The Actuary Magazine December 2004 - Health Care: From Opaqueness To Transparency

Health Care: From Opaqueness To Transparency

By John W.C. Stark

If you're a health actuary, you're going to want to know about the top issues you'll be facing and what the SOA is planning to do to address them.

The SOA's health leadership met earlier this year for an all–day meeting in New York. A significant portion of that meeting was spent discussing current challenges facing the U.S. health care system and how the SOA can best serve its members by addressing top priority issues.

Four areas in particular stood out:

  • Transparency in health care information
  • Health care financing and affordability
  • Variability, and
  • The impact of an aging population.

To help give the general SOA membership a better understanding of the issues that health actuaries, in particular, deal with on a day–to–day basis, the following series provides a thumbnail sketch of these issues. This article addresses the first of these issues. Other issues will be addressed in future editions of The Actuary.

Why Now?

In the past few years, companies have come under increasing pressure to make their financial reports more transparent. Health care companies are no exception. The pressures come from sources common to all public companies (e.g., Wall Street analysts) as well as from other areas unique to the health care industry.

We are all well aware of the reasons that various stakeholders are demanding transparency from all publicly held companies. The driving force is the scandals that have occurred in the past few years. This has spawned requirements from legislators, regulators, rating agencies, stock analysts, shareholders and customers to have better and more transparent financial reporting in order to understand a company's financial condition. Hopefully, this movement will enable all of these groups to regain confidence in companies and their management.

Transparency for Health Insurers

In addition to the reasons mentioned above, health insurers have more demands for transparency due to the nature of their business and the state of health care financing today. Some of these include the consumerism movement, affordability, solvency, and increased regulation.

The consumerism movement has made a significant contribution to the issue of health care transparency. As consumers are being expected to either share in more of the cost of health care and/or to manage a pool of funds to pay health care expense, they need better information from health plans about benefits, providers, and treatment options in order to be more efficient users and purchasers of health care services.

Affordability has been a critical issue for some time and has gained even more importance with the recent rise in health insurance premiums, the increasing number of uninsureds and levels of executive compensation. For public companies this issue is complicated by the conflicting needs of consumers and regulators on one hand and the capital markets on the other.

Solvency is becoming a greater concern in this environment. While all of the stakeholders want a financially viable health insurance industry, they require companies to walk a finer line to attain this status. In the past, health carriers could hold substantial reserves in order to guarantee solvency. For public companies especially, this is no longer acceptable. High levels of reserves lead to increased premiums, inefficient use of capital, and raise questions of managing results.

Three other areas that are driving forces in health care financing are provider networks, the role of benefits consultants and increased litigation. Increasing transparency may or may not highlight the effects of these forces. Provider networks represent one of the largest issues for health carriers. Balancing the requirements of affordability and accessibility is extraordinarily difficult. Benefits consultants help companies to select from the myriad of health insurers and benefit structures available in the market. In tailoring benefits for a company, there can be additional costs in terms of administering unique benefits and supplying information. Finally, health insurers are being sued by a variety of parties including members and providers. These lawsuits consume considerable time and money.

Once an industry has shown that it cannot police itself, the standard response is increased regulation. This has serious implications for health insurers since regulation occurs at both the state and federal levels. The regulatory burden ranges from severe for smaller carriers to heavy for large companies. Witness the resources used to implement HIPAA and Sarbanes–Oxley, which could have gone to address some of the issues mentioned above.

In tackling the issues that have resulted in the demand for more transparency, health carriers need to learn the lessons from the early stages of the managed care era. Cost saving initiatives must be clearly communicated, must be shown to be in the interest of all concerned, and must be monitored to determine if they truly save money and/or enhance quality.

Enter the Cavalry

What does all of this mean for the actuarial profession as a whole and for individual health actuaries in particular? Well, as actuaries, we wrestle with each of the issues mentioned above on a daily basis. Our challenge is to help solve a constrained optimization problem. By definition, none of the parties will be completely satisfied since the solution will accommodate the needs of the system not of the individuals.

While actuaries, as a profession, are ideally suited to tackling this problem, we face, in–creasing demands to make our own processes more transparent as well. Actuaries have the combination of mathematical and business knowledge necessary to lead the charge. In addition, we have the standing of a profession and all that that entails. On the other hand, we are under increasing pressure to justify our models, especially those used to establish estimates of liabilities. Also, Professional Judgment as a general concept has come under greater scrutiny over the past few years. Actuaries need to be able to clearly explain the rationale behind specific estimates as well as the modeling tools and the assumptions on which they are based. Actuaries need to ensure that explanations are clearly understood and accepted by the profession's end–users; to the extent they are not, the end–users will be left to develop their own means for determining whether they will accept the actuary's results.

Individual members need to maintain high professional standards no matter what their role. In addition, members should reassess their roles within their own organization. Are you a pricing actuary or do you coordinate all risks associated with setting rates? Members can look to enterprise risk management as a way to help clarify their roles and manage risk.

On the technical side, individual members need to be active in developing new methodologies and in defining data needs. Analytical needs often outstrip data availability. Also, with Sarbanes–Oxley and HIPAA, IT resources are in short supply. So, developing better models is critical. We must be active in defining data needs and this information must be shared with not only IT professionals, but also with users of actuarial work products in our organizations as well. This will ensure that actuaries have the best information available to meet the needs of the organization. These days, part of the ongoing balancing act is to balance the cost of data collection with the value of the data?and actuaries can help show the value of data.

John W.C. Stark, FSA, is executive director and actuary at Anthem Health Plans of Virginia, Inc.  in Richmond, VA. He can be contacted