. His views of thestate of health care are also well summarized in aletter to Governor Corzine of New Jersey thatwas distributed. He points to our inability tomake a sensible compromise as a huge issue.4

I was very proud that Cori Uccello, seniorhealth fellow of the American Academy ofActuaries presented a primer on insurance as partof the NASI conference. The concentration ofclaim dollars and the large claimant is a hugeissue. The skewness of health care spendingprovides incentives for insurers to avoid thosewho are at risk for health claims. The issue wasimplied in the discussion by Cori, “InsuranceMarkets 101.” About 10 percent of the peopleusually account for 50 percent of the spending ormore. Of the high cost claimants, many arechronically ill. In the individual market, whereinsurance companies can choose who they wantto insure and are competing, there is a big advan-tage for insurers to avoid high cost people. In other markets where they can charge appropri-ately or pool some of the extra risk, there is no such disadvantage.

REFLECTIONS ON HEALTH CARE FINANCING AND BENEFITS ...


2 The IBM paper is titled “Living Well: Transforming America’s Health Care,” and can be found at http://www.businessofgovernment.org/main/publications/grant_reports/details/index.asp?GID=304

3 http://www.nasi.org/publications2763/publications_show.htm?doc_id=660901&name=Medicare

4 https://wws.princeton.edu/news/Reinhardthealthcarecommission/

Putting band-aids on the current employersystem will surely cost more. A market basedapproach with tax incentives will leave out the people who are poor risks, or it will includemany regulations and subsidies, movingit away from a real free market system. The entire situation is very difficult.

H e a l t h W a t c h | M a y 2 0 0 8 | 1 5

Gail M. Lawrence,

FSA, MAAA, is a

consulting actuary.

She can be reached at

515.224.4380 or at

LawrenceConsulting@

mchsi.com.

There has been a lot of discussion about the high cost of health care, creating animpediment for the financing of universal

health care. A lot of fingers get pointed at defen-sive medicine, the high cost of technology,exorbitant compensation for some physicians,high prices for drugs, excessive demand byhealth care consumers due to insurance andprescription drug advertising, and large bureau-cratic overhead created in large part by theinsurance industry.

Only rarely are questions raised regardingthe medical necessity of treatment and the effi-ciency in delivering quality outcomes by ourhealth care delivery system. That would meansecond guessing the practices and judgments ofour sometimes revered health care professionals.In reality, the best evidence-based practices arenot always straight forward in an industry wheremedicine is sometimes as much art as science.

A couple of weeks ago, I was channel surfingand stumbled upon the CSPAN coverage of abook tour appearance by Shannon Brownlee,author of Overtreated, Why Too Much Medicine IsMaking Us Sicker and Poorer. Brownlee, a widelypublished journalist, is a senior fellow at the NewAmerica Foundation in Washington, D.C. Her presentation was compelling as sheexplained the numerous sources and reasons forwaste within the medical system.

I bought the book and I found it to be an eye-opening, captivating read. Brownlee tackles agirth of topics, punctuating her points with well-documented medical research, pertinentanecdotal stories and even a glimpse into thepersonalities and motivations of the various play-ers within the industry.

I was a student of economics long before Ibecame an actuary. Business is about maximizingprofits and revenues and for the most part, medi-cine is big business. Exacerbating the situation isRoemer’s law, a tenet of health economics thatexhorts the notion of supply-induced demand

when it comes to medical care. In the medicalfield of dreams, if you build it, patients will come.

In Overtreated, Brownlee explores the extraor-dinary differences in geographic costs. For example, in 1996, a Medicare patient inMiami, Fla. cost $8,414 per year as compared to$3,341 in Minneapolis, Minn. In other areas ofthe country, some medical practices have distincthigh-cost signatures. Research indicates thatmuch of the extra spending is for minor proce-dures, as well as, imaging and diagnostic testsordered at the discretion of the physician.

High spending does not necessarily translateinto better health. Brownlee argues that researchhas shown patients are more likely to die in highspending environment. Higher death rates arecaused by complications from medical proce-dures, a greater chance of medical errors, andlack of coordination among caregivers creatingnew medical issues.

One of the most interesting chapters dealtwith “our broken hearts.” Two million Americanshave a heart catheterization procedure each year,of which 800,000 are in the midst of a heartattack. That leaves 1.2 million elective proce-dures where Brownlee writes, “at least 160,000are inappropriate meaning they should not havebeen done, according to cardiologists’ own rulesfor when to put in a stent or do an angio-plasty….The latest research…suggests that thevast majority of elective cardiac procedures areno more effective at preventing heart attacks anddeath than medical management, which involvesgiving patients drugs and counseling.”

Bypass surgery reduces the chances of dyingfor only the sickest of the sick. While someoutcomes are successful, many patients havesignificant surgical side effects including death orcognitive deficiencies from being on a heart-lungmachine. (The last time I saw my family doctor, Irecall he complained about the large number of

Letter from the Editor ... Are We Over Treated and Over Dosedby Our Health Care Industry?by Gail M. Lawrence


Editor’s note: Some of the material included in thisarticle previously appeared in the author’s presenta-tion at the 2007 SOA Annual Meeting inWashington, D.C. last October.

Here in early January 2008, as member-ship in Medicare Advantage (MA) soarsto a new all-time high, small and large

organizations alike wait with apprehensive antic-ipation to learn more about the future funding of MA. Many companies that offer MA Part Cwould like to better understand what the futureholds in the way of county-specific payment ratesor “benchmarks” for 2009 and beyond. The 2009benchmarks will be officially released on April 2,2008. CMS will issue their annual 45-day noticein mid-February, at which time they provide astrong preliminary indication of where finalpayment rates will land. By the time this articleis published, the 2009 rates will be known and thediscussions concerning MA funding in 2010 andbeyond should have progressed considerably. In the meantime, via national conference call onDec. 17, 2007, CMS announced that it wouldpropose to rebase the county-specific MedicareFFS costs. This would introduce more variabilityinto the 2009 county-specific changes in marginthan in 2008. There are other variables that affectthe revenue level of MA plans, such as risk-adjustment, but in this article I will confine the

subject primarily to MA payment rates andMedPAC’s stated intent to make them equal toFFS Medicare costs in each county.

The logic behind county payment rates hasbecome increasingly complicated and difficult forcarriers to follow due to changes in the minimumfunding level for each county brought on bylegislation over the past decade. As a result of the Medicare Modernization Act (MMA)passed in December 2003, however, MA carriershave enjoyed significantly higher funding.Consequently, more private carriers have onceagain become involved, especially in Private Feefor Service (PFFS) , a relatively new MA productenabled by the BBA in 1997. These carriers arethe private-sector companies that participate inMedicare Advantage—elsewhere they are alsoreferred to as insurers, MAOs (MedicareAdvantage Organizations), or plans.

CMS provides annually updated MAbenchmarks as well as the corresponding county-specific Medicare FFS (Fee for Service) costs foreach of the 3,200+ counties of the United States,Puerto Rico, Guam, and the Virgin Islands. The difference between the two is typicallyreferred to as “lift” or margin, and it too varies bycounty. In fact, margins have been substantialenough to encourage even some less experiencedplayers without networks to enter the MAmarket. Now that many carriers have returned tothe managed Medicare market and other newcarriers have joined, they all want to know howfuture MA funding will affect their future.

About half of the MA membership growthover the past few years has been in PFFS. The other half has been mostly in HMO plans,which are still the long-standing primary benefitform of managed Medicare for reasons of efficientdelivery. In some counties, the differencebetween the MA benchmark and the FFS cost oftraditional A/B Medicare is negligible; in others,the benchmark may be substantially greater thanthe FFS cost. According to MedPAC, the congres-sional advisory council on the funding ofMedicare, CMS pays MAOs 12 percent more to


Daniel Bailey, FSA,

MAAA, IAA, is a

consulting actuary

with Reden & Anders

in Rocky Hill, Conn.


daniel.bailey@

reden-anders.com.

Medicare Advantage—FutureBenchmarksby Daniel Bailey


deliver MA than CMS would pay if the samemembers had remained in traditional A/B FFSMedicare. This breaks down into 10 percent morefor HMO and 19 percent for PFFS. That disparityhas attracted attention because a health plan’s“efficiency” helps to drive that difference. From2000 to 2003, MA enrollment had declined byabout one- fourth. Post-MMA, the enrollmenthas risen to a record level. The CongressionalBudget Office has projected continued growth,but at a decreasing rate in years to come:

All else equal, the more margin that isembedded in the MA benchmark, the more bene-fits an MAO can offer to its members relative totraditional Medicare. Even without medicalmanagement savings, there are many counties inwhich an MAO can profitably offer an attractivezero premium PFFS plan with a richer package ofbenefits than traditional Medicare. It goes with-out saying that the administrative costs of anMAO per member are greater than those of thegovernment. Even so, there is enough margin insome county rates to overcome this hurdle. And,for those MAOs that can deliver medical manage-ment savings, there is opportunity to profitablyoffer MA in many counties. Later in this article,we will return to the concept of “efficiency.” For now, let’s say a private plan is more efficientthan Medicare, this means that it can manage theclaims costs associated with the standard packageof Medicare A/B benefits and all its administra-tive cost to a lower level than Medicare can. PFFS

is typically a less efficient delivery mechanismthan HMO or PPO, and is closer to traditionalindemnity than a PPO or HMO.

Over the past several years, MedPAC hasexpressed concern over the post-MMA level ofMA funding. When their concern initiallysurfaced, it was difficult to conduct a faircomparison between the per member cost of MAvs. traditional Medicare. They could not draw afirm conclusion without actual member risk scoredata. In preparing their June 2007 report,however, MedPAC had obtained the necessaryrisk score data and completed their analysis.Their two-fold conclusion was clear—the govern-ment pays more per member under MA thanMedicare, and this should be addressed byCongress. Industry proponents of MA are quickto point out that MA members generally get morebenefits under MA than they would or do undertraditional Medicare. That is, MA is like tradi-tional Medicare plus a free or low-costsupplemental benefit plan. Many of the currentMA members have limited incomes, moreover,and cannot otherwise afford to buy a supplemen-tal benefit plan. Also, if an MA plan is notentirely free (in the form of a “zero premium”plan), then the MA member premium amount isusually low and attractive, relative to a MedicareSupplement premium. If not, the plan could notsurvive in the competitive MA market.

The fact that the 119 percent PFFS benchmarkaverage is higher than the 110 percent HMOreflects the fact that the take-up rate for PFFStends to be higher in those counties where thereis higher margin. After all, these are the countiesin which the additional benefits of MA seem rich-est in comparison with traditional Medicare.HMOs, on the other hand, are located wherecarriers have their networks, and that tends to bein urban more so than rural locations. For thisreason, PFFS has come to serve Medicare benefi-ciaries in rural counties that previously had noMA plans offered. Many of the counties withlarge margins are rural “floor” counties, and their

MEDICARE ADVANTAGE ...


What is a benefit rush? Well, picturethis. It is late on a beautiful autumnFriday afternoon. You have a few

minutes to kill before your last meeting of theday, so you click on your company’s Web site to check stock prices and there it is: The announcement that your company is goingfull-replacement Consumer Driven Health(CDH). What is your first reaction?

a. Wow, that is great. My company will savemoney.

b. I will use this as an opportunity to become abetter consumer.

c. Gee, I better call my doctor and get anappointment for that procedure I have been putting off.

When this happened to me, my choice waseasy: c. Like myself, most consumers who “bene-fit rush,” receive services where the timing isoptional, like some knee and back surgeries.

A benefit rush may occur anytime there is a noticeable change in the benefit package. Even simple things like a change in carrier maytrigger a benefit rush. The financial impact of therush depends on the magnitude of the changeand the timing of the announcements. For largegroups, announcements come early and a changesuch as a full-replacement CDH are consideredmajor, so an increase in annual claims costs in thethree percent to five percent range is common.

On the other hand, small groups tend to haveshorter announcement periods and less richplans, so the impact on a customer by customerbasis is less pronounced.

The benefit rush not only impacts the yearbefore a change is implemented, but also has animpact for two years following implementationas illustrated in Exhibit 1 below. In the yearfollowing implementation there is a “benefithush.” Claims are lower than they would be on a“steady state” basis in part because some of theservices that would have been incurred in thattime period were incurred during the rush. In addition, there is often a wait and see attitudeas consumers adapt to the new plan. In thesecond year, there is a “trend crush,” as claims goback to a more normal level and consumersbecome more used to the new plan design. The trend, however, is higher than it would havebeen because it is coming off a lower base.

In a similar vein, there is a benefit delaypattern that emerges when a customer adds amajor life style benefit , such as LASIK eyesurgery, or increases a benefit limit on a costlyservice such as hearing aids. A benefit delayfollows a rush-hush-rush-hush pattern in the firstfew months following implementation. The firstrush occurs in January when consumers who arevery in tune with the benefit package rush out totake advantage of the upgrade. There is a shortlull, then the second rush occurs three to sixmonths later, after word of mouth among


Joan C. Barrett, FSA,

MAAA, is senior

actuary at

UnitedHealth Group in

Hartford, Conn. She

can be reached at

Joan_C_Barrett@

uhc.com.

Timing’s Everything: The Impact of Benefit Rushby Joan C. Barrett

Exhibit 1: The Benefit Rush Pattern


the employees and provider-induced demandkicks in. After the second rush, the pattern tends to level out.

The Impact: Large, Self-InsuredCustomers

If a self-insured customer makes a change toits program big enough to precipitate a benefitrush, then chances are the customer will sooneror later ask the question “How much did I save?”

To maintain credibility, consultants, under-writers, actuaries and others who advise largeclients may find it prudent to walk the customerthrough the benefit rush cycle step by step, starting with an initial projection and true-ups as experience becomes available as illustrated inExhibit 2 (above).

The calculation of a savings amount is alwayssomewhat tricky because of the inter-related vari-ables: trends, change in provider contracts, etc.Typically, savings are shown by a comparison to a

“do-nothing” scenario as shown in Exhibit 3below, which simply compares the customer ’sactual trend to the projected experience based onpricing trends or some other reasonable trendassumption. This approach is simple and all thekey variables are implicitly accounted for. The customer may object to it, however, becauseat the end of the day, the do-nothing trend is still hypothetical, no matter how reasonable the assumption.

A more concrete way to demonstrate savingsis an explanation of trend exhibit like the oneshown in Exhibit 4 (see page 39), which breaksdown the savings into the component parts. Thismethod has the advantage that the bottom line isnot hypothetical: the experience is the experience.Needless to say, the method for deriving thecomponents is somewhat subjective.

Historically, self-insured business has beenrelatively “risk-free” from a carrier stand-point,

TIMING’S EVERYTHING ...

Exhibit 2: Actual vs. Do Nothing

Exhibit 3: Actual Experience vs. Original Projection


Cori Uccello had a lot to consider whenchoosing her career path. A woman withmultiple interests and talents, one of her

biggest challenges was picking just one way togo. In the end, her curiosity and hard work havepaid off as she finds herself in a career that allowsher to explore more than one of her passions. As senior health fellow for the AmericanAcademy of Actuaries in Washington D.C.,Uccello is able to combine her experience as anactuary with a genuine love of research, publicpolicy and working with people.

BackgroundUccello was born in Hartford, Connecticut—

a city with deep roots in the insurance industrywhere becoming an actuary is not much of astretch for a local who loves numbers.

As a young student, Uccello was drawn tosubjects that tested her logic and reasoning skills, such as science and math. It was thesuggestion of a teacher that she consider pursu-ing an actuarial career.

“I had a really great algebra teacher and Ithink she was actually the first one to mention theprofession to me,” Uccello said. “So even going to

high school I had that in the back of my head,even though I wasn’t 100 percent positive aboutwhat I wanted to do.”

After high school Uccello attended BostonCollege and earned a bachelor’s degree in mathe-matics and biology. While attending classes she took the first of her actuarial exams anddecided that actuarial science was the career pathshe would take.

“I’m not really sure why I decided to becomean actuary, but I think it was almost by default,”she said. “I was a math major and I passed an exam, so that’s what I did, but I was never absolutely certain that it was what Iwanted to do.”

Her first job out of college was as an actuarialassistant for John Hancock in Boston. For sevenyears she worked there and gained experience invarious departments.

At the same time, Uccello continued to takeher actuarial exams and stumbled across a newinterest in the process. “One of the examscovered some health policy topics and in theprocess of studying for the exam I came to realizethat public policy was more what I wanted todo,” she said. “After I finished that exam, it wasn’t long after that I earned my FSA anddecided to go back to graduate school.”

Uccello moved to Washington D.C. andpursued a master’s degree in public policy fromGeorgetown University, a move which led to a paid internship with the health and humanresources division of the Congressional BudgetOffice (CBO). “I very much enjoyed my experi-ence there,” she said. “It was during Clintonhealth reform and that I was able to play even asmall role in some of the analysis that CBO didon the Clinton health reform package was veryexciting and rewarding.”

Upon receiving her degree from Georgetownin 1994, Uccello took a job as a research associatein The Urban Institute’s income and benefitspolicy center. In that position she worked onseveral health reform issues and eventuallymoved on to focus her research in retirementsecurity areas such as retiree health insuranceand pensions.


Navigating New Horizons: An Interview with Cori Uccelloby Sarah Lawrence


The AcademyIn 2001 Uccello took her current position as

senior health fellow for the American Academy ofActuaries, an organization that serves the publicon behalf of the U.S. actuarial profession. The Academy unites actuaries from all practiceareas and acts as the voice of the profession onpublic policy and professionalism issues.

As senior health fellow, Uccello is the profes-sion’s chief health policy liaison. In this role sheprovides information to policy makers as they areputting together health care related proposals.Working with the many health-related volunteercommittees, she helps put together issue briefsand monographs that help her interact withcongressional staffers and the media.

Uccello said one of the things she likes bestabout her job is the variety it has to offer in day-to-day activities. “There’s almost no such thingas a typical month for me,” she said. “What I doreally depends on what issues Congress is talkingabout, what issues the media is covering and alsowhat kinds of things the Academy is trying topursue and highlight.”

Every fall, the Academy’s Health PracticeCouncil meets for a planning session to map outwhat issues they will address over the next year.“It’s partly thinking ahead to what kind of issuesare going to be prominent and decide how we canapproach them from an actuarial perspective,”she said. “In D.C. alone there are scores of organi-zations whose main purpose is to do healthrelated policy work, so the Academy has to thinkabout how best to use its resources to provideinformation to policymakers as they’re puttingtogether proposals.”

This year the country will pick a new presi-dent and Uccello said the outcome of that racewill have a large effect on what the Academyfocuses on for the rest of this year and in 2009.

“In an election year like this, we’re clearlymore driven by what the candidates are speakingabout,” she said. “We need to not only look at thegeneral approaches that different candidates aretaking to health reform and health related issues,but also to prepare ourselves to be ready once the next president takes office. We also need tohighlight any issues that we don’t think are

receiving enough attention from the candidatesand the media alike.”

With health care issues near the top of mostof the presidential candidates’ agendas, Uccellosaid there could be a lot of change ahead.

“No matter who the next president is, healthreform is likely going to be high on that presi-dent’s agenda,” she said. “Also, even thoughsome health reform issues have been publicly onthe back burner over the past couple of years, itdoesn’t mean policymakers aren’t still workingbehind the scenes to shore up their differentproposals and get more information on the impli-cations of different approaches.”

Uccello said this means that while there may not be much health care related legislationpassed or acted upon this year, members of Congress are certainly gearing up for thatpossibility in the future.

As for the Academy, Uccello said its role is toprovide expert policy advice that is nonpartisanand objective. “The Academy does not typicallytake positions on any particular piece of legisla-tion," she said. "Instead, we focus more onhighlighting the implications of generalapproaches and offering ways to address poten-tial adverse consequences.”

An example that illustrates the impact of theAcademy relates to the risk sharing provisions inthe new Medicare prescription drug law. Beforethe law was finalized, the House and Senateversions of the bill differed in their risk sharingprovisions. Uccello helped the Academy draft aletter to Congress commenting on the strengthsand weaknesses of each approach. “We pointedout some potentially negative implications of oneof the approaches and the final version of thelegislation and the law that was eventuallypassed reflected our input,” she said.

NAVIGATING NEW HORIZONS ...


I think the next couple of years are going to be a very exciting time not only for me, but also for the Academy and the actuarial profession as a whole.”

Uccello said taking that kind of seat at thepolicy table on behalf of actuaries nationwide iswhat makes her job so rewarding. “I’ve been herefor almost seven years now and I still love it,” shesaid. “It’s exciting, especially in those times whenhealth reform issues are at the forefront of thepolicy agenda. I think the next couple of years aregoing to be a very exciting time not only for me,but also for the Academy and the actuarialprofession as a whole.”

Get InvolvedWith so much going on in the world of health

care policy, Uccello said she wouldn’t be able todo her job effectively without a lot of help fromvolunteer members. “All of the volunteers are sogenerous with their time and are always happy tohelp answer my questions and work on variouscommittees,” she said. “They put together issuebriefs on very important topics that are necessaryfor lawmakers to have a better understanding ofdifferent potential policies.”

Uccello said the Academy is always happy totake on more volunteers to work in health related

issues. “Volunteering is pretty much how theAcademy operates,” she said. “The Academy isnot only trying to help different actuaries becomepart of the public policy process, but it’s alsohelping to inform our member actuaries on thedifferent policy issues that arise. So it goes bothways in a sense.”

For those who are too busy to volunteer butwould like to follow the Academy’s activities,Uccello suggested a visit to www.actuary.org. “TheAcademy has an alert system that sends out anemail to member subscribers whenever there aremajor legislative, regulatory, or judicial develop-ments affecting actuaries,” she said. “Each alerttypically includes a brief summary as well aslinks to find more information.”

In addition, visitors to the Web site can learnmore about the Academy’s other roles, such ascreating practice notes that can help actuaries asthey do their jobs. “The Academy as a whole isvery much here to help actuaries,” she said. “I think what we do here is really important andhas the extra benefit of being really interestingand exciting.”h


NAVIGATING NEW HORIZONS ... | FROM PAGE 21

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SOA Releases New Long-TermHealth Care Cost TrendsResource Modelby Steven Siegel


What will the world look like 30 yearsfrom now in 2038? How about regularcommuters to the moon celebrating

the launch of the first lunar Starbucks with VentiMocha Frappuccinos at the special grand openingprice of $52.95 (just a $1.00 more than the regularprice of $51.95 on Earth)? Or, how about the ulti-mate in Bluetooth technology, where cell phonesare actually implanted permanently in eardrums?Talk about hearing ringing in your ears! Andwhat new, wondrous technology for critically illpatients will impact health care costs?

Although my first two predictions for 2038are clearly tongue-in-cheek, the last question ispart of a real exercise in projection that actuarieswho produce FAS 106 and GASB 45 valuations gothrough regularly. To help these actuaries, theSOA’s Pension and Health Sections recentlyreleased a new resource model for projectinghealth care trends through the year 2099. Themodel and accompanying documentation can befound on the SOA Web site at: http://www.soa.org/research/health/research-hlthcare-trends.aspx

The original idea for the project came fromKevin Binder, who also served as chair of thegroup overseeing development of the model.Binder, an actuary with Bolton Partners, had reada 2004 article in Business Week on possibleincreased scrutiny by the U.S. Securities andExchange Commission (SEC) into assumptionsmade in connection with accounting for post-retirement benefits. The SEC was concerned thatsome assumptions might have been manipulatedto meet companies’ profits and balance sheetfigures. Included among the assumptions that theSEC flagged was the level of health care costinflation in relation to retirees’ medical benefits.

The SEC’s concern underscored the lack ofactuarial research concerning long-term healthcare trends. Binder suggested that having aresource model that was both transparent inmethodology and clearly documented its datasources and economic assumptions would be avaluable tool for selecting long-term health caretrend assumptions. Furthermore, the model could

be used to help explain, document, and justify theassumptions to interested parties. With this objec-tive in mind, the Pension Section’s Research Teamset out to hire a researcher to develop such amodel that could easily be used by knowledge-able practitioners.

Subsequently, a request for proposals wasissued and proposals from several leadingexperts were received. From those proposals,Professor Thomas Getzen of Temple Universitywas selected to create the model. Prof. Getzen, awell-known health care economist, is alsoExecutive Director of the International HealthEconomics Association (iHEA). His textbookHealth Economics and Financing (Wiley; 3rd ed.) ison the SOA exams syllabus as part of the HealthSystems Overview FSA module.

To oversee the research, a group of prominentactuarial practitioners from both the Pension andHealth Sections was recruited (with Binder chair-ing): John Cookson, Marilyn Oliver, Adam Reese,Russell Weatherholtz, and Keith Williams. The group was excited to forge a partnershipwith a researcher from outside the profession and felt that the multidisciplinary perspectiveGetzen provided would result in enhanced interest of the work by a wide range of healthcare professionals.

The results of the research include an Excelmodel that projects per-person expenditures andgrowth rates through 2099 using a set of equa-tions and assumptions developed by Getzen withassistance from the project oversight group. Themodel includes baseline assumptions as well asflexibility for user-inputted alternative assump-tions. The data sources underlying the modelassumptions are specified in the accompanyingtechnical documentation providing transparencyand support for the ultimate results.

To further illuminate the model, the projectoversight group authored a document that describes practical issues that might be


Steven C. Siegel,

ASA, MAAA, is a

staff research

actuary with the

Society of Actuaries

in Schaumburg, Ill.

He can be reached

at [email protected].

http://www.soa.org/research/health/research-hlthcare-trends.aspx


What’s New

In March, the Health Practice Council, aspart of its 2008 election strategy, releaseda series of brief summaries of some of the

relevant issues being discussed as part of thenat iona l d ia logue on hea l th care re form.The purpose of these papers is three-fold: toprovide basic information for policymakersand the media, address issues policymakersneed to consider as they engage in discus-sions on any of these topics, and to remindpolicymakers that the actuarial profession isan object ive resource that is aware of thei s s u e s a n d re a d y t o h e l p w i t h s o l u t i o n s .T h e s e r i e s i n c l u d e s i n f o r m a t i o n o n t h efollowing: rising costs of health care, medicalre i n s u r a n c e , m e d i c a l i n s u r a n c e p o o l s ,Medicare and consumer driven health plans.

Also in March , the Medicare Steer ingCommittee updated and published its annualissue brief , Medicare's Financial Condit ion:Beyond Actuarial Balance, which provides abrief analysis of the 2008 Medicare Trustees'R e p o r t . And a s u b g ro u p o f t h e M e d i c a reSteering Committee released a practice note,Actuar ia l Equivalence for Prescr ipt ion DrugPlans and Medicare Advantage Prescr ipt ionsDrug Plans under the Medicare Drug Program.The practice note provides guidance to actu-aries certifying the actuarial equivalence of aPDP or MA-PD, pursuant to CMS guidelinesand requirements. The practice note can befound online at: http://www.actuary.org/pdf/practnotes/health_partd_mar08.pdf.

The Academy’s Health Practice FinancialReporting Committee submitted a commentletter on the NAIC’s exposed actuarial opin-ion section of the Health Annual StatementInstructions on Feb. 19, 2008. The commentl e t t e r h i g h l i g h t s s o m e c o n c e r n s t h a t t h ecommittee has, as the NAIC moves forwardi n c re a t i n g a m o re c o n s i s t e n t H e a l t hActuarial Opinion. The comment letter can befound online at: http://www.actuary.org/pdf/health/opinion_feb08.pdf.

The exposure draft can be found online atthe NAIC’s Web site: http://www.naic.org/docu-ments/committees_lhatf_ahwg_haosg0114.pdf.

In February, the Disease ManagementWork Group released its practice note, whichprovides insight into current practice andincludes an appendix on relevant ActuarialStandards of Practice. The practice note canbe found online at: http: / /www.actuary.org/pdf/practnotes/health_dm07.pdf.

Having received a charge from the NAICto create a health trend test , a joint workg ro u p o f t h e H e a l t h P r a c t i c e F i n a n c i a lReporting Committee and the Committee onState Health Issues is in the process of beingformed. It is anticipated that the new groupwill begin work by the start of the secondquarter of 2008.

I n D e c e m b e r, a n o p - e d b y A c a d e m ySenior Health Fellow Cori Uccello appearedin the Union Leader urging the presidentialc a n d i d a t e s t o s t a r t p a y i n g a t t e n t i o n t oMedicare’s financial difficulties. “Candidatesneed to break the silence, acknowledge theproblem, and begin a public dialogue thataddresses the tradeoffs necessary to ensureMedicare’s future,” writes Uccello. The news-p a p e r i s t h e l a rg e s t i n N e w H a m p s h i re ,which held the first presidential primary of2008 in January. The op-ed can be foundo n l i n e a t : h t t p : / / w w w . u n i o n l e a d e r . c o m /article.aspx?headline=Cori+E.+Uccello%3a+Presidential+candidates+are+failing+to+address+Medicare%27s+looming+insolvency&articleId=43735a21-fbdb-46fd-ac84-eed6030be4d9

Ongoing ActivitiesThe Academy’s Health Practice Council has

many ongoing activities. Below is a snapshot ofsome current projects.

CCoonnssuummeerr DDrriivveenn HHeeaalltthh PPllaannss EEmmeerrggiinnggDDaattaa SSuubbggrroouupp (David Tuomala, Chairperson)—This work group is developing a paper analyzingemerging CDHP data.

Soundbites from the AmericanAcademy of Actuaries HealthPractice Council by Heather Jerbi

http://www.actuary.org/pdf/practnotes/health_dm07.pdf

http://www.actuary.org/pdf/practnotes/health_partd_mar08.pdf

http://www.unionleader.com/article.aspx?headline=Cori+E.+Uccello%3a+Presidential+candidates+are+failing+to+address+Medicare%27s+looming+insolvency&articleId=43735a21-fbdb-46fd-ac84-eed6030be4d9

http://www.actuary.org/pdf/health/opinion_feb08.pdf


HHeeaalltthh PPrraaccttiiccee FFiinnaanncciiaall RReeppoorrttiinnggCCoommmmiitttteeee (Darrell Knapp, Chairperson)—Thecommittee continues to work on updating severalpractice notes (Small Group Certification, LargeGroup Medical, and General Considerations).They are also finalizing their practice note onMedicare Part D accounting.

IInnddiivviidduuaall MMeeddiiccaall MMaarrkkeett TTaasskk FFoorrccee(Mike Abroe, Chairperson)—This task forcecontinues to work on a monograph related tohow the current individual market operates.Issues examined in the paper relate to affordabil-ity and barriers in the individual medicalinsurance market. The paper is expected to bepublished in the second quarter of 2008.

LLoonngg--TTeerrmm CCaarree PPrriinncciipplleess--BBaasseedd WWoorrkkGGrroouupp (Bob Yee, Chairperson)—This work group is beginning the modeling phase of theirwork and will be providing an update to the NAIC in 2008.

UUnniinnssuurreedd WWoorrkk GGrroouupp (Cathy Murphy-Barron, Chairperson)—The work group isexpected to release a paper on issues related tothe fundamental principles of insurance and the characteristics of health coverage byApril 2008. The work group has also begun work

on an issue brief that will address the drivers of health care costs.

HHeeaalltthh CCaarree QQuuaalliittyy WWoorrkk GGrroouupp (MichaelThompson, Chairperson)—This work group isdeveloping an issue brief that will examine healthcare quality today and the impact of comparativeeffectiveness research on the advancement ofhealth care technologies and quality treatments.

NAIC ProjectsThe Committees on State Health Issues and

Health Practice Financial Reporting continue tomonitor issues, including LTC, health insuranceissues, Medicare Part D, principles-based method-ologies, Medigap modernization, etc.

Upcoming Activities andPublications

Several documents are slated for publicationin 2008, including papers on individual marketissues, health care coverage, drivers of health care costs, and health care quality and compara-tive effectiveness.

If you want to participate in any of theseactivities or you want more information about thework of the Academy’s Health Practice Council,contact Heather Jerbi at [email protected]. h

SOUNDBITES FROM THE AMERICAN ACADEMY ...

encountered by actuaries using the model. Issues discussed include the relationship of short-term trend rates inputted by users to long-termprojected rates, characteristics of the prescribedsubstantive plan to be valued, and special cases that may require model adjustment. As well, examples of sample report language are provided.

To keep current with the latest health caredata, the model will be updated annually. The timing of the updates will be dependentupon availability of the latest health care costestimates from CMS and other sources.

In keeping with the original objective of themodel’s creation, it is important to note that it is

intended to serve as a resource tool, rather thanin any way representing an official statement onthe preference of the methodology in the modelover any other ones that are in use.

The Pension Section and Health SectionCouncils would like to express their thanks to theproject oversight group for its dedication andvaluable assistance in completing this effort.They would also welcome any feedback you haveon the models and thoughts for future relatedprojects. Please e-mail me at [email protected]—your comments are greatly appreciated! h

SOA RELEASES NEW LONG-TERM HEALTH ... | FROM PAGE 23

mailto: [email protected]

event (which suggests that there’s a fair amountof money to be made in turning a local Blue Crossorganization into the nation’s largest health plan).Robinson is the new editor-in-chief of HealthAffairs, having taken over the job a few weeksearlier from founding editor John Iglehart.Schaeffer describes Robinson as one of the fewhealth services researchers who really under-stands the health care business, having “talkedhis way” into an internship at WellPoint whiletaking a break from his day job as a professor anddepartmental chairman at UC-Berkeley.

Robinson notes that there are two breathtak-ing features of America’s health care system. The first is the dizzying pace of clinical innova-tion, leading to cures and treatments which, just afew years ago, we could scarcely have expectedto achieve (or even imagined, in some cases). The second is the astronomical cost of the system,not just in terms of new technology but in termsof almost every aspect of how care is deliveredand financed in this country. Robinson thenintroduces the first three speakers: NationalInstitutes of Health (NIH) Director EliasZerhouni, Aetna CEO Ronald Williams, and Merck CEO Richard Clark. The idea is tohave one panelist (Zerhouni) representing public-sector researchers, another (Williams)representing private-sector payers, and a third(Clark) representing private-sector “innovators.”

Once upon a time, we might have expectedthe director of the NIH to focus on the firstfeature of the health care system that Robinsontalked about (clinical innovation) and the CEO ofAetna to focus on the second feature (high costs).But the two issues are inseparable, as all threespeakers acknowledge. Zerhouni offers twocompelling examples of this:

• The cost of treating chronic conditions iseating up an ever-larger share of the healthcare pie. In order to control this cost, weneed to be able to detect the biochemicalchanges that occur 20 or 30 years before a chronic disease starts to present diagnos-able symptoms. This is a huge scientificchallenge, but it’s one where a breakthroughcould lead to dramatically lower costs in the long run.

• In order for new health care technology tobecome more affordable, we need to preventour reimbursement systems from gettingstuck in the earliest phase of the innovationcycle. Like any innovative technology, a newhealth care product (such as a drug or diag-nostic device) starts out with a very high unitcost. As the product becomes more widelyused, the unit cost declines, often precipi-tously, since the huge expenses associatedwith research and development can now bespread over a larger base. But in the healthcare arena, reimbursements are often set in the early (high unit-cost) phase of thecycle, and remain frozen at that level even ifunit costs plummet.

Next on the agenda is Mark McClellan. In the next 20 minutes I’ll realize that—just as I’dfeared—there’s barely enough room on my platefor the informational feast that today’s speakershave to offer. Dr. McClellan was a member of thePresident’s Council of Economic Advisers, the commissioner of the Food and DrugAdministration, and the administrator of theCenters for Medicare and Medicaid Services, allby the age of 40. In a room where almost every-body has at least one graduate degree, Mark hasthree (MPA from Harvard, PhD in economicsfrom MIT, and MD from both). A guy with hisvast experience and expertise could easily fill awhole day with insightful analysis and cogentarguments, but he’s been allotted less than halfan hour. McClellan compensates for this by talk-ing very fast. I manage to squeeze most of hiskey points into a few pages of furiously scribblednotes, hoping after it’s over that my right handwill recover in time for the next presentation—and thinking that perhaps the most apt metaphorfor today is not a sumptuous banquet but insteadan attempt to get a sip of water from a fire hose.

Having left the federal government,McClellan is now affiliated with both theAmerican Enterprise Institute and the BrookingsInstitution, which means he has the ideologicalspectrum pretty well covered as far as think tanksgo. He starts out by noting that, at the presenttime, we don’t know the relative efficacy of mostof the care that’s being delivered today. And the


THE 2007 HEALTH POLICY SUMMIT ... | FROM PAGE 1


knowledge gap is growing: over the last fewyears, there’s been a huge increase in the numberof health care products and procedures that areavailable, without anything close to a commensu-rate increase in the number of cost effectivenessstudies being performed to evaluate all these newtreatments. The problem is compounded by theincreasing personalization of medicine, whichmeans that we can’t just focus on the averagepatient in performing our evaluations. (As Dr.Zerhouni noted earlier, any given treatment—even if it’s generally considered safe and effective—will have a noticeably beneficial effect on onlya fairly small percentage of the patients for whichit’s indicated. For most patients, the treatmentwill have little or no therapeutic effect, and foranother small percentage of the patients, it actu-ally will be harmful.) The solution, according toMcClellan, is to develop a “learning” health caresystem in which the collection and evaluation ofoutcomes data (not just claims data) is integratedinto the delivery of health care. Among othereffects, this could facilitate the development of“value-based” insurance, in which reimburse-ment policies take into account not just the cost ofa treatment but its likely effect as well.

The last session before we break for lunch is a panel discussion on the alignment of providerincentives with health care quality goals. The moderator is Risa Lavizzo-Mourey, presidentof the Robert Wood Johnson Foundation, and thepanel includes Donald Berwick, president of theInstitute for Healthcare Improvement; DavidEddy, co-inventor of the Archimedes health caresimulation model; and George Halvorson, CEO ofKaiser Permanente (which makes him my boss’sboss’s … boss’s boss). The underlying principleof the discussion is that, in going about their jobs,most people—including doctors and othershealth care providers—will do what they’re paidto do, but won’t spend much time or effortperforming tasks for which they’re not rewarded.Thus if we want to have more high quality, cost-effective care, we have to arrange the finan-cial incentives so that the doctors who provide itwill earn more, not less, than the ones who(understandably, given the current system) don’tbother to do so.

The lunch program features a talk by CherylScott, chief operating officer of the Bill andMelinda Gates Foundation. Unlike most of theconference attendees, Scott’s professional focus ismore on health care in developing countries thanon the U.S. health care system. Still, she controlsmore money than most of us will ever see in ourlifetimes, so it’s always worthwhile to hearwhat’s on her mind.

The lunch program concludes with the pres-entation of an award to John Wennberg for beingthe “most influential health services researcherover the past 25 years.” As a professor anddepartmental chairman at the Dartmouth MedicalSchool, Dr. Wennberg has led the way in thedevelopment and application of small area analy-sis to study geographical variations in health careutilization and resource allocation. The results ofhis and his colleagues’ research can be found inThe Dartmouth Atlas of Health Care, another bitof “required reading” among health care analysts.

The afternoon sessions include two roundtable discussions. The first one, a “CEORoundtable” moderated by Susan Dentzer ofPBS’s “The News Hour,” is enlivened by theinclusion of Linda Golodner, president of theNational Consumers League, and Andrew Stern,president of the Service Employees InternationalUnion. Other participants include Bill Novelli,CEO of AARP, and Gail Wilensky, a prominent

THE 2007 HEALTH POLICY SUMMIT ...


health economist who worked in the first Bushadministration. And, of course, there are thecorporate CEOs, although they’re in the minorityhere: Jack Bovender (HCA), Angela Braly

(WellPoint), and Joseph Hogan (GE Healthcare).The conversation turns out to be more about poli-tics than about business or management. Hoganoffers one of the more intriguing thoughts tocome out of the discussion: while everyonewants to reduce emergency room utilizationthrough increased access to primary care, if wewere actually to achieve that, our current primarycare system would be completely overwhelmed.For me, though, the highlight of the discussion isBraly’s observation that there’s an “actuarial lawof gravity” (adverse selection) which can beneither defied nor ignored. It’s nice to know thatthe higher-ups have an appropriate degree ofrespect for our profession and its “laws.”

The second discussion, a “PresidentialCandidates’ Health Policy Adviser Roundtable,”is moderated by Drew Altman, president of the Kaiser Family Foundation. This would havebeen an interesting session to report on were itnot for the fact that most of the candidates have dropped out of the race by now. Still, itgives me another opportunity to hear LenNichols, director of health policy at the NewAmerica Foundation and one of the keynotespeakers for this year ’s Society of ActuariesHealth Spring Meeting. I come out of the sessionvery pleased with our choice!

The last two speakers of the day are UweReinhardt, of Princeton University and theCommonwealth Fund, and Mark Smith, presidentof the California HealthCare Foundation. Prof.Reinhardt might be considered the dean of healthservices researchers in the U.S. (or at least at thisgathering), having taught economics at Princetonsince 1968, and being the only member of theHealth Affairs editorial board to have served in

that capacity since the journal’s founding. He delivers his talk on the ethical and philosophi-cal issues surrounding health care reform withhis characteristic wit and charm.

Dr. Smith is also witty, but his wit has moreof a bite to it. He starts off by saying that whileall the other speakers have expressed how gladthey are to be here today, he’s not happy at all,given that his presentation is the last one of theday and thus will be delivered after every inter-esting remark that possibly could be made aboutthe health care system has already been made.Nonetheless, he manages to give us a quite inter-esting and entertaining analysis of what ails thehealth care delivery system in this country. As Smith sees it, there’s no point in reforming thehealth care financing system if we don’t firstreform the delivery process to reduce costs andincrease customer satisfaction. Two keys toaccomplishing this are (a) having much more self-service and self-care than we currently do, and(b) matching caregiving tasks with providers whohave the appropriate level of skill and training(for example, not requiring a doctor to do a taskthat a registered nurses can perform, and notrequiring a nurse to do a job that can be handledby a health aide).

For me—looking at it from an actuarialperspective—the key takeaway from the HealthPolicy Summit was contained in a comment madeduring Dr. McClellan’s presentation. He notedthat, before all the reforms that all the speakershave been talking about can be accomplished, “alot of challenging statistical issues” need to betackled. I’m interpreting this as an open invita-tion for the actuarial profession to jump in andtake a stab at it. h

Editor's note: Both a transcript and a video of the Health Affairs 2007 Health Policy Summit isavailable at: http://www.kaisernetwork.org/health_cast/hcast_index.cfm?display=detail&hc=2424


THE 2007 HEALTH POLICY SUMMIT ... | FROM PAGE 27

The solution is to develop a “learning” healthcare system in which the collection and evaluation of outcomes data is integrated intothe delivery of health care.

http://www.kaisernetwork.org/health_cast/hcast_index.cfm?display=detail&hc=2424


Apart from the effects on the health and vital-ity of individuals and the population, the healthcare system has spill-over effects throughout the economy: medical bills are overwhelminglythe most common reason for personal bank-ruptcy; hospitals, particularly emergencydepartments, provide a safety net at considerablecost; and employer health care costs affect global competitiveness.

The popular view about the relative strengthsof the U.S. health care system is that it offers indi-viduals more choice, with the implication thatgreater choice equates with higher quality andlower cost due to competitive pressures.However, Americans may have less choice than ispopularly believed. Businesses often sharplylimit the number of health plans offered toemployees and managed care systems oftenrestrict availability of physicians. In any event,the evidence does not support the assumptionthat consumer choice significantly increases qual-ity or reduces costs.

These, and many other deficiencies, are wellunderstood. However, the political communityhas not been able to agree on a solution, despite aproliferation of reform proposals during an elec-tion season. The ideological sticking pointremains whether public or private solutionsshould be primary. The serious, foundationaldeficiencies I have thus far discussed are part andparcel of the private system. But despite theevidence, market theories say that we could fixthe problem. The usual proposals are healthsavings accounts (HSAs), “consumer driven”systems, and high deductibility policies. I am notimplacably opposed to all these proposals, but tothink that they are sufficiently scalable to evenmake a dent in the problems I mention above isutterly unsupported.

Problem #1: HSAs, whatever their ostensiblegoals, are another ttaaxx bbrreeaakk ffoorr tthhee wweeaalltthhyy, whohave already been showered with tax breaks.Paying medical expenses with pre-tax income isworth a lot to high-income individuals who face amarginal income tax rate of 35 percent, but littleor nothing to lower-income Americans who face amarginal tax rate of 10 percent or less, and lackthe ability to place the maximum allowed amountin their savings accounts.

Problem #2: HSAs tend to uunnddeerrmmiinnee eemmppllooyy--mmeenntt--bbaasseedd hheeaalltthh ccaarree, because they encourageadverse selection: health savings accounts areattractive to healthier individuals, who will betempted to opt out of company plans, leaving lesshealthy individuals behind.

Problem #3: Evidence already demonstratesthat ppeeooppllee ddoonn’’tt,, iinn ffaacctt,, mmaakkee wwiissee ddeecciissiioonnsswwhheenn ppaayyiinngg ffoorr mmeeddiiccaall ccaarree oouutt ooff ppoocckkeett . A classic study by the Rand Corporation foundthat when people pay medical expenses them-selves rather than relying on insurance, they docut back on their consumption of health care—but they cut back on valuable as well asquestionable medical procedures, showing noability to set sensible priorities.

Problem #4: The essential issue has beenmisdiagnosed. Conservatives believe thatAmericans have too much health insurance. The 2004 Economic Report of the Presidentcondemned the fact that insurance currently paysfor “many events that have little uncertainty, suchas routine dental care, annual medical exams, andvaccinations,” and for “relatively low-expenseitems, such as an office visit to the doctor for asore throat.” The implication is that health costsare too high because people who don’t pay theirown medical bills consume too much routinedental care and are too ready to visit the doctorabout a sore throat. And that argument is allwrong. EExxcceessssiivvee ccoonnssuummppttiioonn ooff rroouuttiinnee ccaarree,, oorr ssmmaallll--eexxppeennssee iitteemmss,, ccaann’’tt bbee aa mmaajjoorr ssoouurrccee ooffhheeaalltthh ccaarree iinneeffffiicciieennccyy,, bbeeccaauussee ssuucchh iitteemmss ddoonn’’ttaaccccoouunntt ffoorr aa mmaajjoorr sshhaarree ooff mmeeddiiccaall ccoossttss..A small number of people requiring very expen-sive medical care (disproportionately in the lastmonths of their lives) account for 80 percent ofmedical expenditures.

So many questions loom large: Is the U.S.health care system in crisis? Do we really havethe best health care system in the world? Are thewell-off willing to give up some small benefits tohelp the most disadvantaged among us? Can thepolitical parties come together to do what everyother civilized country in the world has longaccomplished—universal access to health care forthe common good? h

NATIONAL HEALTH CARE REFORM ... | FROM PAGE 7

Different observers have different viewpointsabout how effective the current individual insurance market is. My view is that privateinsurance will not work satisfactorily if the sickcan’t get insurance, and this has been the case up until now.

Community rating was intended to solve theproblem, but it became much less common in theUnited States years ago. Today, some statesrequire community rating for small groups andsome for individuals. If a company tries commu-nity rating in a state that does not require it,healthy people will look for a lower price so thatthe company that uses community rating will getan unfair share of sick people, and its costs willspiral. Risk adjustment is an approach to dealingwith this problem. My opinion is that any marketbased solution that will function satisfactorily forthose in poor health would need to include someform of risk adjustment and access for all.

Employer Coverage—a Successor Failure?

Within the last few weeks, I have hearddiscussion that takes opposing positions on therole of the employer coverage—both success and failure. The NASI conference included a panel that discussed the role of the employer. The provision of health benefits by large employers was demonstrated to be quite stable. The panelists provided interesting data on theemployer’s approach to coverage.

Sherry Glied from the Department of HealthPolicy and Management at Columbia presenteddata indicating that employer coverage has beenvery stable except among small firms—those withthree to nine employees—where there is amarked decline. Note that there is also some shiftto employment in very small firms and there isgrowth in the number of contingent workerswithout coverage. The percentage of workerscovered also declined when companies sought to have dual earner couples each get covered bytheir own employer, and priced dependent coverage to encourage this. She made the strongpoint that the employer system works for long-term employees of most companies and that there is at present no comprehensive private

alternative to employer coverage. In addition to employees of small firms, employee coveragedoes not work well for those without stable or regular employment and those in firms that do not offer coverage.

There are obviously different perspectives onthis topic. In February I attended the RetirementIncome Industry Association (RIIA) meetingwhere a financial planner, Chris Cooper, spokeabout issues related to health benefits from theperspective of providing advice to individuals.Apparently many of his clients are independentor work for small firms. He had nothing positiveto say about the employer system. He alsopointed out that when one spouse loses employercoverage and is unable to obtain it from the other,it may be advisable for the couple to divorce. His rationale was that current law in all statesrequires that the couple would both need toapply for Medicaid together, but if they divorceand shift assets to protect them, the spouse with-out coverage may apply for Medicaid alone. This seemed to me to be an extreme idea, but Ispoke to him about it later, and he indicated thatit happens more often than one would think, particularly where the person without coveragehas chronic illness.

Health Care and BankruptcyHealth care is often a significant factor in

personal bankruptcy. This can happen if some-one does not have insurance or if they have amajor illness and spend more than the maximumon the insurance. This was highlighted recentlyin a CNN special featuring Sanjay Gupta. Publicawareness of these issues is clearly growing. This fit well with the discussion mentioned abovefrom the financial planner.

MandatesA system for universal coverage would effec-

tively be a tentament. In other words, the designof such coverage would create a mandate. In addition, mandates in some form are a possiblepart of either of the first two solutions. They canbe structured in various ways and there are manyquestions about how to structure them


REFLECTIONS ON HEALTH CARE FINANCING AND BENEFITS ... | FROM PAGE 13


• Is the employer required to offer coverage?• Should there be an individual mandate?• What aspects of coverage are mandated?• How do you enforce a mandate?

One session of the conference was onmandates, and the presentations are available onthe NASI Web site.5

Models to Look at for Change If we focus on universal coverage, Canada

and the United Kingdom are obvious models toanalyze. Both countries have single payersystems and supplemental health insurance.Both countries have had these systems for a longtime. Supplemental coverage can be used to payfor services not covered and in the UnitedKingdom, to receive treatment more quickly thanunder the public system. Both countries spendmuch less on health care than the United States. I have found that in trying to understandwhether the systems work well, opinions are verymixed. Some people say they work very well andothers say not so well.

There are a variety of other models that arealso of interest. Individual States in the U.S. areinvolved in a wide variety of reforms and areinteresting models to review. In many ways, thedirection we are moving in would provide for thestates to be like “laboratories” for nationalreform. The Netherlands and Switzerland havealso recently changed their systems. There was avery interesting presentation on the Netherlandswhich has a hybrid system—something betweenpublic and private and close to universal cover-age. Kieke G.H. Okma, Wagner School of PublicServices, NYU, presented information about theDutch system. Pertinent features of hte Dutchsystem include:

• Health insurers are usually not-for-profit,but can be for-profit.

• Residents are required to take broad coverageand pay 6.6 percent of their income asearmarked taxation and in addition acommunity rated premium to the insurer.

• The insurers are highly regulated and thesystem includes subsidies for the poor, andsome redistribution of funds so that theinsurers with a greater share of high-costpeople are compensated.

• The majority of hospitals and health facilitiesare independent and usually not-for-profit.

• Most family physicians are self-employed. • Market choice has been accompanied by

market concentration—opposite of whatsome people expected.

• The system is highly regulated with subsidiesat various points and depends on social ideas of solidarity.

There is other evidence of differing perspec-tives. The ERISA Industry Committee’s NewBenefits Platform describes an alternative thatincludes a very different structure. This proposalincludes many interesting features, includingoptions for individuals without coverage to buyinto regional cooperatives and mandates.

Getting to a Solution—ReachingConsensus

This will be extraordinarily difficult in theU.S. environment and has been a major reasonwhy pensions and the health care system have somany problems. There was a panel that discussedthis, but I do not think they had much in the wayof advice other than engaging the public.

These discussions challenged me to thinkabout some questions:

• What is the best way to understand the keyoptions that are on the table?

• What should be on the table? • HHooww ccaann aaccttuuaarriieess ppaarrttiicciippaattee iinn tthhee ddeebbaattee

iinn aa mmeeaanniinnggffuull wwaayy?? • What should the role of the employer be?• What are the successes and failures around

the employer system?• How important is universal coverage or

universal access?

REFLECTIONS ON HEALTH CARE FINANCING AND BENEFITS ...


5 http://www.nasi.org/publications2763/publications_show.htm?doc_id=660141&name=Medicare

• What are the implications of mandates?• Who can help parties with very different

views come together and compromise?• What is the impact of the level of health care

spending on the economy?• What can we learn from the states?• What can we learn from the Netherlands and

other countries?• If we retain the employer system, how do we

deal with the uninsured?

• Many countries treat health care as a funda-mental right, as they do education. Why isthis not true in the United States?

Note: The actuarial profession is working to coop-erate with NASI. The Society of Actuaries and theAmerican Academy of Actuaries jointly sponsored atable at the conference dinner, as they have for severalyears. The SOA research on post-retirement risks waspresented at a conference round-table. h


REFLECTIONS ON HEALTH CARE FINANCING AND BENEFITS ... | FROM PAGE 31

Health care is often a significant factor in personal bankruptcy.


his age 80+ patients undergoing heart proce-dures, where he said only one in three have agood outcome.)

Medicare reimbursement rates for heartprocedures create profit centers within hospitals.It is not surprising there has been an influx ofcatheterization labs into this lucrative field withno shortage of patients. As classic example ofsupply-induced demand, researchers have founda strong correlation between high incidence ratesof procedures and greater availability of services.

Medicine is always in search of “the desper-ate cure.” If some chemotherapy is good, it onlyseems to reason that more chemotherapy must bebetter. Chapter five tells the story of Dr. WilliamPeters, his advocacy of bone marrow transplantsfor the treatment of breast cancer, the quickuptake, and the legal battles with feminist over-tones that ensued to get insurance companies topay for this treatment.

After 10 years of clinical trials, researchersultimately concluded that the short extension of life for some patients was offset by the mortal-ity due to the treatment. While bone marrowtransplants for breast cancer have been discred-ited, other treatments of unproven efficacypervade the medical landscape, such as spinalfusion therapy.

People and medicine seem to love new tech-nology! Seventy-six million tomography scanswere performed in 2005, up from 40 million in2000. If the growth rate persists, 100 millionscans will be done in 2010—one for every threeAmericans. Brownlee writes, “National ImagingAssociates, a company that helps insurers decidehow to pay for imaging services, estimates that atleast two thirds of MRI’s contribute nothing tophysicians’ ability to diagnose their patientsaccurately. In 2002, Blue Cross Blue Shield ofMissouri calculated that 20 to 30 percent of their claims for PET, CT, and MRI scans were for unnecessary tests. In states where malpracticelaws make it less likely that doctors will be sued, there’s only about a 15 percent difference

in the amount of unnecessary treatment doctors deliver.”

Now there is a rush to buy the latest new 3-Dand 64 slice CT scanners, described by Brownleeas a parlor trick by some radiologists becausethey don’t really provide new information.Imaging procedures are big profit centers forhospitals and now physicians have gotten intothe game, potentially contributing to supply-induced demand.

Much criticism has been written about thepharmacy industry, the fastest growing sector ofhealth care, where harmful drugs have madetheir way into the market for extended periods oftime. Brownlee provides insights into the lifecycle of several harmful drugs and the lack of information to demonstrate that they were safeand more effective than conventional treatments.Our current system relies primarily upon the pharmaceutical industry to dictate whatresearch is done and what information is dissemi-nated. Bottom-line agendas and conflicts ofinterest provide strong incentives for biasedresearch and conclusions.

Brownlee also discusses at great length themarketing tactics of the medical industry. We’reall too familiar with the direct-to-consumerprescription drug advertising, which has beenspectacularly successful. Brownlee writes,“…condition branding…allows marketers toextend a market simply by redefining disease;coming up with an entirely new disorder; orsimply widening the definition of an old one, andthen forging links in the minds of both physiciansand consumers between the new definition and a particular drug.” Add to that, the cozy relation-ship between physicians and the pharmaceuticalindustry where influence buying appears to be alive and well.

The insurance industry, in particular the ability of HMO’s to contain costs and providebetter medicine, does not escape Brownlee’s

LETTER FROM THE EDITOR ... | FROM PAGE 15



LETTER FROM THE EDITOR ... | FROM PAGE 33

perspective. It was a bit of a trip down memorylane as she recounts the effects of such early costcontainment tactics as primary care gatekeepers,shifting extraordinary risk to individual practi-tioners, and strenuous pre-approval procedures.While HMO’s have loosened their grips in somerespect, they have been effective at ratchetingdown reimbursements, perhaps contributing tothe decline of family practitioners.

All is not broken and Brownlee has kudos for a number of health care systems, naming well-recognized organizations such as the MayoClinic, Kaiser Permanente, IntermountainHealthcare and Group Health of Puget Sound.She also touts Pursuing Perfection, a programstarted by a group of idealistic physicians inBellingham, Wash., that uses a multidisciplinaryapproach to help practitioners prevent diabetesand chronic heart failure and to employ best prac-tices for counseling patients on navigating thehealth care system and controlling their diseases.

She also tells the story of the remarkabletransformation of the Veterans HospitalAdministration under the direction of KennethW. Kizer beginning in 1994. Kizer led the effortto decentralize management, renegotiatedcontracts with suppliers and installed a comput-erized medical-records system now known asVistA. With a better computer system they wereable to operate more efficiently, reduce errors,better coordinate care and perhaps most impor-tant, measure outcomes and performance . A neighbor of mine, who left a private medicalpractice for a position at our local VA, is now chief of staff and cannot sing its praises loud enough.

While Browlee does not have all of the solu-tions for fixing our system, she recommends we

focus on making sure we use the best, most validevidence-based approach in the delivery of medi-cine. She advocates changing compensation toincrease cognitive services and the number offamily practitioners who can best coordinate careand manage chronic conditions. She believes itmakes sense to pay doctors and hospitals as agroup on a per capita basis to encourage them tobetter coordinate care and render appropriateamounts of care. She advocates that Medicarechange its reimbursement rates to stop overpay-ing for radiology and heart procedures, whichcreates profit centers and encourages unnecessarydiscretionary tests and procedures. In bothpublic and private sectors, quality can be meas-ured and reimbursement can be decreased to those facilities that don’t measure up or facili-ties can be turned over to the VHA. Governmentcan facilitate the transformation to electronicrecords by making VistA available to other hospital systems.

In this short article, I have only been able totouch upon some of the high points ofOvertreated . I ’m sure that many medical professionals will take issue with Brownlee’sconclusion. However, as a consumer of medical care, so much of what Browlee has to say rings true.

As I reflect upon my family’s encounters withthe medical system, I can think of many instancesof unnecessary tests and treatment. The listwould begin with the removal of my tonsils atage five, a procedure so common it was practi-cally a rite of passage for my generation. And thelist could go on and on.

As health actuaries, we can participate in anumber of ways to help improve the medicalindustry through such things as the design ofbetter reimbursement systems, the encourage-ment of evidence-based medicine (see, forexample Goldman’s article in our last issue), andthe measurement of quality and performance.Even if your career path does not take you in thisdirection, Overtreated provides insightful food forthought for all health care consumers.

Exacerbating the situation is Roemer’s law, atenet of health economics that exhorts thenotion of supply-induced demand when itcomes to medical care. In the medical field ofdreams, if you build it, patients will come.


In This IssueWith the presidential race in full swing and

the health care reform debate heating up, thisedition of Health Watch features four articlesfocusing on health care financing reform. In ourcover article, Catterall relays what he learnedfrom health care luminaries at the 2007 HealthPolicy Summit. There are two opinion pieces, onefrom Professor Lawrence Gostin of GeorgetownLaw and the other from Ian Duncan, recapping a debate from the 2007 SOA Annual Meeting.Professor Gostin argues that the health care crisisrequires a fundamental change in the structure ofthe system (possibly even single payer), whileDuncan argues that there is no health care crisisand the market will fix itself (especially if thegovernment leaves it alone!). Our last article onthis topic is by Anna Rappaport, who reflects onwhat she took-away from the National Academy

of Social Insurance annual conference “Getting toUniversal Health Insurance Coverage.” She alsooffers a few opinions of her own, which offer a sharp contrast to Duncan’s positions.

Health actuaries have unique abilities andperspective when it comes to health care financ-ing. With this comes a profound sense ofresponsibility—that of keeping the debaterational. It will be very interesting and hopefullysatisfying to see the contributions the actuarialprofession makes. h

LETTER FROM THE EDITOR ...

Cost of Paper to Print SOA ResearchReport: $0.17

New Health Research Ideas: Priceless

The SOA Health Section Council is seeking new research ideas or proposals on a

health-related topic for potential funding. The Council has a dedicated annual budget

to fund research projects that benefit health actuaries. You can submit a proposal or

idea at any time. Proposals are chosen among those submitted for funding based on

their relevance to health actuaries and available budget. Examples of prior studies

funded include the newly released report on the commercially available Risk

Adjusters and the Impact of Medicare Part D on Drug Costs study. Here's an oppor-

tunity for you to advance the profession and potentially uncover new knowledge!!

For more details on how to submit a proposal and the selection process, please

contact Steven Siegel, SOA research actuary, at [email protected].

payment rates were on average about 134 percentof FFS Medicare; this compares with roughly 121percent for urban floor counties.

The MedPAC ReportIn their June 2007 report to Congress,

MedPAC proposed that CMS reduce MA bench-marks to the same level as FFS cost in eachcounty. This recommendation is of enormousimport and will have a dramatic effect on themanaged Medicare market. MedPAC suggestedfour different methods that CMS might employ.Since MA rates are updated annually, there are afew variables that can be used as adjustmentlevers to achieve this end:

• Time—over how many years should marginsbe reduced to 0?

• Rate of decrease—constant, accelerating,decelerating?

• Which counties are affected when—countieswith highest margins first, all counties by the same amount, all counties by samepercentage, etc.?

MedPAC suggested four possible methods toreduce rates:

1. Freeze Benchmarks where they are now.2. Cap Benchmarks at some maximum percent-

age of FFS Cost.3. Phase in a blend of MA Benchmark with

FFS Cost.4. Competitive Bidding.

The proposed endgame is the same for each ofthe four methods—MA payment rates that equalthe Medicare FFS costs in each county.

1. Under Method 1, medical trend would causethe FFS cost level to rise until it is as great as

the frozen MA rate. The margins in countieswhose MA rates are already close to FFS costwould be affected first and most in terms ofmargin reductions expressed as a percentageof FFS cost. Those counties that have thehighest margins could still have higher MArates than FFS cost for many years. Youcould think of this as the “Highest MarginsStay Highest” approach.

2. Under Method 2, all counties whose MA ratesare in excess of the cap in year one, say 130 percent of the FFS cost, would be cut to130 percent. All the counties below 130percent remain untouched. Assuming lineardecreases to the maximum over a four-yearperiod, under method 2 the caps mightdecrease systematically, such as 130 percentin year one, 120 percent in year two, 110 percent, and 100 percent. Think of this as the “Highest Margins Reduced First” approach.

3. Method 3 would implement the margin cutsby blending MA Rate with FFS cost overtime, such as 75/25, 50/50, 25/75, and 0/100over four years. According to this formula, a county at 140 percent in year zero goes to130 percent in year one, 120 percent in yeartwo, 110 percent, and 100 percent.

4. The fourth approach is harder to envisionand explain. RPPO and PD rates are set withcompetitive bidding, so this could involve ablend of bids and MA rates, which seemscounterintuitive—the plans with the lowestbids that deliver care most efficiently would seem to be reduced more and thuspenalized for it.

As MA rates move to the FFS level, the effectsof reduction will play out differently by geogra-phy—some states affected more than others. For example, states with the highest margins in their county rates will be affected more. In order to visualize the aftermath of reductions in margins, it is helpful to look at the


MEDICARE ADVANTAGE ... | FROM PAGE 17

“Actuaries will play an important role. Ourprofession will be called upon to help solve asignificant and complex social problem…”


distribution below of the number of counties by margin percentage:

• Reconsider method 1 first. The distributionis right-skew and the majority of countieshave margins less than 10 percent of FFS cost.If medical trend is five percent in year one,then the counties with margin greater thanfive percent will decrease by that percentage;and the counties that have less than fivepercent margin in year zero will have nomargin in year one. At the other extreme, acounty with a margin of 50 percent in yearzero will go to about 45 percent.

• Method 2 starts with the counties that havethe greatest margin and reduces them tosome maximum level. Using the exampleabove of 130 percent, 120 percent, 110percent, and 100 percent, all the bars to theright of the annual maximum will move tothe left and stack on top of that bar. If theyear one cap is a maximum of 130 percent,then the two bars for 30 percent to 40 percentand 40 percent + will stack on top of the 20percent to 30 percent bar with a probabilitymass at 130 percent. In year two, there willbe two bars only, etc. According to thismethod, it seems that most of the countieswill not be affected until year four. In fact,the counties with the greatest margins tend tobe rural counties with relatively low popula-

tion, so it is important to also consider themargin distribution based on the number ofMedicare eligibles.

• In order to understand method 3, considertwo different counties: Country A hasmargin of 10 percent and Country B has 60percent. A 75/25 blend in year one reducestheir margins to 7.5 percent and 45 percentrespectively. With each passing year, theright-most bars become shorter and the left-most bars get taller.

• Method 4 is somewhat similar to method 3,but instead of blending the county-specificbenchmark with 100 percent of FFS cost, Isuspect that the benchmark would beblended with the average bid in that county.Bids are typically less than benchmarks—thisis one of the favorable results of managedcompetition. A simplified example (assum-ing an average risk score of 1.0) helps explainhow this would work for two different carri-ers in the same county with a 25 percentmargin in year zero. Both carriers’ plans areassumed to be zero premium to the members:

a. The first carrier is an HMO that candeliver the exact same MA services as

MEDICARE ADVANTAGE ...


Distribution of Liftby Number of US Counties

A/B Medicare using Medicare reim-bursement to providers and 20 percentutilization savings due to effective coor-dination of care. Consequently itgenerates savings and a rebate of $120(just a guess). It gives the rebate back toits members in the form of a richer MAbenefit plan than the traditional A/BMedicare plan—an MA plan with lowermember cost-sharing (than traditionalA/B) and a few additional benefits suchas vision, preventive dental, and a stan-dard Part D drug plan.

b. The second carrier bids a PFFS plan thatis identical to A/B, and the secondcarrier delivers no utilization savings.After it incorporates the cost of adminis-tration and profit into its bid, the secondplan has no rebate. Consequently, thesecond carrier’s actual benefit plan is farless rich than the first’s. Carrier two hasstandard Medicare cost-sharing, and nostandard drug, etc.

Carrier one has a bid that is $160 less than thebenchmark; carrier two’s bid equals the bench-mark. It seems that blending the benchmark withthe HMO plan’s bid drives the adjusted bench-mark (per method 4) to a lower level than wouldoccur if blending the benchmark with the secondcarrier’s bid. This is why, as stated above, thisapproach seems counter-intuitive.

The last point to cover in this article is therelative “efficiency” of MA HMO vs. PFFS. The following table shows that HMO is more effi-cient than traditional Medicare, but PFFS is not:

MedPAC on PFFS in MA—Efficiency

Despite having to pay commissions, higheradministrative expenses, and a profit charge,private MA HMO plans still manage to provide abenefit plan equivalent to A/B Medicare for acost that is three percent less on average than thegovernment pays to deliver the same. Note, however, that the same is not true forPFFS—after all the claims and expenses are paid,PFFS plans spend 10 percent more than thegovernment to deliver the same level of benefit asMedicare A/B. Typically, HMO, PPO, and PFFSplans provide a richer benefit than traditionalMedicare. Some of this extra benefit may besubsidized, at least in part, by the margin in thepayment rate; based on the efficiency data, thisoccurs more for PFFS than HMO & PPO.

Should 100 percent of FFS cost be the upperlimit of MA benchmarks? Benchmarks levelshave risen and fallen with changes in politicaland market conditions over time. The debatemay be over, however, and if the reduction ofbenchmarks to 100 percent of FFS cost is a fore-gone political conclusion, then it seems to me thatMedPAC will need to formulate a margin reduc-tion strategy that 1) does not disproportionatelypenalize more efficient plans, and 2) maintainsthe other goals and objectives of the MAprogram, such as offering choice to Medicarebeneficiaries in urban and rural locations alike.

As Congress decides how to contain increas-ing Medicare cost and, more specifically, restrainMA funding levels via margin reductions, theissue of equity will be a critical consideration.Actuaries will play an important role. Our profession will be called upon to help solve a significant and complex social problem that will require advanced quantitative capabili-ties. We are well-equipped to meet thisprofessional challenge. h


MEDICARE ADVANTAGE ... | FROM PAGE 37

except perhaps for some stop-loss business.Increasingly, however, carriers are offering trendguarantees to large self-insured customers.Typically, the carrier puts a portion of theiradministrative fees for a policy year at risk iftrend exceeds a specified percentage. While thismay not sound like a big deal to an actuary whoworks with insured business, there may beseveral million dollars at risk. Enough that even alarge carrier sits up and takes notice.

Trend guarantees are always a risky proposi-tion, but the fact that the carrier may not knowabout anticipated changes adds to the risk. For example, most carriers are working now ontrend guarantees for 2009. If the customer imple-ments a major change effective 1/1/2010, then thebenefit rush in late 2009 may cause the carrier tomiss the guarantee even if they otherwisepredicted the trend accurately. To minimize thisrisk, more and more carriers are caveating theguarantees to limit the risk if a major change inoffering is made.

Insured BusinessAlthough the benefit rush impact tends to

be greater for a large self-insured customer, theoverall financial impact can be greater for aninsured block of business, especially if the propor-tion of CDH and other large deductible plans isgrowing rapidly.

For small business pricing, many insurancecompanies offer a new business discount offmanual rates to reflect the favorable impact dueto underwriting. In the second year, the companyis usually limited to an increase of 15 percent +the change in manual rates under small groupregulation. The 15 percent is intended to coverunderwriting wear-off and to correct somewhat

for unfavorable experience without causingundue hardship on the customer. Many carriersare hesitant to use the full 15 percent for fear ofbeing accused of offering a low first yearpremium and then pulling a “bait and switch.”

While this is always a problem, it is muchmore serious when a high proportion of CDHplans are introduced and the carrier is faced withthe trend crush. There is no easy answer to theproblem. The first year discount may be reduced,which may make them uncompetitive or theymay reflect the crush and risk being accused of bait and switch.

For experience-rated cases, the underwritershould reflect the benefit rush pattern intopremium calculations in a manner similar to theself-insured business.

The impact of a benefit rush on reserving isclear. An increase in annual claims in the threepercent to five percent range translates to a 10percent to 20 percent increase in claims in thefourth quarter. Since many insurers rely onprojected claims costs instead of completionfactors to estimate run-out on fourth quarterIBNR, the estimate can be inadequate unless thebenefit rush is taken into account.

A more subtle impact, however, is the factthat a mini-rush often occurs at the end of thepolicy year on any type of high deductible plan.The mini-rush occurs as consumers satisfy theirdeductible and out-of-pocket maximums. At thatpoint, services are either “free” if the out-of-pocket maximum is met or at least a lot cheaper ifthe deductible is satisfied. Savvy consumers willuse that opportunity to receive optional services.If the block is stable, then the actuary can rely onseasonal patterns to develop the claims estimates.If the block is growing, however, the actuary will have to perform additional analysis to determine the impact. h


TIMING’S EVERYTHING ... | FROM PAGE 19

Exhibit 4: Explanation of Trend

Health Section Announcements

Individual and Small Group HealthInsurance Underwriting SeminarMark your calendar and plan to take part in this uniqueseminar, Sept. 18-19 in Chicago, to gain a broad and objec-tive update on developments in individual and small grouphealth insurance underwriting for chief health underwriters,health actuaries, health claims managers, senior healthinsurance management, industry consultants and industryservice providers throughout North America. All of thepresenters are experts in their respective fields of healthinsurance risk management. In this seminar, you'll gaininsights into the product and market; increase your abilityto analyze problems and challenges related to health insur-ance underwriting, and learn how to creatively solve thoseproblems. This seminar provides you with an opportunity toincrease your knowledge and position yourself as a leadingexpert in understanding and solving health insuranceunderwriting challenges at your company. More informa-tion will be available soon at http://www.soa.org/mee t ings -and- event s / event -de ta i l / ind - sma l l -g rp -h l th -seminar/default.aspx.

Critical Insurance ConferenceWhether you're considering selling critical illness productsor are beginning to explore the details of the industry, this isthe one conference you must attend! Leading the industry,the 2008 Critical Illness Conference, Sept. 22-24 in Las Vegas,is sponsored by LIMRA, LOMA, the Society of Actuariesand the National Association for Critical Illness Insurance,and will provide the cutting–edge information you need tounderstand the challenges and opportunities this marketpresents. Increase your ability to analyze problems andstrategies related to critical illness insurance, learn creativesolutions to those problems, and understand how tocommunicate those solutions to your company and yourcustomers. Register now at http://www.soa.org/meetings-and-events/event-detail/critical-ill-ins-conf/default.aspx.

Introduction to Predictive Modeling:Techniques and Applications forInsurance ActuariesPredictive modeling has entered almost every facet of indus-try, government, and academia, and its applications forinsurance are only beginning to be realized. This two–dayintroductory course, Nov. 10-11 in Chicago , offers life actu-aries a practical, working understanding of predictivemodeling tools. Beginning with a discussion of data consid-erations, the course next provides a review of leadingtechniques–Neural Networks, General Linear Models,CART, and others. The remainder is spent on a case study,providing attendees with a solid grasp of how predictivemodeling can be applied in the real world of insurance.More information will be available soon at http://www.soa.org/meet ings-and-events/event-detai l /predict ive-model ing/default.aspx.


http://www.soa.org/meetings-and-events/event-detail/predictive-modeling/default.aspx

http://www.soa.org/meetings-and-events/event-detail/ind-small-grp-hlth-seminar/default.aspx

health watch, may 2008, issue no. 58 - member | soa · education, public health is the foundation...

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