Health Care Financing and Affordability: What It Means To Actuaries

Health Care Financing and Affordability: What It Means To Actuaries

by Dave Axene

All actuaries can play a part in improving the system.

The Society of Actuaries' health leadership met earlier this year for an all-day meeting in Chicago. 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
  • Variability
  • Health care financing and affordability
  • The impact of an aging population.

To better give the SOA membership a thumbnail sketch of these issues that health actuaries, in particular, deal with on a day-to-day basis, the following article addresses the third issue. The first and second were described in the Dec. 2004 and Feb. 2005 issues of The Actuary.

The Issue
The United States spends more on health care per capita than any other country in the world, and health care cost trends continue to outpace increases in other types of goods and services. The percent of the U.S. G.D.P. attributable to health care has risen to a new high of approximately 15 percent and is expected to continue to increase to approximately 18 percent by 2013.

Health care benefits are the second largest employee expense for those corporations that offer them. Employers are trying to manage their health care expenses through a variety of means, including (but not necessarily limited to) increasing employee contributions and cost-sharing provisions, offering consumer driven health plans, implementing disease management programs, and at times, through reducing or eliminating coverage (for actives and/or retirees) altogether.

Health care consumers are finding the increase in their costs to be reaching unaffordable levels and at times may have to make decisions between purchasing health care, health insurance or other basic necessities. While not limited to these groups, the problem is especially acute for early retirees, small business employees, the self-employed and others with limited group insurance purchasing options. As a result, the number of uninsured is growing, which limits access to health care and puts additional pressure on providers of care and those who finance health insurance programs, whether private or public.

Challenges and issues related to health care affordability are not limited to individuals and employers, or the United States, alone. While much of this article discusses the U.S. situation, government bodies around the world, including provincial and federal governments in Canada, will also need to consider how much publicly provided health care can be afforded under various resource bases.

The Actuarial Implications
The financial strains of the health care system have many actuarial implications. These will be discussed separately at both the macro and micro level.

At a macro (profession-wide) level
Actuarial thought leadership is needed and can add value, relative to new ways to structure health care financing and health care systems. Actuaries need to consider how to define, consolidate and integrate different types of data (such as, quality measures, efficiency measures, effectiveness measures, etc.) into meaningful financial models to assess the key aspects of a health care system and how they could be improved.

The profession also needs to more closely integrate itself with health care delivery experts to improve its effectiveness. The integration of the practice of medicine with the practice of actuarial science provides great opportunities to provide improved problem solving. For example, integrating actuarial science with epidemiological studies provides meaningful breakthroughs in understanding how care is delivered, how it should be delivered, and the differing financial and health outcomes of different approaches.

The profession needs to understand the different health care costs and utilization drivers and their impact on health care trends. The emerging health care crisis requires both short-term and long-term solutions, which require clear understandings of likely short- and long-term health care outcomes. The profession needs to take a leadership position in developing these perspectives.

There is a strong professional interest and need to have a "seat at the table" relative to reform discussions and long-term forecasting of social insurance programs. An actuarial perspective can add value to these discussions, especially relative to financial viability considerations and the underlying intricacies of health care system dynamics and metrics.

As potential changes in the allocation of responsibility between public and private emerge, the overall impact of these types of changes needs to be understood. This assessment can best be done by or with the help of the actuarial profession, and is particularly important if the changes impact the artificial lines between the predominantly employer-funded care and government-funded care (i.e., Medicare and Medicaid).

At a micro (individual-member) level
As health care costs continue to rise, employee-benefits and some health plan actuaries will be engaged to help their employer clients with challenging decisions relative to offering health insurance benefits to their employees and retirees (in terms of plan offerings, plan design and financing, including from a cash basis and an accrued liability basis). Actuaries will also be engaged in helping their clients understand and respond to the new Medicare Modernization Act (one of the recent policy responses to the affordability issue).

Health actuaries are and will continue to be involved in the development and financial modeling of new potential approaches to efficient health care financing and purchasing:

  • Consumer-driven health plans
  • MSAs/HSAs
  • Tiered networks
  • Pay-for-performance methodologies
  • Medical management effectiveness studies.

Actuaries will also need to be cognizant of issues that arise due to the blurring of group, small group and individual health plans due to the emergence (and now tax favored treatment) of some of these newer approaches to financing health care.

In today's environment, actuaries less familiar with the complex technical issues associated with selection bias, risk assessment, predictive modeling, medical management, etc., will need to upgrade their professional knowledge and competency to be able to participate in these discussions.

Future Challenges
Even with the recently improving economic situation, the excessive escalation of underlying health care costs, rising premium rates and the inability to absorb these increases is leading to a worsening of the affordability situation. Federal deficits continue to increase, corporate earnings are less than stellar, interest rates are starting to rise, and the average consumer is having a hard time keeping ahead. A solution is needed now before the problem worsens further.

The actuarial profession and each actuary can play an important part in the solution process wherever they are. Specifically, if they work for an insurance company or health plan, they can take a leadership role in broadcasting the nature of the issue to mobilize more, they can take a leadership role in helping their employer craft improved solutions for their customers, and they can complete analyses of their organization's effectiveness as to how it improves the cost and affordability of care. If the actuary works for a consulting firm, they can take a more active role in helping their customers understand and improve these issues. If the actuary works for government, they can take a more active role in communicating the real issues regarding the affordability of care. All actuaries, wherever they work, and in their personal lives, can become more active in helping their peers, friends and families understand the situation and how it could be improved.

Dave Axene, FSA, is president of Axene Health Partners LLC. He can be contacted at: