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Actuarial Research Corporation 1
Inside the Black Box:Adjustments and Considerations for Public Policy Proposals
AcademyHealth Annual Research Meeting: June 8, 2004Cathi Callahan, ASA, MAAA
Actuarial Research Corporation 2
Adjustments and Considerations
Issues of Pricing a Particular Plan Plan and population specific adjustments
Issues of Total Cost of the Proposal Who benefits and how
Actuarial Research Corporation 3
Adjusting for Public Policy: Pricing a Plan
Starting population / starting costs Benchmarking Adjusting for particular plan / program Adjusting for population targeted Adjusting for lack of prior insurance Adjusting for who takes up insurance
Actuarial Research Corporation 4
Where We Start
People with insurance Private sector (this discussion) Public sector
Medicaid SCHIP Medicare
Their costs Costs of the group over a given time interval Costs of a person / person’s group over a longer period
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Premiums
Where do we get starting premiums from? Industry data
Biased by clients Survey data
Biased by respondents Public program data
Often dated / limited release
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Adjusting the Premium: Benchmarking
Why Benchmark? Need to control to federal or state specific data Need to control level and / or trend
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Adjusting the Premium: Plan Richness
What is the particular plan being proposed vs. starting data?
“Actuarial valuation” Adjusting benefits of a specific reform plan vs.
what is perceived as “average” (or starting point) coverage
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Adjusting the Premium: Population
Who participates
Different underlying costs by different populations Prior Insurance Age
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Adjusting the Premium: Induction
Changing spending habits based on richness of new plan Increased spending for previously uninsured Increased or decreased spending for previously
insured (plan dependent)
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Induction Effects (the required actuarial slide)
Total spending for covered services is assumed to be proportional to:
1/(1 + *P)
where is the "induction parameter" and P is the average fraction of the cost of services paid by the consumer.
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Adjusting the Premium: Selection
Persons who participate may be above average risk (cost)
How does this happen? Not all eligible participate Who does?
Some average risk Some above average risk
Not all experience selection Effects of subsidy schemes
Spread selection effects across entire group of participants
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Selection Effects: Examples
Use claims distributions to look at differential assumptions 25% participating vs. 10% participating
The more who participate, the less the effect on the overall group
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Selection Effects: Examples
Example 1 25% participation in an uninsured subgroup draws:
Half (12.5%) from top of distribution Half (12.5%) from rest of distribution
For Children, this is a 375% increase If subgroup were 10% of total population, this has effect of 1.275
Example 2 10% participation in an uninsured subgroup draws:
40% (.4*.1 = 0.04) from top of distribution 60% (.6 * .1 = 0.06) from rest of distribution
For Children, this is a 836% increase If subgroup were 10% of total population, this would be increase
of 1.736
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Example of Premium Calculation Source information:
Kaiser Project on Incremental Health Reform, Kaiser Family Foundation
Premiums calculated for the proposal detailed in: “Extending Health Insurance Through Tax Credits”, Mark
Pauly, October 1999.
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Example of Premium Calculation Pauly Plan:
Income Related Tax Credits Tax credit covering full cost for under 150% of
poverty Sliding scale to no credit at 500% poverty Insurance purchased in current market Reconciled on tax return
Choice of this or tax exclusion for ESI
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Example of Premium Calculation Starting point: Average market premiums for
children, 2005 terms $2107 overall
Based on $1139 per child in 1998, inflated by NHE per capita change in private health insurance of 1.85
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Example of Premium Calculation: Population Adjustment Participation by:
Uninsured children ~10% of participants at 0.5 * non group cost
Non-group children ~90% of participants at 1.0 * non group cost
No participation by Medicaid or ESI kids
$2002 per child
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Example of Premium Calculation: Induction adjustment Previously uninsured only Proxy utilization replacing actual induction
equation
40% increase for the uninsured Approximately 2% overall
$2042 per child
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Example of Premium Calculation: Induction adjustment (alternative calculation) Induction equation: Q= 1/(1 + *P) α = 0.555 Uninsured:
P = 1.0 (Person pays 100%)Q = 1 / (1 + (.555 * 1) ) = 0.643
Insured:P = .2 (Person pays 20%)Q = 1 / (1 + (.555 * .2)) = 0.900
0.900 / 0.643 = 1.40
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Example of Premium Calculation: Selection For those not fully subsidized
Children > 150% of poverty Selection of 1.67 on partially subsidized uninsured Use 1.00 for all fully subsidized children Use 1.00 on those with current coverage
Coverage does not change Spread over all children who participate
$2124 per child
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Summary of Adjustments
Starting per child cost: $2107 Population adjustment: $2002 Induction assumption: $2042 Selection assumption: $2124
Final premium: $2124
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Considerations of Public Policy Plans Who benefits
The already insured who may not have access to current subsidies
The uninsured Long vs. short term uninsured Children, parents, working adults
How we spend tax dollars New vs. existing coverage
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Issues with Tax Credit Proposals
Availability of Credit Prospective vs. Retrospective Cost of covering
All recipients of credits vs. Covering newly covered
Usually a small percentage with retrospective credits