Archive for December 2015
In this excellent article on risk corridors, Scott Katterman of Milliman writes:
The risk corridor algorithm itself will tend to result in higher insurer receivables, compared to payables, due to an asymmetry in calculating the “target amount” (or expected cost) for each insurer.
The problem here is that the target amount really isn’t the “expected cost”. Actuaries of all stripes have struggled with how to characterize the target. In their seminal “3R” paper in 2013, the American Academy of Actuaries said virtually the same thing in their otherwise informative Risk Corridor Chart:
Below the fold, I show that the “Target Claims” should best be thought of as a function off *actual claims*, with two adjustments. The first adjustment occurs if the plan has profits lower than the amount provided for in the regulation. The second adjustment occurs if administrative expenses exceed the regulation’s cap. If the plan profit falls below 3% (or 5% in 2015), then the target is raised to give a plan a chance to receive money through the risk corridor program. If the plan’s administrative expense, inclusive of profit, exceeds 20% (or 22% in 2015), then the target is lowered, giving the plan a higher probability that they will have to pay money into the program.
Given the nature of competitive markets, it is clearly much less likely that a plan will have administrative expenses (plus profit) greater than 20%. Conversely, it is quite easy to have profits less than 3%; in fact, many plans may have priced for lower profit margins than that. And this is the crux of Katterman’s “asymmetry”; it isn’t so much a direct characteristic of the formula as it is a characteristic for how the formula was calibrated.
It is admittedly mind-blowing to think of a target as being predominantly a function of the actual amount with those two odd adjustments, but the algebra is unforgiving. This is a significant distinction between the Part D risk corridor program, where the target is a function of a plan’s “bid,” which makes a reasonable proxy for “expected”. In the ACA risk corridor, in contrast, if you price for something lower than 3% profit, then you would *expect* claims to be higher than target.
The first AV Calculator was published prior to the 2014 benefit year. Deep in the bowels of the calculator were a series of continuance tables. In these tables, you could add up all the parts that make up health insurance claims — in-patient claims, ER claims, drug claims — and compare that to the total expected cost per member. If you do that comparison, you will find that the pieces are $297.06 short of the total, for all “combined” continuance tables.
That’s true for the platinum tables that have higher expected costs. It’s true for the bronze tables that have lower expected costs. That’s true of the silver and gold tables that are somewhere in between. To be clear, it’s not just true that all have a gap. All have the exact same size of gap, $297.06.
Then along came 2015, when CMS introduced something called an “effective coinsurance rate” calculation its draft calculator. All of the continuance tables were identical to the 2014 calculator, so the magic $297.06 appeared again, repeatedly. More interestingly, somewhere around line 3200 of the code inside Excel, you will find the following:
eff_coins = (eff_coins + 297.06 * coins) / (Worksheets(Sheetstr).Cells(88, “C”).Value)
Suddenly, the magic $297.06 that was fixed for any benefit tier in 2014 becomes a function of the underlying coinsurance for the benefit plan (the variable “coins”). The draft 2015 calculator was never approved for use, so no harm, no foul, but set the seeds for …
… the 2016 Calculator , the odd code that appeared in the draft 2015 calculator appears again, this time around line 3300 (search for “+ 297.06”). This time, the calculator goes into production.
Even worse, for 2016 ER costs in the continuance tables were increased by more than 13% (6.5% per year for two years). IP costs went up similarly. Physician costs went up similarly. In fact, every component of health spending for every benefit tier went up by about that same amount … except for the poor, lonely, uncategorized $297.06. This is why when you measure annualized trend by category from the continuance tables, you will see roughly a 6.5% rate applied to each category … but the total increases by something lower than that, 6.2% and change, depending (see below).
And now, at long last, we have a draft 2017 Calculator . Again, each component of the continuance tables went up 6.5%. So, naturally, the first thing I check in the new calculator is the magic $297.06. Would it survive another wave of trend? Would it remain constant across benefit plans? Would they continue to apply coinsurance to it in the macro, despite not allowing the underlying richness of the benefit tier to impact it?
Yes, YES, and YESSS!
This, my friends, is why you don’t set your premiums based upon the AV calculator. Because outside of Washington DC bureaucracy, there is nothing magic about $297.06 that makes it work for every benefit, every year, where you can simultaneously *apply* coinsurance (within the effective coinsurance rate calculation in the macro) and *not apply* coinsurance (the same gap exists in each metallic tier).
And in case anyone is interested, there’s a parallel issue within the separate medical/rx portion of the calculator. Perhaps that will be fun in a post I’ll do for 2018.
A summary of all of the relevant continuance tables, trend values, and the calculation of this magic $297.06 are below the fold.
P.S. Despite the sarcastic tone in this post, in all seriousness if there’s a rational explanation for what this $297.06 represents, I would like to hear about it. If there is such a rationale, it should be a prominent part of the documentation.