# Hypothetical Mean

Commentary from an Actuarial and Economic Perspective

## Risk Corridor “Asymmetries”

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.

Written by Victor

December 15, 2015 at 9:11 pm

Posted in Healthcare Reform

## The AV Calculator’s Magic \$297.06

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.

Written by Victor

December 9, 2015 at 3:31 am

## Paying for Contraceptive Coverage: The Case of Self-Funded Employers

Most Catholic institutions affected by the recent contraceptive ruling fund their own health benefit plans. This means that there is no “insurer” available to pass the cost of that coverage on to, even in a shell-game sort of way (see prior posts on large and small employers that purchase insurance).  When the Administration announced its compromise for the relatively insignificant fully-insured market, it didn’t offer any compromise for the much larger set of religious self-funded plans.  Instead, they announced an intention to figure out how to compromise:

The Departments intend to develop policies to achieve the same goals for self-insured group health plans sponsored by non-exempted, non-profit religious organizations with religious objections to contraceptive coverage.

In this past week’s Advanced Notice of Proposed Rule-Making (ANPRM), Health and Human Services (HHS) began the brainstorming process:

For such religious organizations that sponsor self-insured plans, the Departments intend to propose that a third-party administrator of the group health plan or some other independent entity assume this responsibility. The Departments  suggest multiple options for how contraceptive coverage in this circumstance could be arranged and financed in recognition of the variation in how such self-insured plans are structured and different religious organizations’ perspectives on what constitutes objectionable cooperation with the provision of contraceptive coverage.

These options (beginning on page 16,507) can be summarized as follows:

1) Use drug rebates;
2) Use fees paid by the religious organization nominally designated for another purpose, such as disease management fees;
3) Use funds from a private, non-profit entity to be specified later;
4) Receive a “reinsurance contribution” fund rebate or tax credit (this only “works” for 2014-2016);
5) Use the federal Office of Personnel Management designate a national, private insurer that would offer this stand-alone coverage;
6) Give the national plan a “credit” so they wouldn’t have to pay their entire Exchange fee bill;

This is an incredibly weak set of ideas.  These boil down into the following “pass the hot potato” funding sources:

a) The religious institution itself (ideas 1 and 2)
b) The third-party administrator itself out of profits (ideas 1 and 2)
c) The individual market via reduced reinsurance payments and/or the general US Treasury (idea 4)
d) An unspecified, wealthy benefactor (idea 3)
e) A benevolent, national, private insurer (idea 5)
f) Each of the individual Exchanges through reduced user fees (idea 6)

The administration is between a rock and a hard place here.  It is worth working through the mechanics of each of the above ideas, however, to illustrate the full breadth of the problem.

Written by Victor

March 24, 2012 at 3:47 pm

Posted in Healthcare Reform

## Preventive Care and Actuarial Value

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Under healthcare reform, women’s preventive services will be covered at no direct cost to women.  The Heritage foundation writes:

In addition, mandated coverage of preventive services with no cost-sharing will increase health care costs, since cost of services will simply be passed from the insurer to the patient through higher premiums.

This is only entirely true in the large group market.  In the individual and small group markets, other health benefits may end up being cut to compensate.

The key is in the restriction that *every* plan (on the Exchange or otherwise) must meet a particular actuarial value, say 60%.  What that means is that health plans must pay, on average, 60% of the cost of covered services.

Let’s assume that the Obama administration rules boost preventive service utilization up to 10% of total services (a nice round number).  Let’s further assume that these services must be paid for at 100%.  In order to comply with an overall actuarial value of, say, 60%, health plans will need to cover all non-preventive services at a rate of 50/90=55.6%.

In this manner, premiums for the 60% actuarial value plan don’t go up.  What you have done is to take from the sick and give to the healthy.  Specifically, the health plan can’t even pay 60% of the cost of other diagnostic imaging, cancer treatments, etc.  They have to reduce their effective cancer coverage in order to boost the detection of that coverage via preventive services.

[Note: through indirect and highly speculative conversations, I understand that HHS may be considering an actuarial value model that is so crude as to not be able to capture the above effects.  To the extent our federal government is not going to calculate actuarial values correctly with respect to this issue, then the Heritage analysis may end up being more correct in all markets.]

Written by Victor

March 24, 2012 at 2:23 pm

## Funding The Affordable Care Act’s Reinsurance Program

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Earlier this month, HHS issued the final rule for the reinsurance program under the Affordable Care Act (ACA).   I believe it will be highly controversial once it becomes understood.  I’ll start with a backgrounder and then move to a short discussion of how this is a tax on states, how it may adversely impact employees of state governments, and how the government is proposing to selectively administer these taxes depending on the religious beliefs of those involved.  This post is necessary background to fully understand the Administration’s proposed “compromise” on contraceptive coverage, which I am covering in a series of posts beginning here.

Written by Victor

March 23, 2012 at 4:14 pm

## Paying for Contraceptive Coverage: The Case of the Small, Fully-Insured Employers

[See the introduction and the post on large employers for the two prior posts in this series.]

The Adminitration’s Advanced Notice of Proposed Rulemaking (ANPRM) discusses in some detail how contraceptive coverage for women employed by religious organization should be paid for when the religious organization is participating in the small employer market (defined as 50 employees or fewer):

Issuers would pay for contraceptive coverage from the estimated savings from the elimination of the need to pay for services that would otherwise be used if contraceptives were not covered.  Typically, issuers build into their premiums projected costs and savings from a set of services. Premiums from multiple organizations are pooled in a ‘‘book of business’’ from which the issuer pays for services. To the extent that contraceptive coverage lowers the draw-down for other health care services from the pool, funds would be available to pay for contraceptive services without an additional premium charged to the religious organization or plan participants or beneficiaries.

This  is vague, so we’ll have to decompose the quote.  First, we’ll discuss how small employer (small group) “books of business” are pooled.  Second, we’ll work an example where we presume that one small group (out of ten total) is a religiously affiliated organization and exempt from the contraceptive mandate.  Third, we’ll then hypothesize how the Administration’s rule could make coherent sense as applied through small group rate review laws.  The conclusion will be that they are generally proposing that the non-religiously affiliated employers will pick up the direct cost of contraceptive coverage on behalf of the religiously affiliated ones, but it is possible that they are proposing that the religiously-affiliated employer will pick up the entire cost of contraceptive coverage.

Written by Victor

March 22, 2012 at 6:49 pm

Posted in Healthcare Reform

## Paying for Contraceptive Coverage: The Case of the Large, Religious Employers

This is the first detailed post in a series on contraceptive coverage.  The introduction was here.

For large, fully-insured, religious employers, the Administration is proposing that health insurance companies be able to contact individual women employed by the religious organization.  Specifically:

The issuer must … provide to the participants and beneficiaries covered under the plan separate health insurance coverage consisting solely of coverage for contraceptive services required to be covered under this section. The issuer must make such health insurance coverage for contraceptive services available without any charge to the organization, group health plan, or plan participants or beneficiaries. …  The issuer must not impose any cost sharing requirements (such as a copayment, coinsurance, or a deductible) on such coverage for contraceptive services and must comply with all other requirements of this section with respect to coverage for contraceptive services.

So far, so good.  Both the Catholic institutions and women’s groups are happy; health insurers are not.  But then, the Advanced Notice of Proposed Rule-Making clarifies how this is to work in practice:

Issuers would pay for contraceptive coverage from the estimated savings from the elimination of the need to pay for services that would otherwise be used if contraceptives were not covered.

Such a simple sentence, but with huge ramifications.

Written by Victor

March 22, 2012 at 4:34 pm

Posted in Healthcare Reform