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The Actuary Magazine October 2004 - Readers' Letters

Readers' Letters

by The Actuary Readers

Discussing Consumer Driven Health Plans

In his article "Evaluating the feasibility of Consumer Driven Health Plans," Scott Weltz makes the statement that "many actuaries would agree that a $1,500 deductible plan will result in a lower level of utilization than a $250 deductible plan, all else being equal." It is that "all else being equal" that gives me serious pause for thought.

As an in-house actuary for our employee benefit plans, I can see the differences in such plan costs. However, I can also see the differences in enrollment and the demographic characteristics of the population in each plan. Nothing is ever "equal." At least Mr. Weltz recognizes that in his paragraph on "Selection." In addition, I am just beginning to read experience studies for consumer driven health plans (where experience, at least up until now, is certainly short and spotty) that suggest "wiser consumption of medical services" is not necessarily the rule. More often, cheaper preventative medical visits are forgone, resulting in more serious and costly medical intervention at a later date. "Steerage" by copays and deductibles has proven far less effective than measures that have "steered" participants into network-oriented plans at substantial discounts to retail medical prices and with at least a modicum of care-management. As a result, there is still a substantial resistance from most employers to "consumer-driven health care" which raises serious doubts about claims of "significant growth over the next few years." Does anyone remember when HMOs were to be the saviour of employer health plans or when the legislative constraints on the number of Medical Savings Plans were thought to be too draconian?

Richard Barney, MONY Life Insurance Company

Mr. Barney's comments add a healthy dose of skepticism to the discussion of Consumer Driven Health Plan (CDHP) feasibility. I agree with many of his comments and would also add the following:

First, I agree that "nothing is ever equal" for purposes of evaluating health costs. In fact, I believe actuaries add significant value to such analyses and that this is the very reason many entities bearing risk for healthcare coverage seek our profession's advice.

I also share Mr. Barney's concerns regarding the potential decline in health status if care is foregone with CDHPs. However, I think it is too early to reach the conclusion that CDHPs "result in more serious and costly care at a later date" when experience to date is "spotty." Many entities offering CDHPs are aware of this concern and have begun to address them. CDHPs often provide preventive services on a first dollar basis. Some CDHPs only require higher levels of cost sharing for discretionary care while non-discretionary care is provided at a higher benefit level. Still, the balance between providing adequate care and properly limiting utilization is something that must continue to be addressed.

Finally, Mr. Barney doubts that "CDHPs are poised for significant growth over the next few years" as he compares this to the recent decline in HMO enrollment. I counter that if CDHPs gain a fraction of the market share that HMOs have achieved, this will be a step in the right direction. HMOs brought added discipline to provider practices via managed care and risk sharing while offering consumers a rich plan design with limited provider choice. CDHPs bring more discipline to consumers via leaner plan designs with incentives to reduce unnecessary healthcare spending while de-emphasizing active provider management. Neither concept is a silver bullet for solving this country's healthcare financing problems. However, both contain elements that could be part of a plausible solution.

Scott Weltz, Milliman

The following is written in response to an article that was authored by Narayan Shankar, SOA staff actuary, for the May issue of The Actuary newsletter.

Views on VAR

I would first like to congratulate you on writing a thoughtful and provocative article for the May issue of The Actuary newsletter. You have provided a wake-up call to actuaries who may have become complacent in their knowledge or role about the new environment we face and what we need to do going forward.

That said, some of the bold positions you have taken have aroused the contrarian in me and I feel compelled to respond to them. I would certainly applaud those in the banking world who have employed advanced mathematics to develop a risk management framework. Nevertheless, I feel as though it's a bit premature to "declare victory" there. We really cannot consider VAR battle-tested until it proves itself in some very difficult circumstances, such as a significant and sustained rise in interest rates and/or a major recession. Until then, the jury is out.

My next reservation has to do with the limits on sophisticated mathematics in general. As actuaries, we know that mathematics can be a very powerful tool. But we also must be aware of the tendency of individuals who are only carrying a hammer around to see every problem as a nail. Sometimes when the problems seem overwhelming and intractable, that should be taken as an indication that we have made a mistake (we have offered the wrong kind of benefit, priced it incorrectly or made some other mistake that has put us in a predicament), not that we are lacking in our mathematical prowess. Given the long-term nature of many of our products, we do need to manage these situations as best we can. But we should not delude ourselves into confusing damage control with proper risk management.

After arriving at the above conclusion, I read an article in the March 2004 Risk Management newsletter which comes to this position from a different angle, albeit a bit more formally. In "Where is ERM Heading?" Shaun Wang states the following: "For pure investment activities, financial economics offers indispensable insights for ERM. For non-investment activities, I think that the theoretical foundation for risk management has more to do with management science than financial economics."

From a practical standpoint, what does this mean for the actuarial profession? It means that we should spend at least as much time determining how we can avoid exposing ourselves to unacceptable risks as we do on trying to manage the ones that are already out there. As in medicine, geopolitics and probably every other sphere, it is almost always more feasible to prevent or solve problems at an early stage, than it is to address them after they have spun out of control.

Finally, your article made me realize that a major challenge to actuaries who aspire to positions such as CRO is having the intestinal and intellectual fortitude to question the conventional thinking and risk the safety of established practices and standards. For example, you describe the debate in pension ALM between investing 70 percent versus 60 percent of assets in equities. A CRO might rightfully ask whether a pension fund should invest quite a bit less than 70 percent in equities when stocks are in a bear market, such as now. But to actually drive through such a policy, one would have to go against the grain of fiduciary standards that dictate that it is appropriate to invest the majority of long-term pension funds in equities.

While it might be the smartest thing to do financially, it is politically risky, since it is always safer to go with the herd. If you follow the status quo and the bear returns from hibernation, you will suffer along with a lot of other companies, but you will be unscathed personally, since you were fulfilling your fiduciary responsibilities. If you did reduce your exposure to equities and the bear remained in hibernation for many years, you would get attacked from all sides. Frankly, these types of challenges would be difficult for anyone to overcome, but many actuaries would not have the stomach for it.

In sum, I applaud you for your personal efforts and your call-to-arms to the profession. I will certainly be following the new developments closely and contributing where I can.

Dave Weiner

Thanks for your insightful letter in reaction to my article. I was particularly pleased with your concluding remark that you will be following the new developments and contributing to the dialogue–I think it is crucial for the profession that we all do so.

It was a pleasure to read your letter, especially because there was almost nothing there that I could disagree with. I will briefly address each of your observations, to clarify my thoughts on them.

Your first observation pertained to VAR not being "battle-tested" with respect to a significant and sustained rise in interest rates and/or a major recession. This might be the one item on which I see it a little differently. I view VAR as essentially a short-term dynamic measure, intended to be used somewhat like delta-hedging. Hence, long-term effects like a sustained rise in interest rates or a recession are outside its scope as a risk management tool. Of course, this underscores the limitation of VAR, and its inapplicability outside a somewhat narrow and specific area. So, please don't interpret my comment as "rising to the defense" of VAR.

I cannot agree more with your second observation about the limitation of mathematical analysis. Indeed, this is one of my pet peeves about some actuaries, that they can be guilty of precision and thoroughness unwarranted by the reliability of the available data and out of line with the business need. Certainly, mathematical analysis can never be a solution for bad business decisions.

Regarding your third point about the theoretical foundation of risk management in non-investment activities being more in management science than financial economics, I agree if financial products such as insurance are included as an "investment" activity. Especially with respect to operational risk, the current emphasis is entirely on management science, as I noted in my article. Process control and "prevention" (such as Six Sigma), rather than financial economics techniques such as hedging and diversification, are the answer.

Finally, you noted the political risk actuaries face if they defy mainstream practice, as in the case of pension fund asset allocation. This only underscores the need for actuaries to be engaged in developing a sound theoretical foundation for risk management. If this is done, we can practice the right approach with confidence, rather than go along with a flawed approach simply to avoid being the scapegoat when things go wrong. ALM is a relatively new field of practice–much remains to be done and there are tremendous opportunities for actuaries in this exciting discipline.

Thanks again for your letter and the effort to start a dialogue. I have enjoyed the discussion.

Narayan Shankar, staff actuary, Society of Actuaries