Actuarial Research Corporation1 Inside the Black Box: Adjustments and Considerations for Public Policy Proposals AcademyHealth Annual Research Meeting: June 8, 2004 Cathi 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

Actuarial Research Corporation 5 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

Actuarial Research Corporation 6 Adjusting the Premium: Benchmarking Why Benchmark?  Need to control to federal or state specific data  Need to control level and / or trend

Actuarial Research Corporation 7 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

Actuarial Research Corporation 8 Adjusting the Premium: Population Who participates Different underlying costs by different populations  Prior Insurance  Age

Actuarial Research Corporation 9 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)

Actuarial Research Corporation 10 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.

Actuarial Research Corporation 11 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

Actuarial Research Corporation 12 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

Actuarial Research Corporation 13 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 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

Actuarial Research Corporation 14 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.

Actuarial Research Corporation 15 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

Actuarial Research Corporation 16 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

Actuarial Research Corporation 17 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

Actuarial Research Corporation 18 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

Actuarial Research Corporation 19 Example of Premium Calculation: Induction adjustment (alternative calculation) Induction equation: Q= 1/(1 +  *P) α = Uninsured: P = 1.0 (Person pays 100%) Q = 1 / (1 + (.555 * 1) ) = Insured: P =.2 (Person pays 20%) Q = 1 / (1 + (.555 *.2)) = / = 1.40

Actuarial Research Corporation 20 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

Actuarial Research Corporation 21 Summary of Adjustments Starting per child cost:$2107 Population adjustment:$2002 Induction assumption:$2042 Selection assumption:$2124 Final premium:$2124

Actuarial Research Corporation 22 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

Actuarial Research Corporation 23 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