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Michael Steven Taylor ASA, ACA, MAAA

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Table of Contents

Michael Taylor, An Actuary's Ramblings on Health Insurance

About this Book 5 How To Read This Book 7 About the Author 9 Updates for the Second Edition 10 Updates for the Third Edition 11 Updates for the Fourth Edition 12 Updates for the Fifth Edition 13 Section I: Retiree Medical Valuations 14 Four Things to Look for in a Good Actuary 15 Accounting for Postretirement Benefits: A Primer 19 Accounting for Plan Amendments 21 Should I Fund My Retiree Medical Plan? 24 The Past, Present, and Future of Discount Rates 28 Are You Paying for an Implicit Subsidy? 30 Lifetimes, They Are a-Changin' 32 Do You Know When to Cash Out? 34 Section II: Plan Design Strategies 37 Health Insurance Cost Saving Measures 38 Employee Contribution Strategies 43 Frozen Benefits: Avoiding Medical Inflation 47 Is Stop-Loss Insurance a Ripoff? 49 Coordinating Retiree Health Plans with Medicare 51 Is Alternative Medicine Becoming Mainstream? 54 Section III: Care Management Programs 57 The True Impact of Health Appraisals 58 Losing Weight … at the Office 61 Holding Employees Accountable: An Ethical Discussion 63 Intrinsic Motivation and the Quest for Better Health 66 Measuring DM Savings: Two Common Mistakes 69

3 Michael Taylor, An Actuary's Ramblings on Health Insurance

Section IV: Plan Monitoring Issues 72 The Hidden Danger of Deductible Leveraging 73 Benefit Rush and Benefit Hush 76 Recent Declines in Prescription Drug Trend 78 Understanding Underwriting Cycles 80 IBNR Methods: Beyond the Basics 83 Section V: The Affordable Care Act 89 Pay for Premiums, or Pay the Penalty? 90 Gold, Silver, and Bronze: Simplifying Actuarial Values 93 What is an Egg Whip? 95 Making Sense of the Cadillac Tax 96 Accountable Care Organizations: A Patient's Perspective 99 Section VI: Mental Health Benefits 102 The Evolution of Mental Health Benefits 103 Evidence Based Medicine: Issues for Mental Health 105 The Basics of Mental Health Parity Regulations 109 Have We Really Achieved Parity? 111 Section VII: Rural Healthcare Issues 113 Rural Healthcare: Access Issues 114 Going Broke: Rural Out-of-Pocket Spending 117 Rural Hospitals: A Mortality Study 120 Section VIII: Healthcare System Issues 122 The Need for Price Transparency 123 The Current State of Health Policy Reform 126 Don't Forget the Neglected Diseases 128 Would You Like to Add a Warranty? 130 What is your Doctor's E-Mail Address? 132 Breaking Through Language Barriers 134 A Hidden Issue: Medical Fraud 136 Bonus Content I - Mental Health Parity FAQs 138 Mental Health Parity FAQs 139


Bonus Content II - Book Reviews 144 Bend the Healthcare Trend 145 The Company that Solved Health Care 147 Extreme Producers - Their Insights and Secrets 150 Health Insurance - Navigating Traps & Gaps 152 The Hour Between Dog and Wolf 155 The Stem Cell Hope 158 Why Nobody Believes the Numbers 161 Appendix 166 Acknowledgements 167 Sources 168 What to Expect for the Next Edition 172 Thanks for Reading 173

Much of what follows was originally part of a blog I created for my consulting startup: Liability Analytics LLC. When I left corporate America during the fall of 2012, I had no clients and no cash flow. What I did have was five years of acquired knowledge about the health insurance industry, and, for the first time in years, ample free time. I created my blog to serve three primary purposes: to provide valuable information to my clients, to demonstrate my expertise to new prospects, and to hold myself accountable to continue my training and education. These blog posts have now been organized, edited, and redesigned for the e-book format. This e-book is provided free of charge. It may be distributed freely for any non-commercial purposes as long as credit is given to me as the original author and no modifications are made to the original work. Pictures and photographs used in this e-book were purchased from Shutterstock.com and may not be reproduced. I intend to continue writing blog posts and book reviews in the future, and to routinely incorporate these into future versions of this e-book. Check in with me at www.liabilityanalytics.com to download the most recent version.

This e-book is organized into the following sections: Section I: Retiree Medical Valuations (8 articles) Section II: Plan Design Strategies (6 articles) Section III: Care Management Programs (5 articles) Section IV: Plan Monitoring Issues (5 articles) Section V: The Affordable Care Act (5 articles) Section VI: Mental Health Benefits (4 articles) Section VII: Rural Healthcare Issues (3 articles) Section VIII: Healthcare System Issues (7 articles) Bonus Content I: Mental Health Parity FAQs Bonus Content II: Book Reviews (7 reviews)

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About this Book


Section I contains 8 articles concerning the accounting treatment of retiree medical plans. I began my actuarial career working on these valuations and they remain a specialty in my current practice. These articles will be useful to plan sponsors, as well as any HR or finance personnel who assist with annual valuations. Section II contains 6 articles related to plan design issues. These will be useful to management, consultants, and plan sponsors that have input in the design of a company’s health insurance plan. Section III contains 5 articles related to care management programs. These explore the issues surrounding care management programs, a growing trend that all plans should look into. Section IV contains 5 articles related to the monitoring of plan experience. These articles are the most obscure and specialized within the book, and will probably be of value only to consultants and managers who regularly review a health plan’s financial experience. Section V contains 5 articles related to the Patient Protection and Affordable Care Act, more commonly referred to as Healthcare Reform. Many plan sponsors have expressed concern and confusion regarding the new laws. Hopefully, these articles will make the regulations easier to understand. Section VI contains 4 articles covering mental health benefits and some regulatory concerns you should be aware of if you implement mental health coverage. Section VII contains 3 articles related to rural versus urban healthcare, a topic that might not apply to everyone, but one that I can appreciate having grown up in a rural community. The final section contains 7 articles related to general issues that need resolving within our healthcare system. They are some of my favorite articles, but can be skipped if you’re only interested in directly usable information.

I have also included some bonus content that didn’t fit well into any of the other sections. The first piece includes answers to many frequently asked questions regarding mental health parity regulations. I have also included 7 reviews for books you might want to check out (or not; read the reviews).


You are under no obligation to read this book from cover to cover, or to follow any type of order. Read the articles that will be most beneficial for your job, or just skim through the book and stop when something looks interesting. Articles average just 500 words apiece, so any individual article can be easily read in just a few minutes. Use the tables below and on the following page to get started:

Best Articles for Business Owners, Managers, and HR Personnel

Book Review: The Company that Solved Health Care

Health Insurance Cost Saving Measures

Employee Contribution Strategies

The Basics of Mental Health Parity Regulations

Four Things to Look for in a Good Actuary

Are You Paying for an Implicit Subsidy?

Accounting for Postretirement Benefits: A Primer

Best Articles for Insurance Agents, Brokers, and Consultants


Book Review: Extreme Producers: Their Insights & Secrets

Book Review: Bend the Healthcare Trend

What is an Egg Whip?

Recent Declines in Prescription Drug Trend

Book Review: Why Nobody Believes the Numbers

The Hidden Danger of Deductible Leveraging

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How To Read This Book


Best Articles for Actuaries and Analysts

IBNR Methods: Beyond the Basics





Mental Health Parity FAQs

Benefit Rush and Benefit Hush

My Favorite Articles

Intrinsic Motivation and the Quest for Better Health

Is Alternative Medicine Becoming Mainstream?

Evidence-Based Medicine: Issues for Mental Health


What is your Doctor’s E-mail Address?

Rural Healthcare: Access Issues



My name is Michael Taylor. I am an independent actuary in Nashville, Tennessee. I am an Associate of the Society of Actuaries, an Associate of the Conference of Consulting Actuaries, and a Member of the American Academy of Actuaries. I graduated from Centre College with a degree in Financial Economics, then began my career with Wells Fargo. For five years, I worked on a team specializing in retiree medical valuations. Other projects included plan design studies, estimates of incurred-but-not-reported medical claims, mental health parity testing, budget projections, and Medicare Part D creditable coverage determinations.

In the fall of 2012, I left Wells Fargo to start my own consulting practice: Liability Analytics LLC. I wanted to offer my clients a new option for actuarial services. I offer lower prices and better service than my corporate competitors. In the corporate firms, management has become obsessed with maximizing billable hours. Actuaries are rewarded for churning out as much work as possible, with little attention paid to their clients’ needs. Work is also sent down the ladder as far as possible. With a significant percentage of each project completed by entry-level analysts, or outsourced to other countries, the quality of work is questionable. I prefer to perform all analysis myself, as small mistakes can often lead to large errors in my line of work. If you would like to work together, check out www.liabilityanalytics.com for samples of my work. I can be reached via email at [email protected], or by cell phone at (615) 946-1496.

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About the Author


The first edition of this e-book was released on March 21, 2013. Since then, I have continued to study various health insurance topics and have been regularly writing new material. This e-book originally contained 25 articles and 5 book reviews, for a total of exactly 100 pages. For the second edition, I expanded my coverage of plan monitoring issues and added a section on rural versus urban healthcare issues. I also added a Sources page, to give credit to the academics and analysts who helped make this e-book possible. The second edition expanded on the first by a total of 23 pages. The following table outlines the updates I made:

Updates from First Edition to Second Edition

New Articles

Understanding Underwriting Cycles (Page 80)

IBNR Methods: Beyond the Basics (Page 83)

Rural Healthcare: Access Issues (Page 114)

Going Broke: Rural Out-of-Pocket Spending (Page 117)

Rural Hospitals: A Mortality Study (Page 120)

New Material

Sources Page (Page 168)

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Updates for the Second Edition


For the third edition, I prepared 5 more articles and 1 more book review, totaling 19 pages of additional content. The third edition update focused on some of the more cutting-edge plan design issues, and added a new book review. The following table provides the details:

Updates from Second Edition to Third Edition

New Articles

Is Alternative Medicine Becoming Mainstream? (Page 54)

The True Impact of Health Appraisals (Page 58)

Losing Weight … at the Office (Page 61)

Holding Employees Accountable: An Ethical Discussion (Page 63)

Evidence Based Medicine: Issues for Mental Health (Page 105)

New Book Reviews

Why Nobody Believes The Numbers (Page 161)

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Updates for the Third Edition


For the fourth edition, I made many aesthetic changes to give the book a more professional appearance, and added some more pictures to keep things interesting. Although this update was mainly a visual one, I did add a few short articles and a new book review. The following table provides the details:

Updates from Third Edition to Fourth Edition

New Articles

Recent Declines in Prescription Drug Trend (Page 78)

Have We Really Achieved Parity? (Page 111)

What is your Doctor’s E-mail Address? (Page 132)

New Book Reviews

The Stem Cell Hope (Page 158)

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Updates for the Fourth Edition


This edition included a major reorganization. This book has expanded by more than 70% from its first edition, and the original sections were starting to get cramped. I have split the healthcare reform section in two: one on the Affordable Care Act and one related to reform issues not yet addressed. I have also added a section on care management programs. The order of articles was also adjusted to group similar topics together. For this edition, I have added 5 new articles, with a focus on healthcare reform issues. The following table provides the details:

Updates from Fourth Edition to Fifth Edition

New Articles

The Current State of Health Policy Research (Page 126)

Don’t Forget the Neglected Diseases (Page 128)

Would You Like to Add a Warranty? (0)

Breaking Through Language Barriers (Page 134)

A Hidden Issue: Medical Fraud (Page 136)

New Material

How To Read This Book (Page 7)

Acknowledgements (Page 167)

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Updates for the Fifth Edition




Accounting for Plan Amendments

Should I Fund My Retiree Medical Plan?

The Past, Present, and Future of Discount Rates


Lifetimes, They are a-Changing

Do You Know When to Cash Out?

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Section I: Retiree Medical Valuations


Shopping around for an actuary can be a confusing process, especially considering that most of the large corporate firms are almost indistinguishable from one another. When evaluating potential actuaries, it helps to have a set of criteria by which to judge any possible consultant. I believe any good actuary should be able to provide their clients with four things: high quality work, fair and affordable rates, easy accessibility and an interpretation of actuarial results which makes the material easy to understand.

High Quality Work

In order to produce quality work, an actuary needs to have the following characteristics: a thorough working knowledge of the academic and real-world material, a high level of attention to detail, and a refusal to cut corners. Becoming an actuary requires the completion of a lengthy and difficult examination process, as well as a commitment to continuing education. By the time this process is complete, new actuaries often already have multiple years of experience in the field. Any credentialed actuary should possess all the expertise necessary to complete basic projects. If they do not have enough experience for a specific project, a responsible actuary will decline to take on a project for which he is not adequately prepared.

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While the actuarial profession does an excellent job of training new actuaries to solve today’s complex problems, I believe many actuarial firms fall short when it comes to the other criteria I mentioned: attention to detail and refusing to cut corners. In larger actuarial firms, it is common for credentialed actuaries to spend their days checking over the work of entry-level analysts who complete the preliminary data work and programming. Unfortunately, it is much easier to overlook an error when you take a high-level view than when you see each and every step in the work process. To make matters worse, what may seem like a very small programming error can lead to very large changes in results. Many actuaries also take the viewpoint that errors should only be corrected if the results would be “significant”. I believe we should instead strive to get things right, even if that means putting in a little extra effort. Some changes that may seem immaterial could actually lead to large gains and losses.


Fair and Affordable Rates

Any actuarial project should be priced at a rate that is fair and affordable. I believe this is another area where the actuarial field has room for improvement. Actuaries are most commonly paid an hourly rate. This is necessary for some projects where the time to completion could vary significantly, but this is rarely the case for many actuarial reports, including both actuarial valuations and IBNR calculations. Hourly rates provide no incentive for actuaries to complete work efficiently or in a timely manner. On the contrary, this system rewards actuaries for dragging out projects longer than necessary. I believe clients deserve to know upfront the full cost of each project. I also believe actuarial services should remain affordable. Many actuaries charge hundreds of dollars an hour. They tell themselves these rates are justified because all their competitors charge similar rates. If they were honest with themselves, they’d admit that they’ve simply charged the highest rate they thought they could get away with. I offer rates significantly lower than my competitors, often leading to thousands of dollars in savings.

Easy Accessibility

Customer service should be a top priority for any professional. Although we all have busy schedules, you should never have to wait long to hear back from your actuarial consultant. Even if a response does take a long time to develop, you should be kept up to date on the status of the project. All too often, I’ve seen clients put on hold while consultants worked on projects for higher profile clients. If you come to me with a question, I’m going to respond promptly. And my work number isn’t an office line that’s available from 9 to 5; it goes to my personal cell phone, which is never far from my sight.


Easy to Understand Language

As actuaries, we have access to numerous techniques and calculations unknown to the general population. Despite this gap in expertise, any good actuary should be able to relate actuarial concepts in a manner that their clients can understand. My reports contain a lot of actuarial jargon by necessity, but I have included additional sections to assist the reader. Each report contains an Executive Summary outlining both the main points of the project as well as any significant changes from prior years. My valuation reports also contain a Glossary of Terms to make the accounting terminology more comprehensible.

Conclusion

When you choose an actuary, it should be a straightforward process that leads to a long-term relationship. However, if you’re reading this, you’ve probably found your prior actuary lacking in some respect. Maybe they provided low-quality work, charged too much, didn’t respond promptly to your questions, or couldn’t provide results in plain English. In any case, you deserve better. Hold any actuary you hire to the standards described above, and you should be pleased with the results.


In my years as an actuary, I’ve found that the majority of people who read a valuation report only take the time to understand a few key figures. They get scared off by the actuarial jargon and assume that they’ll never understand the full report. While I can’t get rid of the jargon, I think most would feel much more comfortable if they had a high-level understanding of the report. This article is meant to give you a broad overview of the accounting process so you can extract the key message of your report.

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“Other Postemployment Benefits” (OPEB) refers to all employee benefits offered to retirees, with the exception of pension plans. Although these benefits aren’t received until after an employee has retired, they are earned over the course of the employee’s working years. If an employee has worked half the necessary time to receive postretirement benefits, you need to recognize a liability equal to half of the present value of their expected benefits. This liability needs to be calculated regularly so it can be reflected in your financial statements.


FASB Accounting Standards Codification 715-60

This document covers the accounting treatment of OPEB benefits for private employers. Under FASB accounting, your liability is referred to as your “Accumulated Postretirement Benefit Obligation” (APBO). Your APBO is slowly accrued on your financial statements. The amount that has been accrued to date is referred to as your “Net Amounts Recognized”. The amount you still need to accrue is referred to as your “Accumulated Other Comprehensive Income/Expense” (AOCI). The amount you accrue each year is referred to as your “Net Periodic Postretirement Benefit Cost” (NPPBC). This is more casually referred to as that year’s expense.

GASB Statement No. 45

This document covers the accounting treatment of OPEB benefits for governmental employers. Under GASB accounting, your liability is referred to as your “Actuarial Accrued Liability” (AAL). If your plan is funded, your “Unfunded Accrued Liability” (UAL) is the AAL decreased by the current value of all assets held within an irrevocable trust. Your UAL is slowly accrued on your financial statements. The amount that you have accrued to date is referred to as your “Net OPEB Obligation” (NOO). Every year, your NOO is increased by your “Annual OPEB Cost” and decreased by the payments made for postretirement coverage and any contributions made to fund these benefits.


This article describes how plan amendments are treated in a private employer’s financial statements according to FASB Accounting Standards Codification 715-60 (formerly Statement of Financial Accounting Standards No. 106, as amended). This applies to the majority of private employers who offer postretirement benefits other than pensions. It does not apply to governmental entities, who are subject to Governmental Accounting Standards Board Statement No. 45, or to insurance companies subject to Statement of Statutory Accounting Principles No. 92.

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Accounting for Plan Amendments


With the cost of health insurance rising every year, plan sponsors are looking at every option to cut costs. Whether it’s increasing contribution schedules, freezing benefits, or reducing covered benefits, these plan amendments can not only help your annual cash flow, but can significantly decrease your postretirement medical liability. You’re probably used to seeing gains and losses every year, and are used to seeing a portion of these gains and losses amortized every year in your annual expense. Plan amendments are amortized in a similar manner, but the calculation is a little different.

Every year, a company’s aggregate unrecognized gain/loss is reduced in magnitude when a portion of the unrecognized amount is amortized within the Net Periodic Postretirement Benefit Cost (expense). At the end of the fiscal year, all new gains and losses are added into the new unrecognized amount. Plan amendments are tracked separately from other gains and losses. The initial change in liability associated with the plan amendment will be amortized in equal amounts over a fixed number of years. For most plans, the amortization period is the average remaining years of service until full eligibility for employees not yet fully eligible. This is usually, but not always, a shorter period than is used to amortize gains and losses. If there are very few participants not yet eligible for benefits, an alternate method is used. For these plans, the amortization period is the average remaining lifetime for all plan participants. Although these methods are recommended by the accounting standard and the ones most commonly used, alternate methods can be allowed if they amortize the unrecognized amounts more rapidly.


An exception applies to plans that have had multiple plan amendments. If you have a plan amendment that increases your liability, and later have another plan amendment that decreases your liability, the later amendment is first used to counter the original amendment. The aggregate amount is then amortized. Note that this only works one way. If your first plan amendment decreases your liability and your second increases your liability, the second plan amendment will be amortized on its own according to the rules outlined in the preceding paragraph. If you decide to amend your plan, give me a call and I can help you determine the expected impact on your financial statements.


This article discusses the pros and cons of funding your postretirement benefit obligation. As the vast majority of private employers have shown little if any interest in funding these benefits, this is written from the perspective of a governmental employer.

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Should I Fund My Retiree Medical Plan?

Historically, very few employers have set aside funds to pay for postretirement medical coverage. However, the percentage of governmental employers who fund benefits is growing. Funding strategies vary considerably based on the type of employer: school systems are often the hardest strapped for cash and are very unlikely to fund benefits; plans for general government employees (possibly including fire and police) are somewhat more likely to fund benefits; utility companies are the most likely to set money aside. Regardless of what type of organization you’re part of, everyone that offers postretirement medical coverage needs to weigh the pros and cons of funding. The following items all need to be carefully considered when making this decision.


Pro – Benefits Become More Secure

Every time a major corporation or city reduces or eliminates benefits, your employees are going to hear about it and wonder if they’re next. Even if you have no intention of taking away coverage, they may be unlikely to take you at your word. By funding benefits via an irrevocable trust, you send the message that these benefits are permanent. It may be difficult or even impossible to spend this money on other purposes. Funding also protects the benefits from corporate raiders. Though hard to quantify, this should lead to an improvement in employee morale and decreased turnover.


Pro – Better Accounting Figures

If you’re a governmental employer with a postretirement medical plan, you’ve probably received an actuarial report every year or two outlining your “Annual Required Contribution” and “Annual OPEB Cost”. These figures can be greatly reduced by funding your plan. They contain an amortization of your unfunded liability, which is the accrued liability directly reduced by the plan’s assets. Your “Net OPEB Obligation” is also reduced every year by the amount of the employer contribution. On a side note, the “Required” in “Annual Required Contribution” is a bit of a misnomer: you are under no legal obligation to prefund these benefits.

Pro – Tax Advantages

Depending on the funding vehicle used, there may be tax advantages. If you use a VEBA (Voluntary Employees’ Beneficiary Association), for example, the contributions to the trust are tax-deductible (up to a limit). Assets will also experience tax-deferred growth, which might not be the case if used for other purposes. Before you make a decision to fund, you should speak with an investment advisor to review the various funding vehicles, each of which has its own advantages and disadvantages.


Con – Money Can’t Be Invested Elsewhere

One of the most commonly stated reasons why private employers don’t fund their postretirement benefits is that they can earn a higher rate of return by investing those assets back into the business. Governmental employers may not have to focus on shareholder returns, but most I’ve talked to have a long list of programs they would like to fund if only they had money to spare. By funding postretirement medical benefits, you are foregoing some of these opportunities.

Con – Assets Set Aside Are Not Flexible

Earlier, I mentioned that assets set aside in an irrevocable trust cannot be taken out for other purposes. This was listed as a positive aspect, as it gives employees added security. But if your company is having a cash flow problem, this could quickly turn into a negative. Some employers even choose to set money aside in a general fund, which cannot be considered funding for accounting purposes, rather than in an irrevocable trust. Even though their financial statements don’t show any improvement, they retain the flexibility to use these assets in whatever way they deem best for the company.


This article describes discount rates as used for valuing postretirement medical benefits for private employers. It does not apply to governmental employers.

In an effort to stimulate the economy, the Federal Reserve is pumping billions of dollars into the market, which is sending all interest rates to record lows. For some, this is a blessing: mortgage rates recently hit record lows, with the nationwide average approaching 3.5%. For others, this is a curse. Investors are looking for any opportunity to chase returns that seemed commonplace a decade ago. But there have been other victims that go unnoticed, including employers with retiree medical coverage. A decrease in the discount rate often leads to a significant increase in a company’s actuarial liability for postretirement benefits.

According to the accounting requirements (from Statement of Financial Accounting Standards No. 106), the discount rate should be based on “rates of return on high-quality fixed-income investments currently available whose cash flows match the timing and amount of expected benefit payments.” The industry standard table of rates is the Citigroup Pension Liability Index. The graph on the following page summarizes the expected discount rate from the beginning of 2010 to the present.

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The Past, Present, and Future of Discount Rates


Rates have clearly been on a downslide, and no one has been immune. Ben Bernanke, the Fed Chairman, has said rates will stay low through 2014. I won’t pretend to know where interest rates are headed in the coming years, but it seems as if things aren’t going to get better in the near future. If you’ve recently experienced a loss due to a change in the discount rate, you may have to wait a few years to see a reversal of fortune.

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3%

4%

5%

6%

7%

1/1/10 7/1/10 1/1/11 7/1/11 1/1/12 7/1/12

Historical Discount Rates


As healthcare costs have risen, some employers have found themselves unable to afford continued coverage for retiree health benefits. Rather than terminate their plans, many have begun passing the full cost on to the retiree. If required to pay the full premium, older retirees will often drop coverage and rely on Medicare to pay for their health expenses. Those not yet old enough to enroll in Medicare will often continue on their employer’s plan. They may be trying to avoid the hassle of looking for individual coverage, or they may fear they won’t find coverage due to a pre-existing condition. Either way, employers are often indifferent to the situation; they believe that all costs are borne by the retiree. However, there are often very real costs to the employer, due to something referred to as an implicit subsidy.

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$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

20 25 30 35 40 45 50 55 60 65Age

Medical Costs by Age

Expected Cost for Employees

Expected Cost for Retirees

Average for All Participants

Average for Retirees


Suppose you have a medical plan that provides benefits to both employees and retirees not yet eligible for Medicare. Your insurance company takes the claims experience of this entire group and sets monthly premium rates of $400 for individual coverage and $1,200 for family coverage. Each of your covered retirees sends in a check each month for this full amount. But this check is likely less than the amount the retiree will spend on medical services. As we age, our medical expenses tend to increase every year. The retiree population, being older than the general population, will have higher claims than the average participant. Even though you aren’t giving any actual cash to help them make premium payments, you are giving them an implicit subsidy by not requiring them to pay their true cost of coverage. This implicit subsidy can be felt in two different places: it will increase the plan’s premiums in future years and it has to be included in the plan’s postretirement actuarial valuations. If your goal is to pass on the full cost of coverage, you should consider requiring higher contributions for your retirees.


Looking through my valuation reports, you’ve probably noticed a lot of differences from reports you’ve received in the past. One thing you probably missed was the change in mortality rates. Only two words were added, “fully generational”, but these two words represent a significant change in methodology. Your previous report may have mentioned a mortality table of “RP-2000” or “1994 GAM” or maybe just “IRS Mortality”. These tables are simple to understand: for every age, there is an assigned probability of death. There may be different rates for males and females, but otherwise the same rates are used for every participant every year. These tables ignore a very important fact: my life expectancy is greater than my parents’, and my children should have a greater life expectancy than me. As medicine improves and societies become wealthier, people tend to live longer. Fully generational tables apply a scale every year to reflect these improvements in mortality. In my valuations, a 40 year old in 2013 has a better chance of survival than a 40 year old in 2012. While it’s great that we get to spend more years on this earth, this also leads to an increase in your calculated liability, as your plan must provide health benefits for a longer period of time. These new generational mortality rates provide a higher level of accuracy in your valuation results.

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Lifetimes, They are a-Changing


Age Liability Before

Liability After

$ Increase % Increase

25 84,000 99,000 15,000 18% 30 153,000 178,000 25,000 16% 35 210,000 241,000 31,000 15% 40 256,000 289,000 33,000 13% 45 292,000 325,000 33,000 11% 50 322,000 353,000 31,000 10% 55 297,000 320,000 23,000 8% 60 204,000 221,000 17,000 8% 65 121,000 132,000 11,000 9% 70 93,000 101,000 8,000 9% 75 70,000 74,000 4,000 6% 80 51,000 53,000 2,000 4%

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So, how much will this increase your liability? For a plan that only provides benefits prior to Medicare eligibility, the impact will likely be immaterial. For plans that offer benefits for life, the impact will vary for every plan, but a simplified example can give us a general idea. Suppose your plan has an individual premium of $15,000 per participant prior to Medicare eligibility and $5,000 for those eligible for Medicare. Costs are expected to increase 7% per year. Your discount rate is 5%. Every employee is hired at age 20 and retires at age 55. Your actuary decides to move from a mortality table projected to the valuation year to a fully generational model. The table below shows the approximate savings for participants based on their current age.


Costs for retiree medical care are increasing at rates far greater than general inflation. Retiree medical plans also come attached with numerous regulatory and administrative tasks which can be a burden on small businesses. While it may be tempting to simply shut your plan down in order to avoid these problems, this is not something that should be done lightly. If your employees have been counting on postretirement medical insurance, they aren’t going to be happy if these benefits are suddenly taken away. If your employees are unionized, it may not even be possible to take away these benefits, depending on the contracts in place. However, there is one way to take away retiree medical coverage that most employees will actually encourage: offer a lump sum cash-out option.

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Do You Know When to Cash Out?


By offering a lump sum to your employees, they will still receive the compensation they “earned” over their work history, but you get to substitute one fixed payment for a lifetime of uncertain payments. If offered a fair price, most employees will actually prefer a lump sum to lifetime benefits. There are a few things I must caution you on, however. The first is that this lump sum will be taxable to the employee. The second is that the money can be used for anything. Sadly, most employees would rather splurge on a new car or vacation than set money aside for medical care decades in the future. Some employers feel the need to protect employees from themselves, while others think their employees should be free to make their own decisions. Your company’s management must decide which position to take.

In the past, many were concerned that retirees would not be able to find coverage on their own. Now that health care reform legislation has been ruled constitutional, you can be confident that, beginning in 2014, coverage will be available via newly created exchanges, even for those with pre-existing conditions. This coverage may seem expensive, but your employees will always have an option available.

There is another important factor to consider: the amount of the lump sum. As an actuary, I have the tools to calculate the expected liability for each person, but you will have to make many decisions in the process. For most plans, retiree insurance offers a greater value to married participants than single participants, but single employees aren’t going to be happy if you offer a greater lump sum to their married coworkers, not to mention that this could greatly increase your legal risk, as it could be interpreted as discriminatory.


You must also determine how you want to assign benefit accruals. For accounting purposes, employees earn a portion of their benefit every year from date of hire to the year they become fully eligible. For example, if retirement eligibility is age 55 with 5 years of service, a 55 year old hired 5 years ago would have earned his full benefit, while a 30 year old hired 5 years ago would have earned only 20% of his benefits. Some employers prefer to have employees accrue benefits solely based on service, to ensure that employees earn an equal amount for each year of work. One good thing about these cash-out calculations is that you are not encumbered by accounting regulations. You can make any changes to methodology or assumptions that you feel like making. In particular, many employers consider adjusting the discount rate, an assumption that can have a large impact on any present value calculation.

If cashing out of your retiree medical liability sounds intriguing, feel free to give me a call and I can walk you through some of the issues. I also recommend you speak with an attorney prior to any such action. There may be legal issues to consider, especially if your plan has any form of benefit contract in place. Although it may seem like a hassle to deal with these issues, the long-term hassles you avoid, year after year in the future, may outweigh short-term problems. It is also worth mentioning again that many employees will prefer this option, provided they are offered a fair amount and are given a choice, rather than feeling forced into the change.




Frozen Benefits: Avoiding Medical Inflation

Is Stop-Loss Insurance a Ripoff?

Coordinating Retiree Health Plans with Medicare


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Section II: Plan Design Issues


After I deliver the results of a retiree medical valuation, it usually doesn’t take long for the phone to ring. Questions often start out simple enough: asking me to explain actuarial terminology or outline changes that have occurred since the previous valuation. But the questions quickly turn to a more complex subject: how can the company reduce its postretirement medical liability? In some cases, there may be some low-hanging fruit that allows for significant savings with little downside. Unfortunately, more often than not, there are no options to reduce this liability without negatively impacting a plan’s participants. In these situations, I typically mention various cost saving measures the client can use to bring down expenses. Although every plan is unique, the items reviewed in this article might be reasonable options to consider if you’re eager to cut costs.

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For clients with fully insured medical plans, I often ask whether or not they’ve considered self-funding these benefits. With a self-funded plan, you accept all the risks associated with the plan and pay a TPA (third party administrator) to handle the administrative work, including plan enrollment and claim processing. This coverage is often significantly cheaper than a fully insured plan. Many companies who self-fund elect to purchase stop-loss coverage to remove the risk of catastrophic claims experience. For further discussion on whether or not to purchase stop-loss coverage, see my article “Is Stop-Loss Insurance a Ripoff?” (page 49).

Approximately 85% of plans require some level of employee contributions. However, the vast majority of these employees are contributing less than half the cost. With claims increasing every year, contributions must increase by a similar percentage or the employer will end up shouldering a greater burden every year. I suggest taking a close look at your contribution structure every year. Be sure to check out my article “Employee Contribution Strategies” (page 43) to give you some items to consider.

The majority of medical plans today use some form of managed care. If you are still using an indemnity plan, you should definitely consider switching to a plan that does more to control costs. Even if you are in an HMO, PPO, or POS plan, you should think about moving to a consumer driven health plan. These plans give the employees more responsibility for their health care, often leading to greater efficiency and cost savings.


One of the most popular movements in employee benefits is the implementation of wellness initiatives. While the savings from these programs can be hard to quantify, most experts agree that they present a good opportunity to simultaneously save money and make your employees a bit healthier. If you speak with your broker, they can provide you with more information on the programs available.

Although it may seem obvious, one of the best ways to save money is to shop around. If you have stayed with the same insurer or TPA for years, it might be time to consider other options. Even if you don’t find a better deal, there’s no harm in looking. This may even push your current insurer to lower your premiums.

Many employers, frustrated with escalating medical costs, are moving to plans that subsidize coverage rather than offer it themselves. They provide their employees with a fixed amount each month they can use to pay for coverage. In this setup, it is the employee’s responsibility to find individual coverage in the market. This has been avoided historically because employers feared that employees would be unable to find affordable coverage due to pre-existing conditions. In 2014, exchanges will be created to provide coverage that cannot exclude for pre-existing conditions. I expect a significant increase in fixed-dollar subsidies to occur in 2014.


Another option to stem the tide of medical inflation is to freeze benefits. Under this scenario, an employer would promise to continue paying the current level of benefit, but any cost increases would be passed on to employees in the form of increased contributions. This system is similar to the subsidy system described in the previous paragraph, but with the employer continuing to offer a group plan. This provides more convenience to the participants, but the employer must continue to deal with administrative work. Take a look at my article “Frozen Benefits: Avoiding Medical Inflation” (page 47) for more information on freezing benefits.

When accounting regulations began to require recognition of postretirement benefits in a company’s financial statements, many companies tightened their eligibility requirements for postretirement coverage. You need to carefully consider which employees you feel deserve coverage and to what degree. Many companies are now tying benefits to years of service. With this setup, an employee who retires with 20 years of service would receive greater benefits than one who retires with 10 years of service. This change will do little to reduce costs in the short-term, but in the long run it could bring your plan considerable savings.


For plans that offer coverage to retirees, one of the easiest ways to cut costs is to pass them on to Medicare. If you don’t require your retired participants to enroll in Medicare Parts A and B, I highly encourage you to add this requirement to your plan. If you pay the Part B premium, plan costs will actually decrease with no added cost for the plan’s participants. If you already require Medicare to pay primary, you need to make sure they are being coordinated properly. For a discussion of the different methods of coordinating with Medicare, take a look at my article “Coordinating Retiree Health Plans with Medicare” (page 51). If you offer drug coverage for retirees, I believe the best option for coverage is an employer group waiver plan with a wrap (EGWP). For an explanation of EGWPs, take a look at my article “What is an Egg Whip?” (page 95).

Another cost saving measure is to remove the effect of leveraging on your deductibles and out-of-pocket maximums. This is a problem many plan sponsors don’t even know they’re dealing with. Leveraging occurs when deductibles do not change from year to year, which allows medical inflation to shift costs from participants to the plan. Take a look at my article “The Hidden Danger of Deductible Leveraging” (page 73) for a more detailed look at leveraging.

The options listed above are only a few of the potential cost saving measures you could use. Before making any decisions, you should try to quantify the savings that would result from a change. You also need to consider the impact this could have on your employees, and involve them in the process early on. Although they’re likely going to be angered anyway, letting them know about benefit changes early on will make the transition go more smoothly than surprising them at the last minute.


This article mentions numerous statistics taken from the 2011 Annual Employer Health Benefits Survey conducted by the Kaiser Family Foundation and the Health Research & Educational Trust. The full survey can be found at ehbs.kff.org.

Health insurance rates are increasingly rapidly. Employers, already struggling under poor economic conditions, are finding it more and more difficult to pay the premiums. The average premium for family coverage has risen from $7,061 to $15,073 over the past ten years. But it’s not just employers that are feeling an added burden. The average employee contribution for family coverage has increased from $1,787 to $4,129. But these employee contributions do more than just transfer costs. If designed properly, contributions can be used to steer employees toward efficient coverage options. This article will not attempt to design a perfect contribution strategy; this will differ for every company. What it will do is highlight some important items to keep in mind when you determine next year’s rates.

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The majority of your employees have spouses and children that they will wish to cover. Spouses tend to be more expensive than employees. For some, the spouses are more expensive because the healthy spouses can get coverage elsewhere, while the unhealthy are forced to join their spouse’s plan. Employees also tend to be healthier, as they must be an active part of the workforce. It is common for plans to discourage spousal coverage via increased contributions. This can be seen in the survey data: employees with individual coverage pay 18% of the cost on average; employees with family coverage pay 28%. I suggest reviewing your claims experience to determine how much more expensive spouses are than members, and consider setting rates to discourage spousal coverage.

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0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Average Premium for Family Coverage

Employer's Share

Employee's Share


Another tricky aspect can be deciding how many tiers of coverage to offer. Should a family with two children pay more for coverage than a family with one child? For every tier you add, you will more accurately tie an employee’s cost to their premium, but you will also increase the administrative complexity of the plan. Generally, I would recommend having at least four tiers of coverage: individual, employee + spouse, employee + child (or employee + children), and family.

Another factor to consider is the rate structure for retired employees. We readily accept that an employee who retires with 20 years of service deserves a better pension than someone who retires with 5 years of service. But within most companies, these retirees would pay the same premium rates for postretirement medical care. Some companies are now adjusting rates for employees based on years of service. For example, those with less than 5 years of service would contribute 30%, those with 5 to 10 years of service would contribute 20%, and those with more than 10 years of service would contribute 10%.

Many plans are now offering separate rates for smokers and non-smokers. Smokers typically cost about 25% more than non-smokers. By increasing premiums for this group, you provide added incentive to stop smoking, thus reducing the plan’s expected claims. Note that the rates charged to smokers cannot be more than 120% of those for non-smokers. Some feel that this added complexity isn’t worth the effort, but charging a higher rate for smokers is a practice that is growing in popularity.


For those who offer multiple plan options, there is extra incentive to think through an ideal contribution strategy. By offering lower rates for a plan, you can steer employees to choose the most efficient option. This is often used by employers who have implemented consumer-driven health plans. These plans often have significant cost savings over traditional PPO and HMO options. Note that the cost savings from steerage will likely be significantly less than the difference in premiums. A significant part of the savings associated with these plans is due to the healthier population choosing these plans with greater frequency than their unhealthy coworkers.

When it comes time to set contributions for the next plan year, don’t merely increase all the rates by the same percentage rate. This is an ideal time to take a step back and think about your goals for the plan and design a contribution strategy that helps achieve those goals.


It’s no secret that health insurance costs are rising, year after year, with no end in sight. Politicians on both sides of the political aisle have promised that better times are ahead, but as someone who studies health insurance for a living, I’m not getting my hopes up. Even if we do make improvements to the system to eliminate waste and increase efficiency, health insurance costs should continue to increase at a rate greater than general inflation. As societies become wealthier, there’s a limit to how much more we’re willing to spend on nicer cars and televisions, but when a person’s health is in jeopardy, they will always demand the most cutting edge technology and procedures, no matter the cost. With costs rising every year, plan sponsors are looking at every possible solution to stem the tide. One increasingly popular option is to freeze benefit levels.

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Frozen Benefits: Avoiding Medical Inflation


In this tough economy, many employers are struggling more and more every year to pay for health insurance benefits. To make matters worse, there are few things employees fear more than losing health insurance coverage. Many would find it difficult, if not impossible, to find and afford coverage on their own. One compromise is to freeze benefits at their current level and pass any future price increases along to the employee. Employees get the benefit of having access to a group insurance plan (generally with significant savings over individual insurance plans), with part of the cost paid for by the employer. Employers are no longer exposed to the risk of large cost increases. They also often experience a significant decrease in their postretirement medical liability. This can have a large impact on a company’s financial statements with relatively little change in short term costs.

Another option is to limit the amount by which the employer’s contribution toward coverage will increase. For example, let’s say your company has a fully insured plan with premiums of $4,500 for individual coverage. Employees are currently required to contribute 40% of the cost, or $1,800 per year. To protect themselves from medical inflation, you implement a plan amendment limiting the employer’s annual contribution increase to 3%. At the end of the year, the insurer reviews the plan’s experience and decides premiums need to increase by 6%. Without the amendment, premiums would increase to $4,770, with $2,862 paid by the employer and $1,908 paid by the employee. After the amendment, the total premium would still increase to $4,770, but now $2,781 would be paid by the employer and $1,989 would be paid by the employee. The savings to the employer become greater every year in which medical inflation outpaces the stipulated limit. If you are struggling to provide health benefits, I urge you to consider all options before making a decision. Too many plan sponsors consider drastic measures, such as plan termination, when a compromise can keep the plan alive and offering benefits for years to come.


Many employers have found that self-funding their employees’ medical coverage can lead to considerable savings over a fully insured plan. The majority who choose to self-fund benefits end up pleased with the decision, but for a small number the decision can be disastrous. Just one catastrophic claim can cost hundreds of thousands of dollars in unexpected medical costs. By purchasing stop-loss coverage, you can pass this risk on to an insurance company, but it often comes with a hefty price tag. Any plan sponsor with a self-funded plan needs to weigh the pros and cons of purchasing stop-loss coverage.

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Is Stop-Loss Insurance a Ripoff?


There are two different forms of stop-loss insurance: individual and aggregate. Individual stop-loss coverage insures each participant separately. If any participant has claims over a specified limit, such as $100,000, you will not be responsible for any payments over this amount. Aggregate stop-loss coverage insures the group as a whole. If total claims go over a specified amount, such as 125% of expected claims, you will not be responsible for any payments over this amount. Aggregate coverage is usually the cheaper option to protect your plan from catastrophic losses, but you will still have to pay for individuals who experience high claims. An important factor to consider is the likelihood of reaching your stop-loss threshold. The predictability of claims varies significantly by group size. As your plan grows in membership, your claims experience will vary less and less from its expected value. This reduces the value of, and need for, stop-loss insurance.

So, is stop loss coverage a good idea for your plan? Many approach this decision by trying to determine whether or not they’re getting a good deal. Let me save you some trouble: yes, they’re charging you more than they expect to pay you, but no, they aren’t trying to cheat you. The profit margins for insurance companies are often nothing to brag about. Rather than focusing on whether or not stop-loss coverage is worth the cost, I think the better question is whether or not your company could survive a worst-case scenario. If you think your plan is taking on too much risk, I recommend speaking with your broker about stop-loss coverage. These plans now offer numerous options to enable brokers to tailor a plan to your specific needs.


This article discusses the different ways to coordinate a retiree health plan with Medicare. It refers only to traditional Medicare, composed of Parts A and B. For a discussion on how to best coordinate a retiree prescription drug plan with Medicare Part D, please see my article on employer group waiver plans, titled “What is an Egg Whip?” (page 95).

If you offer your retirees lifetime medical coverage, you are passing up significant savings if you do not require them to enroll in Medicare. Even if you do make Medicare primary, you might not be using the best coordination method possible. There are four different options for coordinating your plan with Medicare: Medicare supplement, standard coordination of benefits, exclusion, and carveout.

I think the different coordination options are best understood through the use of an example. Suppose you go to the doctor and get a procedure that costs $10,000. You are enrolled in two different plans: an employer-sponsored plan and Medicare (Parts A and B). Medicare pays $6,000 of the cost. For those not enrolled in Medicare, the employer-sponsored plan would pay 80% of the cost for this procedure. For a Medicare enrollee, the plan payment could vary greatly based on how the employer has chosen to coordinate with Medicare.

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Coordinating Retiree Health Plans with Medicare


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The simplest option is a “Medicare supplement” plan. Using this option, the plan pays the covered charge amount less the Medicare payment amount. In our example, the plan would pay the $4,000 not covered by Medicare.

Supplement payment = $10,000 - $6,000 = $4,000

The “standard coordination of benefits” option (often abbreviated Standard COB) yields a plan payment equal to the lesser of two calculations: the regular plan benefit and the supplement payment. In our example, the regular benefit would be 80% of the $10,000 in covered charges, or $8,000. The supplemental payment would be $4,000. The plan would pay the supplemental amount in this case, as it is the lower amount.

Standard COB payment = lesser of (1) $10,000 * 80% = $8,000 and (2) $10,000 - $6,000 = $4,000


The “exclusion” coordination option reduces the covered charges by the Medicare payment prior to applying the plan’s benefit formula. In our example, the covered charges ($10,000) would be reduced by the Medicare payment ($6,000) before the benefit formula is applied (80%).

Exclusion payment = ($10,000 - $6,000) * 80% = $3,200

The “carveout” coordination option reduces the regular benefit amount by the Medicare payment amount. In our example, the regular benefit ($10,000 * 80%) would be reduced by the Medicare payment amount of $6,000.

Carveout payment = ($10,000 * 80%) - $6,000 = $2,000

These examples are admittedly simplistic. They are meant only to help you understand the different coordination options. Although many plan sponsors pay little attention to their coordination option, this is an item which deserves careful consideration.


This article relies on the research originally presented in a Health Affairs article: “Mainstreaming Complementary Therapies: New Directions in Health Care”, written by Mary Ruggie. The final section, covering the future of complementary medicine, discusses a follow-up article by Richard L. Nahin, Carol H. Pontzer and Margaret A. Chesney entitled “Racing Toward The Integration of Complementary And Alternative Medicine: A Marathon Or A Sprint?”.

Alternative medicine doesn’t have the best public image. For many, it brings to mind new age practitioners smoking herbs rather than going to the doctor to get a prescription. But in recent years, studies have shown some validity to alternative techniques. Many are now using these alternative therapies in addition to traditional Western medicine, leading to the term CAM: complementary and alternative medicine. Every year, these new therapies become more accepted. Popular techniques include acupuncture, massage, herbal remedies, and chiropractic care. In the near future, it appears as if the use of CAM may become the norm for most patients.

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In her 2005 study, Mary Ruggie outlined four reasons for the transformation of alternative medicine from quack medicine to accepted therapy. She credits “(1) growing use, which led to (2) the establishment of the National Center for Complementary and Alternative Medicine (NCCAM) at the National Institutes of Health (NIH), which led to (3) scientific research on the safety and efficacy of CAM, all of which are (4) stimulating physicians’ interest in and acceptance of CAM, albeit conditional.” Americans now make more visits to CAM practitioners than they do to primary care physicians. Health insurers and employers are also taking notice. There is some evidence that cheap CAM therapies may prevent costly surgeries, with very large potential savings. Even if they do not feel confident that cost reductions will result, many are considering adding coverage just to satisfy demand. Some CAM practitioners, such as chiropractors, are extremely popular.

The implementation of CAM relies on a partnership between the medical community and the CAM community. Doctors have historically been opposed to complementary medicine. They are only changing their opinion after numerous studies have demonstrated the safety and efficacy of certain treatments. They are right to demand this level of scientific inquiry, and any improvements in the quality or quantity of research is ultimately in the best interests of everyone (except perhaps for those in the business of selling unsafe or ineffective medicine, but we’re not concerned about them). It is imperative that research continue into all of the various forms of alternative medicine.


So what’s next for CAM? If handled properly, the integration of CAM with traditional medicine will occur at a slow enough pace to allow sufficient research to be conducted, to build the necessary relationships between various stakeholders (including physicians, CAM practitioners, insurers, patients, and business interests), and to determine the optimal way to integrate care most efficiently and with as little distress as possible along the way. This needs to happen sooner rather than later, as alternative medicine is rapidly growing in popularity. We need to ensure that economic interests do not take precedence over scientific evidence in choosing the best course of action.


The True Impact of Health Appraisals

Losing Weight … at the Office

Holding Employees Accountable: An Ethical Discussion


Measuring DM Savings: Two Common Mistakes

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Section III: Care Management Programs


This article relies on the research originally presented in a Health Affairs article: “Health Risk Appraisals: How Much Do They Influence Employees’ Health Behavior?” This study was conducted by Haiden A. Huskamp and Meredith B. Rosenthal.

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The True Impact of Health Appraisals


Health appraisals have become very popular lately. They are part of a growing movement that attempts to reduce costs by focusing on the patient. Over half of large employers offer some sort of risk appraisal to their employees. Over 20% offer a risk appraisal with an accompanying financial incentive. This prevalence allows for measurement and study to determine the impact these appraisals actually have on employee behavior.

Almost all health risk appraisals are voluntary. Although there may be financial incentives to take one, completing an appraisal is very rarely a prerequisite to acquire health insurance coverage. There are noticeable differences between the participants that complete an appraisal and those that do not. Completers are more likely to be female, enrolled in a consumer-driven health plan, and have fewer chronic conditions. As such, it would be misleading to measure the savings of completers against non-completers within the same company. To counteract this, the study’s authors compared the completers to employees with similar characteristics who worked for companies not offering any sort of health risk appraisal.

The results of the study demonstrate a slight increase in cost and utilization due to health appraisals. Completers were found to increase office visits by 3% and get 4% more prescriptions filled. They showed no additional use of emergency room services. Of four different recommended medical tests studied, only one (a test for cervical cancer) was found to increase in prevalence as a result of the health appraisals. Similar tests for diabetes and heart disease showed no significant change.


These results are in line with expectations. For the most part, especially regarding the conditions treatable via a wellness program, we are all aware of our individual risk factors. Obese people know they should lose weight and smokers know they should quit smoking. A health risk appraisal is unlikely to provide any new information, but may be a “wake-up call” for a participant that has put off attempts to change their behavior. As such, the implementation of health risk appraisals will probably lead to improvements in employee health, but the impact will likely be small. Note that this discussion only refers to health risk appraisals, not more in-depth biometric screenings. These screenings, which also include medical tests, can bring to light unknown conditions, such as high cholesterol. They are more likely to lead to behavioral changes. Health risk appraisals are likely here to stay, as they provide a good source of data, are very cheap to administer, and lead to at least a minor improvement in employee behavior. However, if you are serious about lowering healthcare costs, a more vigorous plan is necessary.


It’s no secret America is in the middle of an obesity epidemic. I won’t waste time providing statistics to back up my point; you can see the evidence just by opening your front door and walking down the street. While most would agree that keeping one’s weight under control is their own responsibility, employers are recognizing the benefits of helping out their employees in this regard. This article will discuss survey results indicating popular opinion on employer-sponsored weight-loss programs. All figures referenced are taken from the study “Obesity And The Workplace: Current Programs And Attitudes Among Employers and Employees”, originally published in a 2009 issue of Health Affairs.

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Losing Weight … at the Office


Employee obesity affects employers in numerous ways. Although some effects are hard to quantify, obese employees are more likely to incur insurance costs (health and disability insurance), have lower productivity levels, and miss more work days. It’s clearly in any employer’s best interest to encourage weight loss for its employees. There are numerous options they can consider. Simple options include offering nutritional education and offering healthier options in cafeterias and vending machines. More complicated options include on-site exercise facilities and health risk assessments. There are also options to enhance existing health insurance coverage, such as disease management programs and adding coverage for nutritional counseling or weight-loss surgery.

Based on interviews of employee benefit managers for companies with more than 50 employees, 71% agreed that it was appropriate for employers to get involved in their employees’ weight-loss efforts. However, they aren’t ready to take on all the responsibility. They were far more likely to assign responsibility to employees, physicians, insurers, and even the food and beverage industry. They seem to be interested only to the extent that it will positively affect their financial statements. What’s more, they consider these programs worthwhile only if they can pay for themselves within three years. Employers and employees agree that financial incentives are acceptable, but financial penalties are not. For example, providing a discount to obese employees who participate in a weight-loss program is okay. Requiring obese employees to pay more for coverage would be met with significant resistance (and possibly legal actions).

It is clear that employer-sponsored weight-loss programs are here to stay. If you haven’t considered these changes, now is the time. There are external forms specializing in these programs. It never hurts to at least have them present their options, along with their estimates for employer savings.


This article is based on a piece titled “Financial Penalties For The Unhealthy? Ethical Guidelines For Holding Emploees Responsible For Their Health”, written by Steven D. Pearson and Sarah R. Lieber. It originally appeared in a 2009 issue of Health Affairs. I agree with them on most points, but do have differing opinions on a couple topics, which will be pointed out in the text.

In another article, “Losing Weight … at the Office” (Page 61), I discussed the popularity of employer-based incentive programs and their current status within the healthcare industry. Popular opinion among both employers and employees is that financial rewards are acceptable, while financial penalties are not. As an economics major, I believe that the equilibrium will shift the same way regardless of the mechanism, and that any financial difference between two groups should be treated the same, but that’s a story for another article. What is important is that employers are legally allowed to charge up to 20% more for some groups through the use of wellness programs, and this practice leads to numerous ethical issues that need to be carefully weighed.

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Holding Employees Accountable: An Ethical Discussion


In a 2009 Health Affairs article, Steven D. Pearson and Sarah R. Lieber outline the two primary justifications for these financial penalties. The first justification is that they protect the other members of the workforce. By your voluntary action to not seek better health, you are forcing the plan’s healthcare costs to rise, which in turn will force your coworkers to pay more for insurance coverage in the future. The second justification is that this will encourage your sick employees to maintain their health, making their lives better in the long run. The first justification is stronger and is used far more frequently than the second.

Pearson and Lieber present the argument that it is unethical for us to punish others for things which are out of their control. As an example, they do not feel that it is fair to charge people more for smoking, as they are addicted to this behavior, and unable to voluntary quit. Instead, they suggest charging more for smokers only if they are unwilling to enter a smoker cessation program. By entering a program, they contend that the smoker is doing everything they voluntarily can to quit, and thus should not be punished, even if the program proves unsuccessful. A similar analogy is used for weight loss. Rather than tying penalties to whether or not a participant loses weight, they argue that you should only penalize them if they fail to enter a weight loss program.


I disagree with Pearson and Lieber on this, and I’m going to reference two unexpected sources. I am a fan of the NBC show “The Biggest Loser”, in which overweight individuals compete against one another to lose the most weight. Every season, they choose a new gimmick or theme to base the show around. Recently, they chose the theme “No Excuses”. All of the show’s participants had a different excuse for why they didn’t lose weight: they didn’t have enough time, they didn’t have enough money, their genetics wouldn’t allow them to lose weight, they were addicted to food, etc. Despite these numerous reasons for failure, every one lost weight when they started eating less and exercising. Although there is a small minority who truly cannot lose weight, I believe the vast majority can if they truly put in the effort. To argue otherwise is to be an enabler and shy away from the issue. My second reference is one of the wisest characters is the history of film: Yoda. As he tells Luke Skywalker, “Do or do not. There is no try.” If an employee fails to quit smoking or lose weight, they have done nothing to reduce the plan’s costs or to help their fellow coworkers.

Pearson and Lieber conclude their article by mentioning many good points to consider if you are going to implement any financial penalties. Below are some broad points to consider:

Employees need to be involved in the process from the beginning.

Equal access should be available for any health promotion tools.

There should be an opt-out process for those with valid reasons.

They should have sufficient time to change any behaviors before being penalized.

Penalties should be fair and not designed to force them out of the plan.

The employer should not have access to an employee’s health information.


In his 2009 book Drive: The Surprising Truth About What Motivates Us, Daniel Pink turned a lot of accepted management practices on their head. He brought to the public eye a growing body of research suggesting that the extrinsic motivational staples of rewards and punishments can do more harm than good, sapping us of our natural drive to learn, grow and produce. Having spent nearly five years in a billable hours system, I didn’t need any book to tell me that these structures do not lead to personal fulfillment. However, reading this book did get me thinking about a different outdated management system: managed care in the health insurance industry. I believe the lessons to be learned from intrinsic motivation research provide an opportunity to simultaneously improve the quality of care and lower costs.

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There are numerous mechanisms currently in use to direct participant behavior: PPOs direct participants to providers who have agreed to discounted pricing; consumer-driven health plans encourage participants to choose lower cost procedures and providers; disease management programs offer medicines at lower cost to encourage participants to better control their chronic conditions. The majority of these mechanisms use either rewards or punishments to impact participant behavior. These methods can be an effective means of steering behavior, but they come with two large downsides: they can sap a person’s intrinsic motivations and they can decrease a person’s engagement and creativity. For every managed care mechanism we need to address two questions: will the participant be intrinsically motivated to comply even in the absence of incentives, and does the participant’s behavior have a significant impact on the quality and cost of care?

To take advantage of a participant’s intrinsic motivations, you must concentrate your efforts on plan design mechanisms that affect the patient’s health, rather than the patient’s wallet. The desire to save money is not as deep as a person’s natural desire to lead a healthy life and better themself. You also need to focus on conditions for which participant behavior can significantly impact both the quality and cost of care. If pure compliance is sufficient, extrinsic motivators, in the form of either carrots or sticks, may still be the most effective way to influence participant behavior.


Let’s look at an example case. Requiring higher contributions from smokers puts their focus on extrinsic factors: they need to stop smoking to save money. The problem is that this reduces their focus on intrinsic factors: they need to stop smoking to live longer, healthier lives. Changing this participant behavior can lower their risk of lung cancer, stroke, emphysema, and other costly and life-threatening conditions. The plan could benefit greatly from encouraging the participant’s intrinsic motivations. One possible option is to offer smoking cessation programs and medicines free of charge. By eliminating a possible barrier to change, this would make it easier for some participants to take advantage of their own intrinsic motivation to stop smoking.

Behavioral psychology regarding intrinsic motivation is in many ways a young science, and its theories represent a significant change from the status quo. There are obvious uncertainties that come with any paradigm shift. With health insurance costs high and still on the rise, no one wants to be the guinea pig that experiments with new ideas. But as the SOA tagline reminds us, “Risk is Opportunity”. I believe there is significant room for improvement in our managed care system. I encourage you to take a close look at your plans and consider creative options that could better influence participant behavior.


Implementing disease management (DM) programs seems like a no-brainer for any plan sponsor: your participants will become healthier and your plan will save money by avoiding costly medical procedures. But some experts claim that these plans aren’t all they’re cracked up to be. While there are certainly many studies underway to determine the true value of these programs, this type of analysis can be difficult. There are two problems in particular that need to be considered: regression to the mean and selection bias.

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Measuring DM Savings: Two Common Issues


Regression to the Mean

DM programs are expensive. The resources expended are only worthwhile if patients meet two conditions: they must be at risk for expensive procedures, and their conditions must be responsive to self-care. Unfortunately, we don’t yet possess the techniques and technology to reliably predict when a patient will develop a chronic health condition. Patients are often placed into DM programs only after they have already had very high medical claims. Ideally, these patients will then recover over the coming months and their medical claims will decrease significantly. To the untrained eye, this could be easily interpreted as a success for the DM program: the patient has high claims, then the patient joins a DM program, then the patient has low claims. The problem is that the patient would probably have had lower claims even without participating in the DM program. This is because claims experience exhibits regression to the mean. This means that, for most patients, having claims far from the average is unusual. In future years, their claims are more likely to return to normal levels than to remain drastically elevated.


Selection Bias

The best way to reliably claim the improvement seen in a patient is due to the DM program is to compare their recovery to that of patients not participating in the program who had similar conditions. This is easier said than done. We cannot exclude patients from a life-saving program because it would be convenient for our study. However, as these programs are voluntary, there will often be a small number who do not participate. However, comparing to this population introduces another issue: selection bias. Those who elect to participate in the DM program are those most committed to improving their health. In addition to joining the DM program, they likely are watching their diet more closely, exercising more, and taking their medications with more regularity. These factors are all partially responsible for the patient’s improved health status. It can be difficult to differentiate between savings due to healthy habits and savings due to the DM program.

Addendum

This article was originally written prior to me reading Why Nobody Believes The Numbers: Distinguishing Fact from Fiction in Population Health Management, which is reviewed on page 161. This book does an excellent job of covering this topic and I highly recommend reading it if you would like to better understand the measurement of wellness programs.





Understanding Underwriting Cycles

IBNR Methodologies: Beyond the Basics

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Section IV: Plan Monitoring Issues


It’s no secret that medical claims tend to increase every year. When plan sponsors see a news headline that predicts 10% inflation, they logically prepare themselves for a 10% increase in premiums the following year. But they might not know the full story. Many plans feature unchanging deductibles and out-of-pocket maximums. Over time, this leads to the plan taking on a much greater share of the payments. This effect is known as deductible leveraging, and it can greatly impact a plan’s premium trend.

I believe this effect is best demonstrated via an example. Let’s suppose you have a plan with a $1,000 deductible and 90% coinsurance. In 2012, a patient has a procedure that costs $5,000. The participant would have to pay the first $1,000 and 10% of the remaining $4,000, for a total payment of $1,400. The plan would have to pay $3,600. One year later, the same patient has the same procedure. The plan structure remains unchanged, but the cost has increased by 10% due to medical inflation. The patient would again pay the first $1,000 and 10% of the remaining cost. The total patient payment would now be $1,450 and the total plan payment would be $4,050. Even though claims have increased by exactly 10%, the actual plan payment has increased by over 12%. The figures are summarized in the tables on the following page.

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2012 Claims Experience Patient

Payment Plan

Payment Total

Payment Patient % Plan %

Before Deductible $1,000 $0 $1,000 100.0% 0.0% After Deductible $400 $3,600 $4,000 10.0% 90.0% Total Claim $1,400 $3,600 $5,000 28.0% 72.0%


Payment Plan

Payment Total


Before Deductible $1,000 $0 $1,000 100.0% 0.0% After Deductible $450 $4,050 $4,500 10.0% 90.0% Total Claim $1,450 $4,050 $5,500 26.4% 73.6%

Trend Rates 2012 2013 Trend Patient Payment $1,400 $1,450 3.6% Plan Payment $3,600 $4,050 12.5% Total Claim $5,000 $5,500 10.0%

This effect is not solely seen in deductibles. A similar effect occurs for out-of-pocket maximums. The tables below demonstrate the impact of leveraging on the out-of-pocket maximum. For this example, suppose the same plan design as our first example, but with an out-of-pocket maximum of $3,000 (including the deductible), and now assume the procedure in question costs $25,000 in 2012.


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If you want your employees to share equally in the burden of medical trend, you must regularly increase both deductibles and out-of-pocket maximums. Some plans feature thresholds that automatically increase every year. Some employers choose to redesign these thresholds every few years. Either way, you must address this regularly or leveraging will slowly shift more and more costs to your plan.


Payment Plan

Payment Total


Before Deductible $1,000 $0 $1,000 100.0% 0.0% After Deductible $2,000 $18,000 $20,000 10.0% 90.0% After Out-of-Pocket Max $0 $4,000 $4,000 0.0% 100.0% Total Claim $3,000 $22,000 $25,000 12.0% 88.0%


Payment Plan

Payment Total


Before Deductible $1,000 $0 $1,000 100.0% 0.0% After Deductible $2,000 $18,000 $20,000 10.0% 90.0% After Out-of-Pocket Max $0 $6,500 $6,500 0.0% 100.0% Total Claim $3,000 $24,500 $27,500 10.9% 89.1%

Trend Rates 2012 2013 Trend Patient Payment $3,000 $3,000 0.0% Plan Payment $22,000 $24,500 11.4% Total Claim $25,000 $27,500 10.0%


When plan sponsors make major amendments to their medical plans, they often pay special attention to the claims experience in the months following the amendment. They are looking for a significant drop in benefits to justify the changes they’ve spent the previous months working for. More often than not, they easily find what they are looking for in the new year’s claims experience. Many would be saddened to know the truth: the true savings are often far less than the raw data indicates. Savings appear inflated due to two factors: benefit rush and benefit hush.

When employees hear that changes are coming for their medical benefits, they worry. Often, those who have been putting off going to the doctor try to make an appointment soon after hearing the news. This is understandable for plans that are going to eliminate benefits or remove a patient’s doctor from their network. But this impact is often present even for amendments that do not negatively impact patients. This increased demand prior to a plan amendment is referred to as benefit rush.

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When employees first enter a new plan, they react hesitantly. Some may not have the time to study the new plan details or select a new doctor, so they put off going in for non-emergency visits. Many who went to the doctor previously as part of the benefit rush will have had their health issues resolved and have no need for further medical care. This often creates artificially low claim experience in the first months after an amendment. This is referred to as benefit hush.

These aren’t the only effects to consider when analyzing the impact of plan amendments. Trend from the year prior to the amendment to the first year post-amendment will be lower due to the effects of benefit rush and benefit hush. The benefit hush impact will wear off over the course of the year following the amendment. The following year will therefore appear higher by comparison. This inflates the observed trend rate from the first year to the second after the amendment. The effect benefit rush and hush have on trend is known as trend crush. Some plan sponsors get discouraged by the heightened trend, fearing that the savings they observed were only temporary and have now been erased. Be aware that while the trend increase may seem excessive, it should return to normal levels in future years.

Benefit rush, benefit hush, and trend crush are just a few of the hidden effects that can skew plan analysis. Even experienced actuaries have a hard time explaining claims experience, which is made all the more difficult when random variations can significantly skew the data. If you have made a plan amendment which should decrease future claims, don’t spend too much time obsessing over the numbers. Instead, accept the results as given and consider further plan amendments if costs are not in line with expectations.


Medical cost increases have been spiraling out of control for some time. This has led to numerous changes within the industry, including alternate methods of provider payment, increased use of wellness programs, and increased cost-sharing by plan participants. Controlling cost increases was also a major objective of the Affordable Care Act. What some fail to recognize is that medical trend contains numerous components, and one of the largest, prescription drug trend, has actually been declining as of late.

I could provide a lot of numbers to demonstrate recent changes in prescription drug trend, but I think a graph can do the job better. The graph below was taken from a study entitled “Prescription Drug Spending Trends In The United States: Looking Beyond The Turning Point”, originally published in Health Affairs.

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There are numerous causes for the recent trend decline:

Blockbuster drugs coming off patent protection

A decrease in the number of new molecular entities

Increased patient acceptance of generic drugs

Formulary changes to encourage cheaper options (i.e. three-tier copay organization)

So what does this mean for you? It’s important to recognize that drug trend will be different for every plan. Plans that are proactive with regards to PBM negotiations, formulary development, copay structure, and participant education can expect significant savings over plans that take a passive approach. Don’t take this article as an excuse to sit back and relax. While patent expirations will be a boon to all plans, other improvements are the direct result of industry actions to control costs.


This article makes use of two sources, each taken from Volume 23 Number 6 of Health Affairs. The first is “The Underwriting Cycle: The Rule of Six” by Alice Rosenblatt. The second is “As the Health Insurance Underwriting Cycle Turns: What Next?” by Joy M. Grossman and Paul B. Ginsburg, which included the graphic below, demonstrating the historical profit cycles of BCBS plans.

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Understanding Underwriting Cycles


Everyone in the business world is familiar with the business cycle. As the economy ebbs and flows, they can watch their company’s financial statements and their personal investments rise and fall with the general economy. Insurance companies are certainly at the mercy of economic conditions, but they are also subject to underwriting cycles. Historically, they have experienced alternating three year periods of profits and losses. While this effect has been minimized, it has most certainly played some role in your year-to-year premium increases.

In a 2004 Health Affairs article, Alice Rosenblatt outlines six causes for these swings in profitability, which I have summarized in the bullets below:

Claim Payment Cycle Time: lags between the incurral and payment of medical claims made it difficult to timely recognize shifts in medical inflation

Renewal Dates and Processes: insurers must begin the renewal process months before the beginning of the upcoming plan year, without full knowledge of the current plan year’s experience

Growth Versus Profit Objectives: after periods of significant growth, management may take actions to improve their competitive positions, which would increase trend rates; when growth slows, they may reverse their decisions

Role of the Actuary: Blue Cross Blue Shield plans used to hire very few actuaries (this is no longer the case), so they lacked the expertise to accurately predict medical trends from the available data

Rate Regulation: Regulators aren’t as lenient with insurers who have large surpluses, so when a company has recently had success, they may not be allowed to raise rates to the levels necessary to remain profitable

Reimbursement Methods: Alternate methods of paying medical providers (i.e. capitation), made it harder to measure trend rates


Actuaries are well aware of the underwriting cycle and have taken steps to reduce its impact. They have been assisted by technological advancements. The lag between the incurral and payment of medical claims has decreased significantly. The amount of data available and the tools to analyze it has also advanced rapidly in the past decade. Although underwriting cycles will never fully disappear, their impact is now significantly less than it was in the past. If you aren’t happy with your premium increases at renewal, it likely has far more to do with poor plan experience than with your insurer’s position in the underwriting cycle. Unless you’re an actuary, you would be safe ignoring everything you just learned when monitoring your plan’s experience, though I hope reading this has at least satisfied your curiosity concerning an oft-discussed health insurance topic.


This article discusses five methods I use to estimate IBNR claims. Each is correct in the broad sense and the format of the calculation; however, they also all include my own personal tweaks, such as preferring to use a geometric average rather than the more commonly used arithmetic average.

There are numerous methods to estimate a medical plan’s IBNR claims (medical claims that have been incurred but not reported). Many plan sponsors simply use an aggregate “lag factor”, which they multiply by the most recent month’s paid claims to estimate IBNR claims. Those who desire more accuracy may even analyze the historical payment patterns via a claims triangle. Unfortunately, there are many other methods to estimate IBNR claims, and they often produce very different results. It is impossible to estimate IBNR claims with perfect accuracy, but by applying multiple methods, you can arrive at a better understanding of your liability. This article will discuss five common methods. When I estimate IBNR claims for a client, I always perform each of these calculations.

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IBNR Methods: Beyond the Basics


Preliminary Lesson: Reading a Claims Triangle

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In the triangles above, data on each row is for the same month incurred. Data on each column is for the same period of duration. Cell A gives the claims incurred in the month of January and paid at duration 0. This means they were paid with a 0 month lag, or paid in the same month incurred. Cell B gives the claims incurred in January and paid in February. Cell C gives the claims incurred in January and paid in March. Going to the next row, cell D gives the claims incurred in February and paid in February. Cell E gives the claims incurred in February and paid in March. It is important to not try to think through things from the standpoint of total paid claims in each month. In the triangles above, the amount paid in March would be F + E + C. This has to be summed along the diagonal. A large payment in March doesn’t necessarily mean that March experience was poor. This large payment could be due to claims in cell E, which were actually incurred in February. In every cell, the aggregate claims triangle shows the total amounts paid to date. It can always be found by summing the values in the original claims triangle.

Original Triangle Aggregate Triangle

0 1 2 0 1 2

January A B C A A + B A + B + C

February D E D D + E

March F F


Preliminary Lesson: Geometric Averages

The geometric average is found by multiplying the N number of items in the group together and taking the Nth root of the product. For a set consisting of all positive numbers, the geometric average will always be less than the arithmetic average. It is most commonly used when dealing with normalized data sets.

Preliminary Lesson: Harmonic Averages

The harmonic average is found by taking the reciprocals for each item in the data set, taking the arithmetic average of the reciprocals, and taking the reciprocal of the average. For a set consisting of all positive numbers, the harmonic average will always be less than both the arithmetic and geometric averages. It is most commonly used when dealing with percentage rates.

Completion Factor Method via Geometric Averages of Durational Claim Ratios

This method uses historical payment patterns to project ultimate claims from known claims. The IBNR claims are calculated by subtracting the known claims from the projected ultimate claims. For each value in the claims triangle, ratios are calculated for the aggregate claims paid in the following month to aggregate claims already paid. The average of these values is calculated for each period of duration. The arithmetic average can give inappropriate results in this scenario. Instead, I prefer to use a geometric average. I usually exclude the minimum and maximum claim ratio from each duration’s calculation. The resulting averages are applied to the triangle to project aggregate claims for each month incurred.


Completion Factor Method via Harmonic Averages of Durational Claim Growth Rates

This method uses historical payment patterns to project ultimate claims from known claims. The IBNR claims are calculated by subtracting the known claims from the projected ultimate claims. For each cell in the aggregate claims triangle, growth rates are calculated for aggregate claims to the next duration. The average of these values is calculated for each period of duration. The arithmetic average can give inappropriate results in this scenario. Instead, I prefer to use a harmonic average. I usually exclude the minimum and maximum claim growth rates from each duration’s calculation. As a reciprocal cannot be taken for the number zero, an arithmetic average is used when any cell in the calculation has a claim growth rate of 0%. This usually only occurs in later durations which are immaterial to the overall results. Calculated growth rates are applied to the amounts incurred and paid to date, yielding the projected aggregate claims for each month incurred.

Projected Claims Method by Duration

Cells in the claims triangle are first adjusted to remove the effects of medical trend and seasonality. Claims are also adjusted to account for the number of days in each month, including additional adjustments for the number of weekend days and federal holidays. Claims are put into a per-member-per-month format by dividing by monthly enrollment. The arithmetic average of the adjusted values is taken for each period of duration. These averages are then adjusted for each period of duration to add back in the effects of trend, seasonality, and enrollment changes. Empty cells in the claims triangle are filled in assuming claims would equal the adjusted average for that duration.


Projected Claims Method by Month Incurred

Ultimate claims are first projected using an alternate method. Claims are adjusted to remove the effects of medical trend and seasonality. Claims are also adjusted to account for the number of days in each month, including additional adjustments for the number of weekend days and federal holidays. Claims are put into a per-member-per-month format by dividing by monthly enrollment. The median of the adjusted values is taken and adjusted for each month incurred to add back in the effects of trend, seasonality, day counts, and enrollment changes. If this figure is less than the claims already paid for that month, an alternate figure must be substituted. This yields the projected ultimate claims for each month incurred.

Bornheutter-Ferguson Method

The claims triangle is first completed using an alternate method. This completed triangle is used to determine the percentage of payments that are made at each duration. For each future cell of the original claims triangle, payment percentages are multiplied by the ultimate claims (also calculated via an alternate method) to estimate claims incurred but not reported. These are added to the known claims to determine the projected ultimate claims.


Caveats

I feel it is necessary to caution you that any of these calculations could produce inappropriate results, even if there are no flaws in your programming. Just one catastrophic claim could produce an outlier data point in the claims triangle and ruin everything. In particular, the Projected Claims Method by Month Incurred will often produce inappropriate results if applied to a period that is almost complete. For this reason, I usually calculate a weighted average that puts little weight on this method in all but the most recent months. Also note that payment patterns change over time, so you could refrain from using claims triangle data from more than a few years back. I also perform calculations using alternate lookback periods, which allows me to put more weight on recent experience, while still taking earlier experience into account.

Conclusion

There are other methods for estimating IBNR claims, but none that are in widespread use. The methods discussed in this article should be sufficient for anyone to estimate their plan’s IBNR claims. You should use caution when using any method, as properly trained actuaries routinely use their professional judgment to modify results. If this doesn’t sound worth the effort, I can perform IBNR calculations for $750 apiece. Otherwise, I hope this article has provided you with the tools to more accurately measure your plan’s IBNR liability.


Pay for Premiums, or Pay the Penalty?

Gold, Silver, and Bronze: Simplifying Actuarial Values


Making Sense of the Cadillac Tax

Accountable Care Organizations: A Patient’s Perspective

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Section V: The Affordable Care Act


The United States stands alone amongst the developed nations of the world in that it doesn’t offer nationalized healthcare to its citizens. For a long time, medical coverage has been considered to be the responsibility of one’s employer. While this used to be merely popular opinion, it will soon be a legal requirement. Beginning in 2014, many employers will either be forced to offer medical coverage or pay penalties to the government in order to help pay for coverage in the new exchanges. Continue reading to determine whether or not these regulations apply to your company, and how much you may have to pay if they do.

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Pay for Premiums, or Pay the Penalty?


There are some companies which will not be required to pay these penalties. If you employ fewer than 50 employees, you are not required to offer medical coverage. For this count, “employee” refers to anyone who works 30 or more hours a week (part-time workers are prorated), not counting seasonal workers (those who work less than 4 months a year). If your workforce consists of mostly part-time employees, you are still exempt if you have fewer than 30 full-time employees.

Even if you do have more than 50 employees, you are only penalized if one of these employees receives a premium credit within the new exchanges. Note that employees are ineligible for these credits if you offer them affordable and adequate coverage. Affordable and adequate, according to the new regulations, means the plan must meet two requirements: (1) cover 60% of medical costs, and (2) have employee premiums for individual coverage less than 9.5% of household income.

Just how much are these penalties? If you don’t offer your employees health insurance, you must pay $166.67 for every full-time employee, excluding your first 30 employees. If you do offer your employees health insurance, you are allowed to use an alternate calculation which may yield a lesser amount. This alternate calculation is $250.00 for every full-time employee who receives a premium credit.


Looking at these formulas, you’ve probably already realized that these penalties are a far cheaper option than paying for health insurance. Looking at this solely as a cash flow issue, you should eliminate coverage and pay the penalty. In the real world, however, eliminating medical coverage is a serious issue not to be taken lightly. This can be a huge blow to employee morale, simultaneously causing an increase in turnover and making it more difficult to attract new employees. If any benefit contracts are in place, which is often the case with unionized workforces, it may not even be possible to eliminate coverage. Before making any decisions, management needs to carefully weigh the costs and benefits of offering health insurance, including the new penalties that came with healthcare reform.


If you’re like me, you got really excited for the London Olympics. For the first time in four years, you found yourself watching volleyball, water polo, and gymnastics. And at the end, you watched the best in the world receive a gold, silver, or bronze medal for their accomplishments. At the end, I knew it’d be two years before I thought about gold, silver, or bronze medals again. I’m not talking about the Winter Olympics, but the new health insurance regulations. Starting in 2014, all insurance plans within the new health exchanges will be assigned a different medal (or metal) tier: gold, silver, bronze, or platinum (you may have heard of these referred to as “the metallics”). Actuarial value is the term we use for the percentage of total costs covered by a plan. For example, if anticipated medical costs are $5,000 per participant and your plan is expected to pay $4,000 on average, the plan would have an actuarial value of 80% ($4,000 / $5,000). To make these values easier to understand, plans will be assigned to different tiers, named for metals.

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Gold, Silver, and Bronze: Simplifying Actuarial Values

Metal Tier Actuarial Value Bronze 60% Silver 70% Gold 80% Platinum 90%


Any plans in the health insurance exchanges will have to target one of these four tiers. Each plan needs to be within 2% of one of these specified actuarial values. Plans can adjust their actuarial values by tweaking the benefits offered or the member cost sharing (a function of the deductible, out-of-pocket maximum, coinsurance percentages, and copays). These tiers provide a simple method for comparing health insurance coverage.


You may have heard the term “egg whip” recently. Despite whatever images this may conjure in your head, an “egg whip” is actually the pronunciation of EGWP, an acronym for Employer Group Waiver Plan. This is a new type of retiree prescription drug plan, coordinated with Medicare, which offers improved savings over the RDS (Retiree Drug Subsidy) program which dominates the market today. Currently, there is a gap in Medicare coverage for prescription drugs, commonly referred to as the “donut hole”. Part of the new health reform legislation requires drug companies to pay a portion of this cost for Medicare beneficiaries. However, these savings are not available to plans who continue to coordinate with Medicare according to the old rules. You must administer benefits via an EGWP to receive any savings. As an added bonus, savings from the implementation of an EGWP can significantly reduce actuarial valuation results. For governmental entities, valuations are not allowed to include reimbursement from the RDS program. In the complex medical insurance market, there are few solutions which can be applied universally. However, I believe any employer offering prescription drug coverage to its retirees needs to seriously consider implementing an EGWP. Brokers and consultants have the opportunity to add significant value by directing clients to these plans.

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President Obama’s health care reform bill, the Patient Protection and Affordable Care Act, was signed into law on March 23, 2010. As one of its provisions, it implemented an excise tax designed to reduce the number of high cost plans. These high cost plans, which came to be dubbed “Cadillac plans” were thought to provide a level of benefits more generous than necessary. Beginning in 2018, a tax will be implemented on plan sponsors for each of these plans.

So what constitutes a “Cadillac plan”. The only criteria is to have premiums greater than a prescribed threshold. The premium thresholds in 2018 are $10,200 for those with individual coverage and $27,500 for those with family coverage. Larger thresholds apply for retiree plans, and for employer plans in some higher-risk industries. These thresholds start at $11,850 for those with individual coverage and $30,950 for those with family coverage. In 2019, these amounts will all increase by a rate 100 basis points above the CPI-U inflation rate. In all following years, they will be tied to the CPI-U rate. Unfortunately, these rates have historically been far below the inflation rates for medical care. If medical inflation continues at a higher rate than general inflation, more and more plans will hit the thresholds as time goes on.

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Making Sense of the Cadillac Tax


So what is the actual tax? The tax will be equal to 40% of the amount over the threshold. For example, suppose you have a fully insured plan in 2018 with premium rates of $10,500 for individual coverage and $28,000 for family coverage. There are 20 employees who select employee only coverage and 15 who choose to also cover dependents. The plan sponsor will have to pay $2,400 for those with employee only coverage and $3,000 for those with family coverage, for a total cost of $5,400.

($10,500 – $10,200) * 40% * 20 = $2,400

($28,000 – $27,500) * 40% * 15 = $3,000


If your plan is rich in benefits, you may soon have to choose whether to accept this new tax or take steps to reduce benefits until your premiums fall below the required thresholds. There is no right answer on whether or not you should amend your plan. You must consider your financial position as well as the needs and attitudes of your workforce. In any case, there should be an ongoing dialogue between every employer and their broker/consultant to ensure that the plan reacts optimally to these new regulations.


There are many different types of accountable care organizations. This article only refers to those that provide services to Medicare beneficiaries as part of the Medicare Shared Savings Program.

As a Medicare beneficiary, you’ve probably seen numerous doctors and filled out your fair share of paperwork. The next time you see a doctor, there’s a chance you’ll be handed one additional form: a notice that the provider is part of an accountable care organization, or ACO. Don’t be embarrassed if you don’t know what this means. I’m an actuary and I had to spend hours searching for info before I felt comfortable claiming to understand ACOs. While I’m not going to get into all the details here, this article should give you everything you need to understand ACOs and how they’ll impact your healthcare.

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Accountable Care Organizations: A Patient’s Perspective


What is an ACO?

An ACO is a group of providers that come together to provide comprehensive medical care. These groups will be very large in size; they must be capable of delivering care to at least 5,000 patients. ACOs use many of the cost management programs historically used by HMOs. The providers share information in order to better coordinate care. They use disease management programs to improve care for those with chronic conditions. But unlike an HMO, the ACO cannot tell you which doctors you can and cannot use. As a patient, you never join an ACO. You are always free to visit any Medicare-participating provider. Every doctor you see, whether a part of an ACO or not, will receive payments on a fee-for-service basis, the same as they did before. But now, the ACO providers are entitled to a separate bonus payment if they meet certain requirements for quality and cost of care.


How Will The ACO Affect My Care?

For the most part, you probably won’t notice much difference in your healthcare. Those with chronic conditions might notice increased attention, but the majority of procedures undertaken will be the exact same as before. The biggest change you’ll notice is that when you go to visit a new doctor or specialist they should have more knowledge of your medical history, as files are now shared between providers. But don’t think that because you don’t notice a difference that you aren’t receiving better care. To receive bonus payments, ACOs must not only reduce costs, but must also meet benchmarks for quality of care. Guidelines will cover five areas: (1) patient/caregiver experience, (2) care coordination, (3) patient safety, (4) preventive health, and (5) at-risk population/frail elderly health. ACOs are required to create processes to ensure that evidence-based guidelines are followed and that efforts are made to better engage patients and tailor care to their unique needs. These changes should lead to improved healthcare for Medicare patients.


The Evolution of Mental Health Benefits



Have We Really Achieved Parity?

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Section VI: Mental Health Benefits


Mental health benefits have come a long way in America. In our nation’s early years, mental health problems were poorly understood. Whereas someone with a virus or heart condition was thought to need help, mental health patients were often blamed for their conditions. Those who had severe mental health issues were sent to an asylum. Those with more manageable conditions were often forced to go without care. Doctors had access to very few legitimate treatments or medicines.

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The Evolution of Mental Health Benefits


Over time, treatment options improved and mental health issues came to be understood as a legitimate medical problem. Private psychiatric wards were created to offer care. Health plans were reluctant to pay for these increasingly expensive treatments, so they placed limits on care. Eventually, separate plans were made to more efficiently manage care for mental health benefits. Mental health services were then carved out of many traditional plans to be covered by these new plans. Many of these plans were organized as MBHOs, or managed behavioral healthcare organizations. They basically acted like an HMO, but only covered mental health services. These plans were initially very effective in reducing costs, but costs quickly began to grow again. A new mechanism was soon created to further manage care: employee assistance programs. These programs seek to provide care early, before more drastic measures are needed. By helping patients at risk for substance use disorder or depression, they can sometimes prevent conditions from worsening.

Mental health benefits are common today. Approximately 2/3 of those who have health insurance are in a plan with managed behavioral healthcare. These benefits are often lumped together with general health insurance to make a comprehensive benefit. As part of the Patient Protection and Affordable Care Act (the recent health care reform legislation), new exchanges will be created with the intent to make care accessible to all Americans. These new plans must offer “essential health benefits”, including care for mental health and substance use disorder. While employers are not required to offer mental health coverage, any company that does offer benefits must offer the same level of benefits for mental health as for physical health. If you haven’t tested your plan for compliance with mental health parity regulations, I recommend reading the following article “The Basics of Mental Health Parity Regulations”.


This article relies on the research originally presented in a Health Affairs article: “Evidence-Based Practice As Mental Health Policy: Three Controversies And A Caveat”, written by Sandra J. Tanenbaum.

On the surface, evidence-based medicine seems like something we should all get behind. Doctors review the data, determine the most effective treatment, and that treatment then becomes the new standard, either through the use of policy guidelines from within the medical community or from outside via policy limitations from health insurers. If I’m in the hospital with any serious condition, my doctor better have a very good explanation if he wants to deviate from evidence-based guidelines. While I can appreciate the need for professional judgment, relying on evidence-based medicine just makes too much sense to ignore. However, in the field of mental health, things aren’t quite so clear. This article will discuss three problems with relying on evidence-based practice for mental health services.

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Problem One: Defining Evidence

In traditional medicine, treatment results are often white and black: someone recovered from a disease or they didn’t. What’s more, there are often proxy variables which can easily be quantified. This could be before and after measures of health statistics, such as white blood cell count, temperature, or blood pressure. With mental health, there is a large gray area. Many mental health patients are diagnosed via a study of their symptoms, often reliant on verbal discussion. How does one quantify the results of a Rorschach test? Another difficulty lies in comparing different study types. In traditional medicine, there is a set hierarchy of test methodologies. Attempts have been made to make a similar hierarchy for mental health practice, but there is still too much controversy to name any current solution the industry standard.

Problem Two: Applying Research Evidence

Compared to traditional medicine, policy guidelines have been ineffective in changing treatment preferences for psychologists. Some insurers are now including evidence-based requirements in their policies, but this is limited and is receiving significant pushback from providers. They stress that much of their success in dealing with patients is the result of individual relationships, rather than actual techniques. This problem is exacerbated by the lack of industry standards for evidence and research, as discussed earlier. Practitioners feel that they have more room for professional judgment, and don’t like the thought of sacrificing this control. Although some techniques may work best for the largest number, they stress that an individual’s circumstances could make an alternative therapy work better in some instances. This is an important consideration, but only works if exceptions are made for individual cases, rather than using this as an excuse for the psychologist to continue using their own preferred methods.


Problem Three: What is Effective?

If a patient goes to the doctor with a virus, the patient and doctor both have the same goal: give me a treatment that gets me back to perfect health, preferably with steps taken to make the interim period more comfortable. With mental health patients, goals might not be so readily apparent. Most would say they want to live a normal life, but what constitutes a normal life? Is it the absence of the mental health disorder? Is it a reduction in the symptoms which allows them to return to prior activities? Is it simply learning to cope with existing symptoms so they no longer interfere to the same degree? Any of these could be a valid goal, depending on the individual patient’s circumstances.


Conclusion

The concept of evidence-based medicine is strong, and one I still feel we should move towards. With all the controversy surrounding the issue, I believe current practitioners should have the ability to use alternate methods if they believe it to be in the best interests of the patient. Rather than prohibit certain techniques, I believe insurers should instead issue guidelines for best practices, but allow psychologists to deviate from them if they are able to demonstrate a valid reason for doing so. It is clear that more research needs to be conducted in this field. As we gather more data, some treatment alternatives will gain more evidence of success, recommending their use in a clinical setting. Evidence-based medicine deserves a place in the mental health services field, we just aren’t quite ready to fully implement it at this time.


This article gives a brief overview of the Mental Health Parity and Addition Equity Act. For a more detailed look at mental health parity regulations, check out my FAQ on the subject (page 139).

Employers are not currently required to offer coverage for healthcare or mental health services. However, those that do offer both types of coverage must do so according to a complex set of rules. In general, the benefits offered for mental health and substance use disorder cannot be inferior to those offered for other healthcare services.

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The Mental Health Parity and Addition Equity Act outlines the tests a plan must pass for mental health benefits to be considered equal to general health benefits. Your plan must pass separate tests for six different classifications: inpatient in-network, inpatient out-of-network, outpatient in-network, outpatient out-of-network, prescription drugs, and emergency care. For each classification, you must determine the type of member cost-sharing that applies to 2/3 of services. Then, you must determine the level of benefit (coinsurance percentage, copay amount, etc.) that applies to the majority of services. The level of benefits for mental health and substance use disorder cannot be inferior to that offered for other services.

If your plan is fully insured, your insurer should have reviewed your plan to check that it complies with these regulations. If your plan is self-funded, it is your responsibility to check for compliance. For $2,500, I can review your plan description and claims history and let you know of any plan provisions you need to change. While this may sound expensive, its less than you’d pay to one of the big corporate actuarial firms, and it’s far less than the potential costs you’d face if your plan was discovered to be non-compliant.


In a previous article, “The Basics of Mental Health Parity Testing” (Page 109), I discussed the new requirements that seek to bring insurance benefits for mental health services up to the same level as for traditional medical services. The enactment of these parity laws was seen as a great success for the mentally ill, but when you look at the details, they may still pay more in out-of-pocket costs. I first became aware of this issue thanks to a study by Samuel H. Zuvekas and Chad D. Meyerhoefer entitled “State Variations In The Out-Of-Pocket Spending Burden For Outpatient Mental Health Treatment”.

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Have We Really Achieved Parity?


The new parity laws split services into six classifications: inpatient in-network, inpatient out-of-network, outpatient in-network, outpatient out-of-network, prescription drugs, and emergency care. What parity laws don’t take into account is that the proportions of mental health services allocated to these classifications is different than for traditional medical services. In particular, mental health patients spend a significantly higher percentage of costs on prescription drugs. Member cost-sharing is higher for prescription drugs than other services. Drug coverage usually comes with many limitations, including restricted formularies, copay tiers, step therapies, and prior authorizations. As these limitations are applied to all prescription drugs, including those not for mental health, their presence does not violate the mental health parity regulations. Although these regulations were certainly a step in the right direction, the term parity might not be valid, as the mentally ill still have to pay more in out-of-pocket costs.



Going Broke: Rural Out-of-Pocket Spending

Rural Hospitals: A Mortality Study

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Section VII: Rural Healthcare Issues


This article is indebted to the research of James D. Reschovsky and Andrea B. Staiti, specifically their article “Access and Quality: Does Rural America Lag Behind?”, first published in Health Affairs. All statistics and survey results presented in this article originated with them.

I was born and raised in Henry County, Kentucky. I went to the one physician practice in the city I was aware of whenever I came down with anything. For larger issues, there was a hospital one county over (named Tri-County Baptist Hospital, as it served the populations of three different counties). If I needed a specialist, I had to go to Louisville, Kentucky, about an hour away. Despite my relatively larger distance from most healthcare providers, I never thought about my health being in jeopardy for being in a rural area. It wasn’t until I began studying health insurance that I realized the importance of the rural versus urban healthcare debate.

My experience is typical for most who live in rural areas. There are 32% fewer primary care physicians per person and 60% fewer specialists per person in rural areas. Evidence also indicates that rural populations are in poorer health than their urban counterparts, although this can partially be attributed to their being older and less affluent. This begs the question: are rural populations receiving an adequate amount of healthcare.

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The article “Access and Quality: Does Rural America Lag Behind?” breaks out access to care into three components: convenience of use, provider supply, and patient resource constraints. Convenience of use refers to travel times and wait times (both time waiting to get an appointment and time spent waiting in a doctor’s office). Provider supply refers to the possible lack of providers willing to accept new patients, and the services that these providers offer. Patient resource constraints refers to the financial aspects of care: are people insured and/or do they have the financial resources to pay for medical services.

So how do rural healthcare providers compare with urban providers when measuring these components? Better than you might expect, for the most part. Appointment wait times and office wait times were similar for both sets of providers. Travel times for primary care were similar, but rural populations had to travel approximately twenty minutes further to see a specialist. Rural populations also don’t seem to have trouble finding healthcare providers, with one significant exception. They have few, if any, options available for inpatient mental health services in rural areas. The most significant differences regarding access to care stem from patient financial constraints. Rural populations are significantly more likely to put off medical care for lack of financial resources.


So, what conclusions can we draw from these results? The primary message I came away with is that we need to focus our attention on the rural population’s finances just as much as their health indicators. It will be interesting to see how things change as a result of the Affordable Care Act. If the lower and middle-class receive subsidized insurance coverage via the new exchanges, access to care could improve significantly. We should also explore ways to offer more mental health services in rural areas. Recent tragedies, involving movie theater and school shootings, have recently brought mental health issues into the public eye. Now is the time to fix this issue to ensure that everyone has access to care. Rural healthcare has made large strides and kept pace with urban healthcare in most respects, but we need to remain vigilant to make sure this remains the case into the future.


This article presents the results of the study “Out-Of-Pocket Health Spending And The Rural Underinsured”, published in a 2006 issue of Health Affairs. This study was conducted by Erika C. Ziller, Andrew F. Coburn, and Anush E. Yousefian.

In another article, “Rural Healthcare: Access Issues” (Page 114), I argue that rural populations have nearly equivalent access to care as their urban counterparts, with two exceptions. The first exception was a shortage of rural options for inpatient mental health services. The second exception was a financial issue: rural households are more likely to have difficulty paying for medical services. This was in reference to a Health Affairs study: “Access and Quality: Does Rural America Lag Behind?”. I initially assumed the financial issue referred to those without insurance coverage. As I continued my research, I came across another Health Affairs article: “Out-Of-Pocket Health Spending And The Rural Underinsured.” This article brought to light another issue: those with insurance coverage still face difficulty paying medical bills and the problem is worse in rural areas.

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Going Broke: Rural Out-of-Pocket Spending


Underinsurance refers to those who have insurance coverage, but still encounter issues accessing medical care due to out-of-pocket costs. To determine if a person is underinsured, you must consider many factors, including insurance plan design, health status, and financial condition. It is impossible to perfectly measure this using data rules, but the Health Affairs study came up with a definition that should approximate this group well. They consider two groups to be underinsured: those families making more than 200% of the federal poverty level (FPL) who spent more than 10% of income on out-of-pocket costs, or those making less than 200% of the FPL who spent more than 5% of income on out-of-pocket costs. This allowed them to compare underinsurance levels between three groups: urban, rural adjacent (bordering an urban area), and rural non-adjacent. They analyzed national data for those under age 65 to better understand these groups.

Urban populations were found to spend $512.44 on average for out-of-pocket costs. Rural adjacent populations spent only slightly more, at $516.21. Rural non-adjacent populations spent significantly more, at $617.57. This is not solely due to rural populations having higher medical costs, but also their having to pay a higher percentage of total costs. Urban insureds paid 32.3% of costs, while rural non-adjacent insureds paid 38.8%.


The study’s authors also gathered data on numerous variables that could potentially explain these differences. Variables included employment, income, age, region, minority status, health status, and various insurance plan details. This allowed them to measure the impact those variables had on a family’s likelihood of being underinsured. They were then able to isolate the impact of different variables. Even after socioeconomic and utilization characteristics were adjusted for, rural non-adjacent families were 70% more likely than urban families to be underinsured. This is evidence of significantly lower actuarial values for plans in rural non-adjacent areas.

It isn’t that surprising that rural insureds have inferior coverage. They are more likely than urban insureds to be self-employed or work for a small business, groups that traditionally have had cheaper plans. Although this is not surprising, it is something that is often overlooked. When analyzing differences between urban and rural healthcare, we need to keep in mind not only the number of uninsured, but also the number of underinsured.


This article summarizes the results of the study “Hospital Remoteness And Thirty-Day Mortality From Three Serious Conditions”, first published in a 2008 issue of Health Affairs. The study was conducted by a collection of academics, analysts, and doctors, including Joseph S. Ross, Sharon-Lise T. Norman, Yun Wang, Brahmajee K. Naliamothu, Judith H. Lichtman, and Harlan M. Krumholz.

In another article, “Rural Healthcare: Access Issues” (Page 114), I contend that those living in rural areas have access to medical care that is just as good as their urban counterparts. In this article, I will tackle another issue: is the care of the same quality as that offered in urban areas? A 2008 study from Health Affairs allows us to analyze this question by the numbers. They analyzed Medicare experience from 2001 through 2003 for three common conditions: acute myocardial infarction, heart failure, and pneumonia. The study looked at mortality rates within 30 days of hospital admission, standardized for risk differences. Hospitals were divided into four groups: urban, large rural, small rural, and remote small rural. Mortality rates were then compared between groups, and the results may surprise you.

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Rural Hospitals: A Mortality Study


The table above shows the risk-standardized mortality rates for the four groups for each of the three conditions studied. The underlined cells are the ones that were deemed statistically significantly different from the urban results. Urban areas did a better job of treating AMI. The authors surmise that this could be due to the delay in rural care resulting from higher travel times, and/or the lack of specialization in urban hospitals. The groups performed equally when treating heart failure. Unexpectedly, hospitals in remote, small rural areas actually did the best at treating pneumonia. This may be due to reduced time to diagnosis and treatment.

Although there was some variation in performance, these variances were small. These results indicate that rural hospitals have kept pace with urban hospitals. This was only one study, and only covered three conditions, but it should provide some reassurance to those living in rural areas that they have access to quality care, regardless of their geographic remoteness.

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Acute Myocardial Infarction Heart Failure Pneumonia

Urban 17.7% 11.7% 14.8% Large Rural 18.2% 11.7% 15.0% Small Rural 18.2% 11.6% 14.7% Remote Small Rural 18.1% 11.5% 14.3%


The Need for Price Transparency

The Current State of Health Policy Reform

Don’t Forget the Neglected Diseases

Would You Like to Add a Warranty?

What is your Doctor’s E-Mail Address?

Breaking Through Language Barriers

A Hidden Issue: Medical Fraud

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Section VIII: Healthcare System Issues


Imagine you’re standing in line at the mall to buy a new television. You go through the line, write a check for $200, and wait by the counter for someone to bring your new television from the warehouse. While you’re waiting, two other people go through the line with televisions exactly like yours. The first pays $200 the same as you. The second pays $500 for the same model. This person then just goes on their way thinking everyone has been charged $500. You feel sorry for them, but you still go home feeling good about yourself for getting a good deal. You then come to find out that your neighbor heard about a similar deal at the mall one town over and got the same television as you for $150. To make matters worse, you went shopping at that mall the week before, but the salesman didn’t tell you about the sale on televisions. Now you want to throw a fit. There are various prices for the same product, and you lack the knowledge to make an informed decision. What’s worse, you realize that most buyers aren’t even aware they’re being cheated. This may seem like a very implausible scenario, but it’s one that takes place every day in our country’s broken health insurance market.

For some time I’ve been meaning to write a blog post concerning price transparency. In reading about health insurance, this is a topic that makes it into every book. It is a well-documented problem in the industry, not to mention a huge frustration for people like me who make a living trying to make sense of the healthcare market. In every other industry, prices are easy to find and compare. This forces prices into a very narrow range; exorbitant prices lead to an immediate drop in sales. This doesn’t happen in the health market because there is often no such thing as a price for each service.

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The Need for Price Transparency


How much does a hip replacement cost? Very few people have ever considered the question, which is crazy considering we live in a supposedly capitalistic society. Patients with medical insurance don’t bother with such questions; they only care about the small fraction of the cost that comes out of their own pocket. Patients without medical insurance usually don’t bother either; they often receive care only when necessary, and often are unable to pay for services anyway. HMO doctors don’t bother either; they are paid on a capitation basis, so it doesn’t really matter what procedures they actually perform or the cost of said procedures. Doctors who are paid on a fee-for-service basis might have a general idea, but they would have a hard time giving you a straight answer. There might be a sticker price that they can read off a patient’s bill, but these prices are rarely paid. Insurers usually have contracts with network providers to reduce these “prices” by more than 50%. Is a price really valid if it doesn’t apply to the majority of buyers?


Many companies have instituted consumer-driven health plans in an effort to encourage their employees to choose more frugal options. As part of this effort, employers are trying to determine the prices of various services so they can inform their employees. These efforts have been met with resistance. But things are starting to change. Efforts are underway from employers, nonprofit groups, and the government to increase transparency in the market. If you have a large enough plan, don’t be afraid to challenge providers on their prices; it’s your right as a consumer to know what you’re paying for. Although this is far from the only problem plaguing the health market, it is one that must be solved if we are ever to have an efficient and fair system.


This article discusses the current state of affairs for health policy research. It does not refer to traditional medical research. For this article, I am indebted to the research of Sumit R. Majumdar and Stephen B. Soumerai.

The process of bringing a new drug to market is extremely rigorous. It can take years of work to get FDA approval. After new treatments are implemented, research continues, evaluating outcomes and comparing treatments. To convince the medical community to change treatment protocols, research must use established methods, usually including randomized controlled trials. These protocols are less likely to be followed in health policy research, where randomized controlled trials are often impossible. This needs to change, as health policy studies influence policymaking that impacts millions.

This isn’t the place to discuss the merits and flaws of the various study methods (although I am considering writing just such an article in the future). Just know that statisticians have developed a loose hierarchy of methods, as some are known to produce inappropriate results. Despite this, studies routinely get published and survive peer review using inappropriate methods. Worst of all, politicians and media correspondents often latch onto the studies that support their cause, rather than those that present the most valid results. These articles are the ones most likely to contain inappropriate results.

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The Current State of Health Policy Research


I believe we need more oversight of health policy research. An independent non-partisan panel of statisticians could be created to grade the validity of study methods. This would give policymakers more data with which to make decisions. As for the media, it is our responsibility to demand more accuracy in reporting, although this hasn’t exactly worked to perfection in the past. Unfortunately, the stakes are too high to accept the status quo.


At this moment, numerous scientists across the United States are poring over research, peering through microscopes, and nurturing cell cultures to find the next great cure. Some are looking for the emotional uplift of curing a loved one. Some are looking for prestige; maybe a coveted Nobel prize. Some are looking for the wealth that often accompanies such discoveries. No matter the motivation, with few exceptions, these are first-world scientists trying to fight first-world diseases. Diseases which affect few people in the first world are paid little attention. These diseases have come to be known as neglected diseases, and new treatments for them have been few and far between.

Third-world countries lack the resources to sufficiently fund research and development to combat these diseases. They are dependent upon industrialized nations. Historically, the aid provided by the rest of the world has been insufficient, to say the least. However, a growing number of advocates are attracting attention to this issue as a humanitarian effort we should get behind.

At its core, this debate will always come down to money. In a 2009 study, the World Health Organization estimated the need for neglected diseases at $150 billion over a six year period (Anderson 1752). This is no small chunk of change. Private philanthropy in the United States is providing less than $1 billion per year.

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Don’t Forget the Neglected Diseases


So where should this money come from? There are only a few options. The first is pharmaceutical firms. The second is the industrialized populations, via governmental grants. The third is philanthropy. If the status quo continues, none of these three will provide sufficient amounts. Pharmaceutical firms see no profits, due to lack of market demand (in dollars, not people). They are also concerned about government intervention and price controls. The U.S. government’s primary organization for allocating research dollars, the NIH, gives less than 4% of its funds to fight neglected diseases. Political leaders have a difficult task ahead of them to convince their constituencies that this is the best use of tax dollars. Philanthropy to date has been insufficient. It has also been heavily focused on delivering current treatments as opposed to developing new ones.

So how do we fix the situation? I’m honestly not sure if we can. One somewhat popular option is for the government to provide tax credits to pharmaceutical firms engaged in research for neglected diseases. This could work, but only if credits are sufficient to make these investments profitable. I have a hard time seeing a piece of legislation passing with large enough credits to make this work. Change will never occur unless incentives align to direct significant sums of money to this cause. I don’t have the answer, but for the sake of millions suffering in the third world, I hope someone smarter than me is looking for one.


This article discusses a new payment mechanism known as PROMETHEUS payments. I first learned of these from an article entitled “Should Health Care Come With A Warranty?”, by Francois de Brantes, Guy D’Andrea, and Meredith B. Rosenthal.

I would be angry if the engine in my Camry suddenly broke down on me. I’d be even more upset if my television quit working. It might seem strange that I’d be more upset with my television breaking down than my car, as this would be a much less expensive problem. However, my anger would only be due to the inconvenience of the breakdown. I am insulated from the financial issues as both of these items are covered under warranty. This warranty gives me peace of mind regarding unexpected problems. The manufacturer is better off providing a warranty, as it makes me more likely to buy their product. I am better off as I am protected in the event of a problem. This begs the question: if warranties are such a good idea, why aren’t they part of our healthcare system?

Although this article will make the case that warranties deserve a place in our healthcare system, the warranties in question won’t be like those you’d find when buying a new washing machine. They won’t be voluntary and there won’t be a separate contract for each service. There really won’t even be an explicit warranty at all. Instead, there will be a payment system that inherently forces providers to pay in the event something goes wrong.

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Would You Like to Add a Warranty?


As I mentioned earlier, I am protected by warranty if my television quits working. This isn’t quite true, however. If I hit my television with a baseball bat, Best Buy isn’t going to ship me a new one. The error must be something that is the manufacturer’s fault. A similar issue arises in healthcare. Some patients will naturally have costlier medical conditions than others. Healthcare providers should not take on risks to account for my probability of being in a car wreck. If that were to happen, however, they should assume the liability for any mistakes they make in delivering care. The first type of risk, which is out of the provider’s control, is called probability risk. The latter type of risk is called technical risk. A fair system will make insurers pay for probability risk and make providers pay for technical risk.

From a theoretical standpoint, I think everyone would gladly except such a system, except perhaps a few error-prone doctors. However, separating probability risk and technical risk is easier said than done. But analysts have made significant progress. For numerous conditions, they have pored through historical and clinical data to determine expected payments for both the core treatments and potentially avoidable complications (PACs). A PROMETHEUS payment consists of the sum of the expected cost of core treatments and half of the expected cost for PACs. Providers receiving PROMETHEUS payments fare better than their fee-for-service counterparts if they can significantly prevent PACs. This aligns the incentives of all parties, as fewer complications results in better care for patients, lower costs for insurers, and higher profits for providers.

Payment mechanisms in the healthcare system are clearly evolving. I believe we will see more treatments in the future paid for on a per-episode basis. If structured properly, this would be beneficial for all parties except for underperforming providers. We need to continue research to develop accurate cost estimates for more conditions, and to ensure that current estimates do not become skewed by changes in treatment protocols and medical inflation. This isn’t a simple system, but early results indicate that it is worth the effort.


Do you know your doctor’s e-mail address? Odds are you don’t. If I want to get in touch with my accountant or my attorney, I have this access. Why do I settle for less with my doctor? The good news is that this may soon change. I recently came across an article in Health Affairs entitled “Patient Experience Should Be Part Of Meaningful-Use Criteria”. It outlined the efforts of Group Health Cooperative to increase the use of electronic communication, with great results.

There are many ways in which electronic communication can enhance a patient’s medical care. The list below outlines some of the options:

Request medication refills

Review medical test results

Exchange messages with healthcare providers

Review after-visit summaries

Review a list of medical conditions

Review a list of immunizations

Review a list of allergies

Schedule office appointments

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What is your Doctor’s E-Mail Address


I have to admit that I’m skeptical about relying on e-mail correspondence for medical care. I want to at least have a doctor look down my throat and in my ears. Even if this doesn’t provide any useful information, I’ll at least feel like the doctor’s expertise has been used. What would be very convenient is the ability to go online to settle administrative matters. Having online access to medical test results seems like a no-brainer. The increased use of electronic medical records will also make healthcare more efficient and lead to improvements in quality. New providers will have access to the patient’s medical history and there will be less duplication of medical tests. It seems ridiculous that hospitals have some of the most cutting edge technologies but don’t make use of the technology most of us have on our cell phone. Increased used of electronic communication seems inevitable, to the benefit of everyone.


Have you ever gone to the doctor and felt like they were speaking a different language? Maybe it was the acronyms you didn’t recognize. Maybe it’s that they kept referring to your heart attack as a myocardial infarction. Either way, it’s easy to get lost in the conversation. Now, imagine your frustration level if you only spoke English as a second language and tried to discuss your treatment options. Millions of Americans are forced to deal with this every time they go to the doctor.

Language barriers create numerous problems in the healthcare system. Problems include “higher costs, lower satisfaction, preventable complications, and higher mortality rates”, resulting from “inaccurate health histories, uninformed diagnoses, misunderstandings of prescription drug or other treatment instructions, the inability to provide informed consent, unnecessary tests, and medical errors” (Youdelman 429). To ensure that all Americans have access to quality healthcare, we must take steps to ensure that language barriers do not place preventable limitations on treatment.

Title VI of the Civil Rights Act of 1964 prevents discrimination on the basis of race, color, or national origin. This was the first step in ensuring adequate healthcare for those speaking English as a second language. These laws were made more explicit by Executive Order 13166: Improving Access to Services for Persons with Limited English Proficiency. There are also numerous pieces of state legislation that address the issue. While improvements have certainly been made, laws are sometimes poorly understood or poorly enforced.

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Breaking Through Language Barriers


It’s irrational to expect doctors to become bilingual. If we are to solve this problem, interpreters are key. In the past, many with poor English skills would rely on a friend or family member to translate. These individuals may lack the medical expertise necessary to properly explain concepts. They may also modify the doctor’s messages based on their opinions. A good interpreter should relay messages accurately without modification. There are also HIPAA concerns, as patient-doctor conversations often contain protected confidential information.

Working through a translator may be inefficient and costly, but it is vital if we want a fair healthcare system. We need to improve education regarding current legislation and put a system in place to hold providers accountable.


This article discusses medical fraud from the standpoint of Medicare and Medicaid. While private insurers and self-funded plans also face fraud issues, they are not covered by this article. All statistics in this article were taken from an article by Lewis Morris entitled “Combating Fraud In Health Care: An Essential Component Of Any Cost Containment Strategy”.

During the numerous healthcare reform debates, I heard little discussion concerning medical fraud. This should be an issue both sides of the political aisle can easily agree on; we shouldn’t give federal money to criminals for medical services that were never performed. The issue likely receives little attention because most assume this is a minor issue. However the data argues otherwise. The FBI estimates that fraudulent billings constitute between 3 and 10 percent of total health spending. Organized crime is increasingly making its way into the healthcare system, as there are fewer barriers to entry, lesser penalties for convictions, and lower risk of detection relative to other criminal endeavors.

I believe far more federal money should be allocated for antifraud efforts. Corporations allocate money based on the expected return on investment. From 2006 through 2008, the HHS Office of Inspector General earned a $17 return for every $1 invested, in the form of investigative receivables and audit disallowances. This program pays for itself many times over, and quickly. While funding has increased in recent years, I do not believe enough has been done. Investing more federal money in antifraud efforts seems like a no-brainer to me.

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A Hidden Issue: Medical Fraud


In a 2009 Health Affairs article, Lewis Morris outlines five principles the healthcare system should follow to combat fraud. I have summarized them in my own words below:

Screen potential providers before they enroll in the system

Make payment processes reasonable and adaptable

Provide assistance with compliance programs and fraud alert

Monitor programs for abuse

React quickly in order to prevent continued abuse

Fraud will always exist to some degree, but efforts to decrease its prevalence could save a significant amount. This is vital for a system already struggling to remain solvent in the face of rising costs.


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Bonus Content I: Mental Health

Parity FAQs


The questions and answers that follow were created to help my clients understand the current regulations related to mental health and substance use disorder benefits. They are based on my best understanding of the regulations and do not represent a comprehensive treatment of the subject. The full text of the Paul Wellstone and Pete Domenici Mental Health Parity and Addition Equity Act of 2008 is available online as part of the Electronic Code of Federal Regulations.

Question: Can you describe the Mental Health Parity Act in one sentence?

Answer: How about this description, taken from the Department of Labor:

“The Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA) requires group health plans and health insurance issuers to ensure that financial requirements (such as co-pays, deductibles) and treatment limitations (such as visit limits) applicable to mental health or substance use disorder (MH/SUD) benefits are no more restrictive than the predominant requirements or limitations applied to substantially all medical/surgical benefits.”

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Mental Health Parity FAQs


Question: Does the Mental Health Parity Act apply to my company’s insurance plan?

Answer: The Mental Health Parity Act applies to all plans with the following four exceptions:

Employers with 50 or fewer employees are exempt from the Act

Non-governmental self-funded plans can opt out by filing an exemption election with the Centers for Medicare and Medicaid Services (CMS)

Employers who expect costs to increase by more than two percent in the first year subject to the Act, or one percent in later years (this exemption can only be used every other year)

Retiree only plans (those covering less than 2 current employees) are exempt (plans must have their own Summary Plan Description and file a separate Form 5500)

Question: Do I have to offer mental health benefits?

Answer: No, the Act does not require employers to offer mental health benefits. However, if any mental health benefits are offered, they must comply with all parts of the Act. Also, if you offer mental health and substance use disorder benefits in any of the six prescribed classifications, you must also offer benefits in all other classifications for which you offer medical/surgical benefits.


Question: What are the “predominant and substantially all” tests?

Answer: The financial requirement (such as copays, coinsurance, visit limits, etc.) is considered to apply to “substantially all” services if it applies to 2/3 of all services. The level of benefit (such as the dollar amount of the copay or the coinsurance percentage) is considered to be “predominant” if it applies to half of all services. The financial cost-sharing requirements for mental health and substance use disorder benefits cannot be greater than those which are predominant and apply to substantially all medical/surgical services. This test is applied across six classifications.

Question: What classifications are used for the “predominant and substantially all” tests?

Answer: There are six classifications: (1) inpatient, in-network, (2) inpatient, out-of-network, (3) outpatient, in-network, (4) outpatient, out-of-network, (5) prescription drugs, and (6) emergency. If a plan fails the outpatient tests, the outpatient category can be subdivided into office visits and non-office visits.

Question: What happens if my plan fails the test?

Answer: If there is not a financial requirement that applies to substantially all services (at least 2/3), all mental health benefits within that category must be covered at 100% with no member cost sharing.


Question: Doesn’t the Mental Health Parity Act also have regulations related to lifetime and annual limits?

Answer: Yes. If your plan has no lifetime or annual limits for medical benefits, it cannot have any such limits for mental health or substance use disorder benefits. Note that the Patient Protection and Affordable Care Act removed these limits from plans, but some plans were allowed to temporarily keep annual limits in place. If your plan does have such limits, there are various regulations with which you must comply.

Question: What about deductibles and out-of-pocket maximums?

Answer: If there are any cumulative financial requirements (including both deductibles and out-of-pocket maximums), they cannot accrue separately for mental health and substance use disorder benefits. For example, you cannot have a separate deductible that applies only to mental health benefits.


Question: Are there any other issues I need to be concerned about?

Answer: The Act also has regulations related to nonquantitative treatment limitations. Any treatment limitations for mental health or substance use disorder benefits cannot be more restrictive than similar limitations on medical/surgical benefits. The Act specifically mentions six types of nonquantitative treatment limitations:

Medical management standards limiting or excluding benefits based on medical necessity or medical appropriateness, or based on whether the treatment is experimental or investigative

Formulary design for prescription drugs

Standards for provider admission to participate in a network, including reimbursement rates

Plan methods for determining usual, customary, and reasonable charges

Refusal to pay for higher-cost therapies until it can be shown that a lower-cost therapy is not effective (also known as fail-first policies or step therapy protocols)

Exclusions based on failure to complete a course of treatment

Question: I haven’t been paying attention to mental health parity laws. What should I do to ensure that my plan is compliant?

Answer: If your plan is fully insured, speak with your insurance company. Insurance companies have checks in place to make sure that plans are compliant with these laws. If your plan is self-funded, it is your responsibility to check for compliance. I can analyze your claims and provide an outline of any changes in coverage required for compliance.


Bend the Healthcare Trend

The Company That Solved Health Care

Extreme Producers: Their Insights and Secrets

Health Insurance: Navigating Traps and Gaps

The Hour Between Dog and Wolf

The Stem Cell Hope

Why Nobody Believes the Numbers

144

Bonus Content II: Book Reviews


Score: 8 / 10

Bend the Healthcare Trend is basically an extended ode to the consumer driven health plan. Although I will be discussing many flaws in this review, remember that I still gave this book an 8 out of 10. I think it is absolutely worth a read for anyone with oversight of a group health plan. If this includes you, I recommend you purchase this book along with The Company that Solved Healthcare (its review begins on page 147). Read The Company that Solved Healthcare first, as it will give you a real world example of numerous ideas to improve your health plan. If it convinces you to consider a consumer driven health plan (and it probably will), read Bend the Healthcare Trend for further information on how to properly implement a CDHP and educate your workforce prior to the change.

145

Book Review: Bend the Healthcare Trend


Bend the Healthcare Trend contains valuable information, but suffers from an excess of optimism. They never once criticize the consumer driven health plan in any way. While I agree that these plans are optimal for most groups, they are not perfect. If your population is small and sick, moving to a CDHP could be a terrible decision. They also place too much confidence in plan participants. Your employees are not going to start eating salads and give up smoking because their employer asks them to. Wellness programs are complicated, and usually see the most savings from management of chronic conditions. To get significant behavioral changes from your general population, there will need to be a significant incentive or an increase in convenience. Speak with an expert on these programs to design an effective program for your plan.

Late in the book, the authors claim that the optimal structure to work toward is a CDHP that includes an HSA account. For most of the book, they treat HRA accounts as accounts where money is rolled forward annually, but in the HRA-specific section they correctly point out that this is not necessarily the case. Many employers will wish to use HRA accounts specifically for this feature. Unspent amounts can be used to fund benefits in the following year, saving the employer a considerable amount. This can be a valuable feature, especially during a recession.

If you want to learn about the healthcare market in general, there are many superior options. This book makes no mention of healthcare reform (the book came out in 2010), and doesn’t offer anything close to a comprehensive overview of the methods to cut health plan costs. But the authors clearly have experience assisting their clients with CDHP implementation. Buy this book for these sections. Changing a health plan is serious business, and if handled poorly, will create opposition from plan participants. This book will help prepare you for some of the issues you may face in the process.


Score: 9 / 10

John Torinus Jr., the author of this book, gets it. He’s not an actuary, broker, consultant, or legal expert. He doesn’t even work in HR. He’s the CEO of a manufacturing firm with 1,500 employees, and this type of book could only come from someone like him. To truly take control of your health care costs, you need an aggressive and proactive plan that involves the highest echelons of management and constitutes a significant piece of your overall firm strategy. This is a far more hands-on approach than most firms are used to, but with health care costs making up a significant piece of most expense statements, it’s hard to justify not giving it increased attention.

This book is a quick read; I finished it in half a day. It provides a high level overview of various reforms you can use to control costs, with just enough detail provided to prove its points. This book won’t give you all the answers, but it will set you off on the right path if you’re willing to put in the effort to bring about significant reforms. The material is all easy to understand and very readable, but some of it is likely old news to you. Odds are you have already moved, or at least considered moving to, some form of consumer driven health plan. You probably already have a tiered prescription drug plan to encourage the use of generics. These sections of the book will likely not be very beneficial. However, there are many new ideas scattered through the book, even for someone familiar with the health care system.

147

Book Review: The Company That Solved Health Care


Many readers will gain the most from this book if they implement two ideas: steering patients to what the author refers to as “Centers of Value”, and seeking out independent primary-care physicians to oversee care and provide mandatory health screenings for their employees. The book cites numerous horror stories where the same procedure can cost three times as much at one hospital as it would at a similar hospital right down the street. Many employees lack the incentive to seek out this information and select the low-cost provider. Many also use primary care physicians employed by large organizations, who are often trained to refer work to that organization’s specialists whenever possible. While most employers lack the numbers to justify hiring their own physician, you can probably find an independent physician available on retainer to be the first contact for your employees. While some employees will choose to stay with the doctor they already know, you can get many to convert by offering lower prices and increased convenience. These doctors often spend far more time with each patient, and are less likely to refer patients away for problems they are qualified to solve themselves. These physicians can also offer medical screenings to help detect conditions early on before they become catastrophic.


Although some of the knowledge is likely a rehash of things you already know, there is a lot of information here. Any reader will likely come away with at least a few ideas to consider for future plan amendments. I wouldn’t hesitate to recommend this book to any plan sponsor or health care consultant. If you work in HR, buy a copy, read it, and pass it up the ladder. This book shows that it is possible to take control of your health care costs if you’re willing to put in the effort and try some new ideas.


Score: 8 / 10

This book is extremely short. The book is divided into 46 tips, each one taking up about half a page. I finished it in just over an hour. When I first pulled it out of the box, I was actually disappointed that I’d spent money for a book and got something closer to a pamphlet. After reading it through, however, I think it is the perfect length. It’s short enough to read through in one sitting, an important consideration for brokers with little time to spare, but it still manages to pack in many ideas.

150

Book Review: Extreme Producers: Their Insights and Secrets


The author doesn’t get into detailed specifics and doesn’t try to reinvent the wheel. In this respect, the “insights and secrets” subtitle is a bit of a misnomer. Many of the tips will instead remind you of the basics: pick a product specialty, ask your clients for more business, have a consistent prospecting system, etc. Nearly half of the tips would fit just as well in a self-help book: plan your day ahead of time, have written goals, believe in yourself, etc. I believe this book is best used as a reminder of core principles. We all too often find ourselves getting drawn into routines, worrying about the problem of the hour without thinking about the big picture. Reading Extreme Producers can help you escape this mindset. Even if you only implement a few of the tips from this book, the improvement in your bottom line will quickly justify the purchase price and short time commitment.


Score: 4 / 10

I had a hard time deciding what score to give this book. There is valuable information here. If you’re one of those about to fall into one of these traps or gaps and this book convinces you to proceed more cautiously, it could be worth hundreds of thousands of dollars. Unfortunately, very few individuals are going to read through 200 pages of health insurance discussion just to add to their body of knowledge. Those who do pick this up are likely to be health insurance professionals, for whom much of this book will already be common knowledge. If you are in the health insurance industry, particularly as a broker or consultant for any form of individual coverage, the topics covered in this book are things you need to know. For those new to the health insurance field, this would certainly be worth a read. Experienced readers might be able to gain some new insights, but will likely find themselves skipping over many examples, which constitute over half of the book. These examples can get repetitive very quickly. At times, it seems as if the author is merely trying to fill pages. I got the feeling that her goal was just as much to prove her expertise as to inform the reader. There’s no shame in this approach (this very e-book is meant to serve just such a dual purpose), but I feel the information could have been presented much more efficiently with no loss in effectiveness.

152

Book Review: Health Insurance: Navigating Traps & Gaps


So what are the traps and gaps we need to be scared of? The vast majority come from someone not paying attention to their health coverage during a transition in their life. This could be not signing up for COBRA in time, not enrolling in Medicare during the appropriate window, or assuming benefits would be relatively unchanged when they got a new job. There is also much discussion of how pre-existing conditions can limit your options, and how you can usually avoid this if you keep creditable coverage in place. While the majority of the traps discussed also come with advice to avoid the trap, there are also numerous pages devoted to general problems within the health insurance market. While these problems certainly do exist, it doesn’t necessarily benefit the reader to study them.

153

If you’re in a position to offer advice to the public on individual health insurance or Medicare, you need to be knowledgeable about the issues presented in this book. I would recommend purchasing it for your office, with every individual tailoring a reading to their own needs. More experienced readers can skim through most of the book, while the rookies can read the entire text. To get you started, read on and I’ll outline the four primary lessons I took away from this book.


Lesson One

Consider healthcare implications of any change in lifestyle, including marriage, divorce, death of a spouse, birth of a child, retirement, losing a job, getting a new job, becoming eligible for Medicare, moving to a new state, moving to a new country, or any change in your employer’s plan.

Lesson Two

Look at all coverage options. This includes individual insurance, group coverage with your employer, new group coverage via staring your own business, coverage as a dependent on the plan of your spouse or parent, continuation of coverage via COBRA, high risk pool plans which vary by state, and various Medicare options.

Lesson Three

Know your rights under COBRA and HIPAA.

Lesson Four

Don’t assume anyone else will be on your side. If you make a mistake (making a late payment, having an inadvertent gap in coverage, or missing an enrollment period, etc.), you will have a hard time avoiding the consequences.


Score: 6 / 10

This book has far less to do with health insurance than any other book I’ve reviewed. But as an actuary, I feel it’s my responsibility to read any bestseller on the topic of risk. This book alternates between three themes, each of which reads very differently than the others. There are sections that outline the biological processes that influence our decisions and actions, specifically those that occur when we are in stressful situations. There are sections that discuss the actions of those on a hypothetical trading floor, who serve as examples for the biological processes he’s outlined. Finally, there are sections that attempt to show how these actions of individual traders combine to make the market boom or bust.

155

Book Review: The Hour Between Dog and Wolf


As an economics major, I’ve always been somewhat fascinated by the trading floor. There was a point in my life where I even considered taking my career to Wall Street, so I expected to enjoy the trading floor stories the most. But this book is no Liar’s Poker. The trader stories suit their purpose well, but don’t exactly make for a compelling read. Strangely, the parts I enjoyed the most were those concerning human biology. In particular, the author brings to light numerous studies that demonstrate just how little we use our conscious brain. Many of our decisions are instead made at a subconscious level. This is usually a very good thing, as we don’t often have time to consider everything, but it can certainly have problematic consequences as well. Also of great interest was the relationship between our brains and our bodies. We have been taught that our brain is our control center, exerting its influence over the rest of our body. We are now learning that our nervous system isn’t a one-way street. Our bodies send signals to our brains that can significantly affect our decision making.

The final chapters of the book try to take the biology lessons and apply them to overall market performance. As all market decisions are made by humans, it stands to reason that anything affecting the human brain will have some impact on the market. When we experience a big win, our bodies release testosterone into our system. This makes us more capable and aggressive, increasing the likelihood of further wins. This can be seen in the market when stocks continue to climb, as in a bubble. Cortisol has the opposite effect. When things start to go wrong, we become more fearful and stocks plummet more than they should. Although his positions are well argued, I think the author goes too far in drawing these conclusions. I believe he exaggerates the impact of these processes on market outcomes.


I had a hard time rating this book. For a book on neurobiology, it is quite readable and you will come away with many interesting notes on how our brains and our bodies react to the conditions around us. However, the pages plod along at times and I didn’t walk away completely convinced of his argument. If you have a nerdy side and are interested in how our brains make decisions, this is worth a read, but for those who routinely skim the business section, don’t expect to come away with much.


This book may deserve a higher score than I’ve given it, but I’m giving it a low score anyway out of spite. It isn’t necessarily a bad book to read, but it also is not what it claims to be. The subtitle of the book is “How Stem Cell Medicine Can Change Our Lives”. This would make the reader assume that it looks toward the future, showing the possibilities for this emerging science. Instead, the book looks to the past, offering a history of stem cell science. While entertaining, it barely scratches the surface of the experiments currently taking place and the potential therapies stem cells could one day yield.

158

Book Review: The Stem Cell Hope

Score: 6 / 10


I am a casual fan of history, and almost found myself minoring in the subject in college, but rarely read books from the history section of the bookstore. However, this is unlike many history books you’ll likely come across. There is much discussion of the science behind stem cells, though you don’t need much scientific expertise to keep up (I only had two science courses in college: introductory classes for biology and astronomy). There are also chapters dealing with the political debates and maneuverings that have played such a key role in stem cell research. Spread throughout the book, the author has also included a lot of material concerning the ethics of stem cell use, particularly that involving human embryos. Viewpoints are considered from scientists, bioethicists, government officials and religious leaders on the topic. This variety is the book’s saving grace. As the book jumps around from one topic to another, the reader is never allowed to grow weary of the subject. Research breakthroughs have been made by numerous individuals around the world, and the author does a good job of providing backgrounds for each. While the majority of the book takes place within the U.S., there are also chapter taking place in Scotland, Japan, and South Korea, showing the international successes, and failures, of the science.

For those of you who lean toward the political left, this book will likely have you clenching your fists at the scientific progress we could have made if not for political gridlock. Even now, the status of embryonic stem cell research is on shaky ground. Part of my faith in humanity died reading this book, when I realized how poorly educated our voters are on the subject, with few taking the time to recognize the differences between the stem cell debate and what should be entirely separate discussions: the debates concerning reproductive cloning and abortion. I believe stem cell research stands poised to revolutionize the practice of medicine, and we owe it to the sick and dying to continue exploring this subject.


As I stated before, my primary hope when I first opened this book was to discover the potential cures on the horizon. While this was not the primary topic of discussion, it was addressed toward the end of the book. The general public often assumes that the potential in stem cells lies in the possibility of growing replacements for our non-working cells. This could be on the medical menu of possibilities one day, but don’t expect to see it anytime soon. Human trials are still extremely limited, and only cover a small fraction of the diseases currently under study. Instead, be excited about the more traditional therapies that will develop more easily using stem cell research. This will result from two causes. The first is that by reverting sick cells back to an earlier state, scientists can track their development, allowing them to diagram the cell’s deterioration to determine exactly how and when they become sick. The second is that stem cells allow scientists to study the effects of genetic and chemical alteration in a controlled setting, speeding up the medical testing process. The truth is, this is still a very young science, and we don’t really know what the future holds, but the possibilities are endless.


Score: 10 / 10

I’m hesitant to give a book a perfect score, especially after withholding one from The Company that Solved Healthcare (Page 147), a book that will hold much more valuable information for the average consultant or plan sponsor than this one. However, for the right (admittedly small) audience, this book could not have been written any better. This book is only of use for those who either measure or monitor the success or failure of wellness programs. If you fit that description, buy this book. It succinctly shows how to detect the lies being hidden behind overwhelmingly complex analysis. I can also say that the entire book is very readable and (in an extreme rarity for books about health insurance measurement) actually quite humorous.

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Wellness program vendors have become experts at inflating demonstrated savings figures. They sometimes employ actuaries for this purpose, or, more commonly, have an external actuarial firm validate their numbers or methods. For this reason, chapter one of this book is titled, “Actuaries Behaving Badly”. While my first inclination as an actuary is to get defensive, I have to admit that his criticisms ring true. Most stem from a lack of what the author refers to as plausibility tests. After a wellness program has been implemented, an analyst will perform many advanced calculations, including risk adjustments, trend adjustments, population stratification, disease identification, etc. They will then combine these to produce figures for either savings and/or return on investment. If savings are positive, they will send the results to their client, pat the wellness vendor on the back, and collect their check. At no point in their analysis did they measure such variables as the reduction of heart attacks, the change in asthma cases, or the change in obesity rates. If savings are truly attributable to the wellness program, they should correlate with these types of variables. A smoking cessation program cannot be responsible for saving money if it didn’t actually cause any participants to quit smoking, yet many analysts would be able to convince the average plan sponsor otherwise.


In an article I wrote half a year earlier, “Measuring DM Savings: Two Common Mistakes” (Page 69), I discussed two factors that were heavily discussed in this book: regression to the mean and selection bias. This book outlines some of the measurement techniques that fail to take these into account, in addition to various other study errors. One such trick is to guarantee an improvement in the risk status for your at-risk patients. The author found a study from Dee Edington, a professor at the University of Michigan, which determined that over a 3 year period, (1) 35% of high-risk participants become medium-risk, (2) 40% of medium-risk participants become low-risk, and (3) 33% of low-risk participants become either medium-risk or high-risk. Thus, your high-risk and medium-risk participants will naturally become lower-risk over time, despite no decrease in the prevalence of high-risk or medium-risk participants, and regardless of whether or not a wellness program is implemented. Using this technique, wellness program vendors can offer a nice-sounding guarantee that is almost certain to fulfill itself regardless of their performance. This is only one of the numerous tricks described in the book, which are too numerous to work through within this review.


After reading this book, I am completely convinced that the measurement of wellness programs is still in its infancy. As such, it is very easy to be misled by those who are supposed to be experts. Many of the reports mentioned, often both published and peer-reviewed, make outlandish claims that cannot hold up to any scrutiny. One report claimed to have saved more in asthma care than the plan had ever even spent on asthma related medical services. One report demonstrated that the wellness program resulted in savings a year before it was even implemented. Other mistakes were harder to detect, but just as incorrect. The author outlines 7 tests a study must pass to be considered valid, which I have summarized below. For examples of these violations and tips on how to notice them in your plan, pick up a copy of the book.

1. No cost element can decline by more than 100%

2. Every metric can’t improve (for example, to reduce inpatient claims you need to spend more money on preventive care)

3. Nothing can decline by more than 50% in a voluntary program with no incentives

4. There must be a logical link between savings and the program’s goals

5. Quality variables must improve before cost savings occur

6. Measurements are only valid if the measurement group and control group are equivalent

7. (Unnecessary and not really a rule but I’m including it for the sake of completeness) If one of the above rules is violated the others are likely violated as well


I want to end this review with a note on wellness programs. They can work, and quite effectively. This is especially true for more in-depth programs that combine wellness programs, disease management, participant education, and provider coordination. Nothing I’ve said in this review should be taken as an indication that you should refrain from using wellness programs. Just proceed with caution and recognize that if something sounds too good to be true, it probably is. This book can help you figure out why. If you’re not currently in a wellness program, the last chapter of this book also contains a checklist to help you prepare an RFP to send to potential wellness program vendors. Or, if you’re interested in a more comprehensive set of changes, let me know and I can recommend a firm specializing in that area. In full disclosure, I work with this firm regularly and a new client for them may result in a small increase in the work they send me, but I genuinely believe they offer a good service for their clients. For those choosing to do this on their own, reading Why Nobody Believes The Numbers is critical if you don’t want to risk being ripped off because of misleading numbers.


Acknowledgements

Sources

What to Expect for the Next Edition

Thanks for Reading

166

Appendix


I am indebted to many others in the creation of this e-book. Without those listed below, this e-book either wouldn’t exist, or would be a much inferior work.

Although many of the articles included in this e-book were well researched, a lot of this material I just pulled out of my head. Much of this knowledge is the result of the five years spent learning my trade at Bryan, Pendleton, Swats & McAllister, a Wells Fargo company. I learned a lot in that time, under the tutelage of three other actuaries: David Shaub, Ed Scott, and Tommy Axford.

In addition to my on the job training, I also completed numerous examinations and courses through the Society of Actuaries. I have also attended webcasts sponsored by the Conference of Consulting Actuaries and the American Academy of Actuaries. I am also grateful to Centre College for giving me my academic start and for making me write enough papers that starting my own book didn’t seem like a daunting task.

The Sources page that follows contains all of the authors, analysts, and academics that helped make this book possible. In particular, I am indebted to Health Affairs for providing such a wide variety of quality academic articles related to our healthcare system. Although the most recent articles come at a price, you can find numerous free articles at www.healthaffairs.org. If you are looking to broaden your knowledge, this is an excellent resource.

All of the pictures throughout were purchased from Shutterstock.

My company logo was designed using Logo Tournament.

This e-book was designed using Microsoft PowerPoint.

167

Acknowledgements


Aitken, Murray; Berndt, Ernst R.; Cutler, David M.: Prescription Drug Spending Trends In The United States: Looking Beyond The Turning Point. In: Health Affairs Vol 28 No 1 (2009)

Anderson, Gerard F.: Spurring New Research For Neglected Diseases. In: Health Affairs Vol 28 No 6 (2009)

Chaikind, Hinda; Peterson Chris L.: Summary of Potential Employer Penalties Under the Patient Protection and Affordable Care Act (June 2010)

Cigna: Stop Loss for Self-Funded Plans (2010)

Citigroup Pension Discount Curve and Liability Index

Coates, John: The Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust, Penguin Press (2012)

De Brantes, Francois; D’Andrea, Guy; Rosenthal, Meredith B.: Should Health Care Come With A Warranty? In: Health Affairs Vol 28 No 4 (2009)

Duncan, Ian: Managing and Evaluating Healthcare Intervention Programs, Actex Publications (2008)

Financial Accounting Standards Boards: Summary of Financial Accounting Standards Number 106: Employers' Accounting for Postretirement Benefits Other Than Pensions (December 1990)

Gabel, Jon R.; Whitmore, Heidi; Pickreign, Jeremy; Ferguson, Christine C.; Jain, Anjali; KC, Shova; Scherer, Hilary: Obesity And The Workplace: Current Programs And Attitudes Among Employers And Employees. In: Health Affairs Vol 28 No (2009)

Gaunya, Mark S.; Borislow, Jennifer A.: Bend the Healthcare Trend: How Consumer-Driven Health and Wellness Plans Lower Insurance Costs, Strategic Vision Publishing (2009)

168

Sources


Government Accounting Standards Board: Statement Number 45: Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions (June 2004)

Grossman Joy M.; Ginsburg, Paul B.: As the Health Insurance Underwriting Cycle Turns: What Next? In: Health Affairs Vol 23 No 6 (2004)

Health Care and Education Reconciliation Act of 2010 (Pub.L. 111-152, 124 Stat. 1029)

Hraban, Jerry: Extreme Producers: Their Insights and Secrets, Xlibris, Corp. (2010)

Huskamp, Haiden A.; Rosenthal, Meredith B.: Health Risk Appraisals: How Much Do They Influence Employees’ Health Behavior? In: Health Affairs Vol 28 No 5 (2009)

Kaiser Family Foundation, The: Health Care Costs: A Primer: Key Information on Health Care Costs and Their Impact (May 2012)

Kaiser Family Foundation, The and Health Research & Educational Trust: Employer Health Benefits: 2011 Annual Survey

Lewis, Al: Why Nobody Believes the Numbers: Distinguishing Fact from Fiction in Population Health Management, John Wiley & Sons, Inc. (2012)

Loughlin-Carley Maura: Health Insurance: Navigating Traps & Gaps, Ampersand Inc. (2012)

Morris, Lewis: Combating Fraud In Health Care: An Essential Component Of Any Cost Containment Strategy. In: Health Affairs Vol 28 No 5 (2009)

Nahin, Richard L.; Pontzer, Carol H.; Chesney, Margaret A.: Racing Toward The Integration Of Complementary And Alternative Medicine: A Marathon Or A Sprint? In: Health Affairs Vol 24 No 4 (2005)

Park, Alice: The Stem Cell Hope: How Stem Cell Medicine Can Change Our Lives, Plume (2012)

Patient Protection and Affordable Care Act, The (March 2010) (Pub.L. 111-148, 124 Stat. 119 through 124 Stat. 1025)


Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008

Pearson, Steven D.; Lieber, Sarah R.: Financial Penalties For The Unhealthy? Ethical Guidelines For Holding Employees Responsible For Their Health. In: Health Affairs Vol 28 No 3 (2009)

Pink, Daniel H.: Drive: The Surprising Truth About What Motivates Us, Riverhead Books (2011)

Ralston, James D.; Coleman, Katie; Reid, Robert J.; Handley, Matthew R.; Larson, Eric B.: Patient Experience Should Be Part Of Meaningful-Use Criteria. In: Health Affairs Vol 29 No 4 (2010)

Reschovsky, James D.; Staiti, Andrea B.: Access and Quality: Does Rural America Lag Behind? In: Health Affairs Vol 24 No 4 (2005)

Rosenblatt, Alice: The Underwriting Cycle: The Rule of Six. In: Health Affairs Vol 23 No 6 (2004)

Ross, Joseph S.; Normand, Sharon-Lise T.; Wang, Yun; Nailamothu, Brahmajee K.; Lichtman, Judith H.; Krumholz, Harlan M.: Hospital Remoteness and Thirty-Day Mortality From Three Serious Conditions. In: Health Affairs Vol 27 No 6 (2008)

Ruggie, Mary: Mainstreaming Complementary Therapies: New Directions In Health Care. In: Health Affairs Vol 24 No 4 (2005)

Tanenbaum, Sandra J.: Evidence-Based Practice As Mental Health Policy: Three Controversies And A Caveat. In Health Affairs Vol 24 No 1 (2005)

Tate, Bob: Accountable Care Organizations - How Actuaries Can Get Involved. In: Health Affairs Issue 67 (2011)

Torinus Jr., John: The Company that Solved Health Care: How Serigraph Dramatically Reduced Skyrocketing Costs While Providing Better Care, and How Every Company Can Do the Same, BenBella Books (2010)


U.S. Department of Health and Human Services: Accountable Care Organizations: Improving Care Coordination for People with Medicare (March 2011)

Youdelman, Mara K.: The Medical Tongue: U.S. Laws And Policies On Language Access. In: Health Affairs Vol 27 No 2 (2008)

Ziller, Erika C.; Coburn, Andrew F.; Yousefian, Anush E.: Out-Of-Pocket Spending And The Rural Underinsured. In: Health Affairs Vol 25 No 6 (2006)

Zuvekas, Samuel H.; Meyerhoefer, Chad D.: State Variations In The Out-Of-Pocket Spending Burden For Outpatient Mental Health Treatment. In: Health Affairs Vol 28 No 3 (2009)


My schedule over the next few months looks to be pretty busy, so I may not be doing as much research in the near future. However, I would like to make it a daily habit to read at least an hour a day, so expect a lot of book reviews when I release version 5.0 of this e-book. Some of the books currently on my bookshelf include The Emperor of All Maladies (a book about cancer), The $800 Million Pill ( a book about prescription drug costs), and three books about the U.S. healthcare crisis and possible solutions: Beating Obamacare, Priceless, and The Healing of America. After I get through the June 30 valuations on my desk, I’ll probably take some time later in the summer to add some more educational articles, covering topics that fell through the cracks in these first editions. Check in with me at www.liabilityanalytics.com for the most recent version of this e-book.

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What to Expect for the Next Edition


I hope you have enjoyed reading, and picked up some useful information along the way. I hope to continue studying and writing in the future, so check my website to find updated versions of this e-book with additional content. If there is a specific topic you would like to see covered in the future, send me an email and let me know. Also, feel free to contact me if you ever need the services of a health actuary, for projects including retiree medical valuations, IBNR calculations, budget projections, or plan design studies.

My Contact Information

Website: www.liabilityanalytics.com

E-Mail: [email protected]

Cell Number: 615-946-1496

Fax Number: 615-296-0389

Again, thanks for reading. I hope to hear from you.

173

Thanks for Reading


michael steven taylor - liabilityanalytics.com€¦ · health insurance coverage, such as disease...

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