Health Care Reform Challenge: An Actuarial Perspective Cori E. Uccello, FSA, MAAA, MPP Senior Health Fellow American Academy of Actuaries NCSL 2007 Annual Meeting August 7, 2007 Boston, MA NCSL Presentation, August 7, 2007 1
Outline Risk pooling basics Issue and rating rules Ways to minimize adverse selection Premium rate setting process NCSL Presentation, August 7, 2007 2
Risk Pooling Basics Risk pools are large groups of individuals (or groups) whose medical costs are combined to calculate premiums. Pooling risks together allows the costs of the less healthy to be subsidized by the healthy. In general, the larger the risk pool, the more predictable and stable the premiums can be. NCSL Presentation, August 7, 2007 3
Risk Pooling Basics BUT, creating larger risk pools will not necessarily lower premiums. Must consider the size of the risk pool AND how it is comprised. If a pool attracts those with higher expected claims (i.e., adverse selection), premiums will be higher. Pools created as a by-product of membership in a group (i.e., group was created for purposes other than buying insurance) tend to be less subject to adverse selection. NCSL Presentation, August 7, 2007 4
Risk Pooling Basics (cont.) Large employer groups Workers automatically obtain coverage as a side benefit to employment Small/medium size employers Workers automatically obtain coverage as side benefit to employment, but employers can move into and out of the insurance market Individual market Individuals enter insurance market for the express purpose of obtaining health insurance NCSL Presentation, August 7, 2007 5
Issue and Rating Rules Balance the goals of access to health insurance and premium affordability Issue rule examples Guaranteed issue Allow underwriting Rating rule examples Pure community rating Modified community rating Experience rating NCSL Presentation, August 7, 2007 6
Adverse Selection When medical insurance is voluntary, it is subject to adverse selection based on asymmetric knowledge of health conditions. Ways to minimize it or its effects: Mandate coverage Provide premium subsidies Default enrollment Penalty for delayed enrollment Risk adjustment NCSL Presentation, August 7, 2007 7
The Rate Setting Process Measure prior health spending Adjust data to reflect the future Use data to project future costs NCSL Presentation, August 7, 2007 8
Premium Components Claim costs Administrative costs Distribution costs Billing and enrollment Underwriting Claims adjudication and anti-fraud Product development Regulatory compliance Taxes, assessments, and fees Underwriting profit/contribution to surplus NCSL Presentation, August 7, 2007 9
Claim Costs One method of calculating claim costs = ( Utilization Average Patient Frequency * Cost of Cost of Service Service Sharing Aggregated over all service categories ( NCSL Presentation, August 7, 2007 10
Claim Costs (cont.) Vary by plan design (e.g., deductibles, copays, coinsurance, benefit limits) Higher cost sharing reduces plan spending Net outpatient share of spending Potentially lower utilization Specific benefits covered Different benefits will have different impacts on costs Limits on specific benefits must also be considered Coverage mandate vs. coverage offer mandate NCSL Presentation, August 7, 2007 11
Bottom Line Premiums depend on many factors Enrollee population characteristics Plan design and benefit package State and federal regulations Risk pooling mechanism Administrative mechanisms NCSL Presentation, August 7, 2007 12