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A Healthy Future? Risks and Opportunities Facing the Health Discipline

A Healthy Future?

Risks and Opportunities Facing the Health Discipline

By Jim Toole

If the U.S. health care system is in crisis,1 where does that put the health discipline? Are health actuaries confidently navigating new horizons, or are we at the mercy of the elements: driven by a maelstrom of legislation, upended by rogue waves of cost increases, and withered by barriers to access while sharing our craft with the ravenous tiger of disparities in quality and outcomes? To understand the challenges facing the health actuary, we must first examine the dynamic environment that is the health care system in the United States. The health discipline is young, and as such, has had a relatively prescribed and narrow role within that system. While that may be comfortable for today's health actuary, it means the discipline is potentially losing its voice to other professions as we remain focused on the needs of insureds and their insurers. The profession needs a seat at the table; the Health Section is working to get us there, but the SOA, and the rest of the profession, must act in concert to move health actuaries deeper into the dialogue. If we truly believe that "Risk is Opportunity," then it's time for health actuaries to move out of the shadows and onto center stage.

The Health Discipline, Yesterday...

To understand the role of the health actuary in the health ecosystem today, you have to consider its history. As a distinct actuarial discipline, health is relatively new. Despite the early roots of health insurance in fixed benefit hospital indemnity products sold by life insurance companies, the primary health insurance products of today have more in common technically with property and casualty insurance. In addition to Major Medical, the health discipline also encompasses the following services and product types:

  • Employee benefits.
  • Long–term care.
  • Disability income.
  • Ancillary benefits (critical illness, dental, vision).
  • Hospital indemnity.

Driven by the rise of managed care and the emergence of large, well capitalized national health insurers and HMOs, health began emerging as a separate actuarial discipline in the early 1970s, when the first specialty meetings focusing entirely on health were held. A health track was added to the exam schedule soon thereafter. Enabled by board resolution, this trend was solidified in 1982 when Paul Barnhart and others took action to form the Health Section as the first special interest section. In 1990, the American Academy of Actuaries (AAA) followed suit, forming practice areas to address the unique needs of the casualty, health, life and pension disciplines.

In 1993, the discipline faced its first critical test: federal health care reform. Responding together, the Society of Actuaries (SOA) and the Academy coordinated more than 110 volunteers on 17 work groups to analyze reform components. Securing acknowledgement of the discipline in the process and recognition of the importance of the volunteer work groups' contribution proved to be difficult. More than a few of those involved complained that actuaries were not given a seat at the table. Bart Clennon, chair of the Communications Work Group, remembers the frustration at not being able to gain access to needed information.

Since that time, reform has been primarily at the state level. Massachusetts has been the biggest experiment to date in terms of providing universal access. At this point we must wait and see what the 2008 election brings, although time and again action on federal health reform has fallen far short of the discussion.

Today...

Today, there are approximately 3,000 self–identified health actuaries in the SOA (16 percent of the total membership) and 3,500 members of the Health Section. Overall, SOA membership has grown 55 percent since 1990, while the number of health actuaries has grown 70 percent. Seventy percent seems quite reasonable considering the overall profession only grew at a rate of 55 percent, but pales when you consider that the size of the health economy has expanded a whopping 295 percent during the same time period. There are reasons why the growth in health actuaries under performed the market (e.g., insurer consolidation), but because the market evolves so rapidly, new ecological niches are constantly being created for the health actuary to exploit.

The ratio of FSAs to ASAs in the health discipline is 140 percent while it is 195 percent in life. This is indicative of the fact that more health actuaries find rewarding, high level roles at the career ASA level than in the life discipline. This suggests either the market has not placed a premium on the health content of the exam curriculum or the manner in which it was delivered. From a qualitative perspective, health actuaries seem to have more than their fair share of the business savvy and communication skills that surveys suggest are in short supply in our profession. Clearly, it is these "soft" qualities in combination with core quantitative skills which make health actuaries valuable to their traditional employers, not the letters after our name.

In a recent section survey, 89 percent of health actuaries characterized themselves as "traditional" actuaries. Traditional work includes trend analysis, pricing, reserving and underwriting, as well as review of stop–loss reinsurance programs for self–insured groups. Individual, small and large group, limited benefit, worksite marketing and government programs all fall under the aegis of traditional products.

The section survey revealed a serious gap in the supply and quality of experienced health actuaries. Health actuaries shape the financing and structure of 16 percent of the U.S. economy (some $2.1 trillion dollars), but do not come close to keeping up with demand for services (an important component of the SOA strategic plan). Comments from participants reiterated concern over a shortage of experienced health actuaries and pointed to a wide variety of symptoms and possible causes. A roundtable discussion with the Health Section Council confirmed the results of the survey. Council members agreed it can be very challenging to find health actuaries with the appropriate skill set for a given position. Although applications may be received, positions may go unfilled for a year or more, or employers may just give up the search.

The Current Industry Environment

If one were to choose a single word to describe the U.S. health care system, it would be fragmented. Fragmentation cuts across all aspects of the system–from payors to providers to doctors to consumers–with consequences both predictable and unanticipated.

Payors

According to 2006 statistics from the Office of the Actuary, about 53 percent of U.S. health care costs were paid for by the private sector. Twelve percent were paid by individuals (including out– of–pocket and uninsured). Some 15 percent is paid for by businesses which self–insure; only 19 percent of U.S. health care expenditures are funded through private insurance. In the private sector, the fight over (profitable) healthy bodies leads to expense levels as high as 30 percent spent on administration rather than the provision of care. The remaining 7 percent of private sector expenditures are funded by philanthropy and other sources; when combined with individual out–of–pocket costs this equals the size of the entire private insurance market.

The remaining 47 percent of health care costs are funded by the government, primarily in the form of Medicare and Medicaid. This can be contrasted with government financing levels of 86 percent in the United Kingdom, 70 percent in Canada and a mere 36 percent in communist China.

Providers

Hospitals, like payors, have different missions. Some are for–profit, others not–for–profit and others public (government funded). Except for the lack of SEC oversight, by most financial measures non–profits are run essentially the same way as for–profit institutions, competing for doctors, market share and profitable patients. On average, less than 5 percent of care provided in these institutions is uncompensated, according to a recent study by the Congressional Budget Office. Public hospitals have become the dumping ground for uncompensated care, providing an average of 13 percent uncompensated care, with 10 providing 28 percent or more. Although these institutions are the backbone of urban community care delivery–from Grady Memorial in Atlanta to King–Harbor in Los Angeles–they are constantly in financial crisis, as federal, state and local budget makers play an unholy game of chicken with non–profit grant makers to see who will grab the ambulance wheel first.

Doctors

Once in the system, doctors face difficult choices. Young doctors graduate with crushing debt loads, ranging from $100,000 to $150,000 from medical school alone. These must be repaid while starting families, buying houses, starting college funds and saving for retirement. Because reimbursement mechanisms are skewed towards providing services rather than outcomes or wellness, the average salaries for specialties such as orthopedics can be three times the rate for primary care physicians. This has produced a shortage of primary care physicians, leading to the unexpected result that 25 percent of primary care physicians in the United States are foreign nationals on H1B visas. These incentives result in an inverted pyramid focusing on heroic interventionist care versus evidence–based primary care and basic public health measures, resulting in increased costs and inferior population health measures.

Businesses

For many companies, health benefits are the largest single expense item outside of payroll. We've all heard the rumor that GM spends more on health care than it does on steel (it's true). Desperate to control their expenses, companies are shifting more of the (after–tax) cost of care to their employees. Perverse incentives skew the labor market. Because of benefit costs, employers have clear motivations to hire young workers over old workers and healthy workers over unhealthy workers. This can lead to job lock for older workers or workers with preexisting conditions. Entrepreneurial activity in this country is stifled due to the difficulty in obtaining affordable health insurance for individuals and small businesses.

Individual Consumers

Of the 35 percent of Americans between the ages of 19–64, an estimated 47 million are uninsured, and another 16 million underinsured lack the financial protection to cover their health care expenses. Medical bankruptcy is the largest single cause of bankruptcy. This affects choices of when to go to the doctor and how efficiently care is delivered, ultimately impacting both cost and outcomes. Underinsured, low wage workers with high deductibles are faced with difficult choices between necessities and health care. Here again, policy affects the affordability of care. Health insurance and normal health care expenditures are not deductible for individuals, while benefit costs are deductible for businesses.

The predictable result of all this is highly variable patterns of care, widespread failure to implement recognized best practices and standards of care, and the persistent inability of provider systems to achieve substantive changes in patterns of practice.

Another word many might choose to describe the U.S. system is inefficient. Inefficiency is certainly one result of fragmentation, but the inefficiency of our system goes far deeper than that, encompassing both the cost of care (outrageous) and quality (uneven at best, and dangerous far too often). Americans spend more than twice the amount other industrialized nations pay per person, and fully four times the efficient frontier of a "world class" system in terms of measurable outcomes.

So, what do we get for our money? A health system ranked at 37th in the world by the World Health Organization, an infant mortality rate more than twice that of Japan and Sweden and an overall population health ranking of 72 among 191 member states. Adding insult to injury, satisfaction levels with our system–as viewed by both the general public and sicker individuals–are significantly worse than government funded systems in Australia, Canada and the United Kingdom.

There are those who would argue that this is the system we have because this is the system we want. Systems and individuals respond to incentives. However, incentives are clearly geared to the delivery of care, not outcomes or, heaven forbid, keeping people healthy. Public health–the first line of defense for healthy populations– receives only one to two cents of the health care dollar. Yet according to the Centers for Disease Control and Prevention (CDC), public health is responsible for as much as 80 percent of the improvement in longevity over the last century.

The primary forces affecting the U.S. health care environment are familiar. These are the same issues faced by every system in the world: cost, quality and access. But one issue is uniquely American: racial disparities in access, delivery and outcomes are the country's dirty little secret. Despite significant progress in the 1960s and 1970s, the ratio of non–white to white infant mortality remains well above 200 percent, and the gap has widened in last decade. Even with the introduction of programs designed to control disparities in infant and young adult mortality, the life expectancy at age 25 for black males is a full three years less than for white males from comparable socio–economic backgrounds. Dr. Martin Luther King is quoted as saying, "Of all the forms of inequality, injustice in health care is the most shocking and inhumane." One wonders if it is a coincidence that the only other Organisation for Economic Co–operation and Development (OECD) nation without some form of universal coverage is South Africa.

And Tomorrow...

The health ecosystem is dynamic and constantly changing. As such, new ecological niches are constantly being created for the health actuary to explore. Yet, due to the lack of supply of health actuaries with the appropriate skill set, positions go unfilled or are occupied by competitors such as health economists, masters of public health, epidemiologists and health statisticians. Anecdotal reports from discussions with actuaries conducted at SOA meetings showed a similar pattern–there is no slack in the system.

One potential avenue for new opportunities is the field of provider solutions. Today most actuaries work for payors or consult for purchasers. Emerging industries in the last decade or so–with significant potential for actuarial participation–include disease management, predictive modeling, network design and many aspects of the pharmaceutical industry. The challenges actuaries face in entering new fields include credibility and the presence of other, better known professionals (M.B.A., M.D., M.P.H.). But the most important hurdle the profession faces is lack of capacity. Why would health actuaries take a risk in a new area when there are plenty of traditional health jobs that beg for actuarial expertise? It's an important challenge that the profession faces.

The Quality of Mercy...

Perhaps the most important revolution that will be played out in the industry in the next decade is quality, and actuaries need to be at the forefront of these efforts.2 This issue has the advantage of benefiting all stakeholders by reducing costs and improving outcomes, while playing to the profession's ethical and quantitative strengths. Although the American Medical Association (AMA) winces at the thought of prescribed treatment protocols, a landmark study published by the Institute of Medicine in 2001 demonstrated that at least 98,000 lives were lost each year due to preventable medical errors, more than auto accidents and gun violence combined. This figure did not take into account the amount of serious harm and near misses.

In her book, Overtreated, Shannon Brownlee suggests the root of our cost problem is in the overzealous delivery of expensive, interventionist care, often with no scientifically based measures of effectiveness compared to less invasive (and less expensive) procedures. As shown by researcher Jack Wennberg, in many cases where you live–and not how sick you are–is a more important factor in determining how care is delivered. The Six Sigma process of error reduction–the standard in any industry where human lives are at stake–has yet to make its way into the hospital. Central line infections, easily preventable by standard protocol, are so common in the United States that they are no longer even considered an error, despite being responsible for as many as 60,000 deaths per year.

Only now are creative, long overdue steps being taken. The Centers for Medicare & Medicaid Services (CMS) and some private insurers have stopped paying for "never events"–mistakes that should positively never happen–"misplaced" surgical instruments, wrong site surgery and transplants with mismatched blood types. Geisinger Health Plan has instituted a flat price heart surgery with a 90–day guarantee. It may sound odd, but would you buy a car without a warranty? The incentives clearly serve as an impetus for the provider to do it better. Over the long term, with process improvements, the price goes down and outcomes improve.

There are no good estimates of the cost implications of medical errors or the potential gains to be made by investing in improvements. Perversely, cost reductions to payors through better quality care can be accompanied by even greater revenue reductions to providers because of Byzantine reimbursement structures. There is a need for dialogue between payors and providers to rethink reimbursement strategies and provide incentives which link services and outcomes.

Changing Health Systems–Increasing Actuarial Influence

Clearly, the business environment for all actuaries is changing. In a competitive market, this is to be expected. What makes the situation with the health discipline pressing is the unrelenting velocity of change. The problem is compounded by the fact that actuaries are not part of the group shaping the agenda, leaving us rudderless in the storm.

Health actuaries are poorly represented in academia, think–tanks and public policy circles, as well as the publications that serve and support the intellectual underpinnings of the health economy. Other than the occasional publication emanating from the Office of the Actuary, actuaries are virtually absent from Health Affairs, the most important policy journal in the United States, if not the world.

We have looked for citations of research by health actuaries outside of standard actuarial publications and scanned the bibliographies of authoritative works in the field. To our great disappointment actuarial work is never cited. It is as though the health discipline does not exist outside of itself. Whether we are unknown to other professions or our work is not considered relevant, in the end, these explanations are not comforting for the long–term health of the discipline. With employers turning to other professions for capacity and actuaries largely absent from reform efforts, we see not only a shortage of actuarial talent in the more traditional roles, but a growing gap in influence as the market moves ahead without us.

We cannot afford to be seen as apologists for the status quo when many of the stakeholders feel the system is not working. Whereas in other disciplines actuaries are perceived as trusted advisors providing independent advice, in the health discipline there is no such counterbalance. In part, this stems from the lack of an academic voice performing independent policy research. Whereas our professional mission is to address the needs of public first and the profession second, it would appear to an outsider that–at least for the health discipline–the needs of the insured population have been substituted for the needs of the public in this equation.

What is To Be Done?

The Society of Actuaries is an educational, research and professional organization dedicated to serving the public and Society members. The Society's vision is for actuaries to be recognized as the leading professionals in the modeling and management of financial risk and contingent events. In order to achieve these goals, our education and research must be timely and relevant. As a section–centered organization, it is incumbent on sections to perform environmental scanning and inform the Board of issues in a timely manner. The Health Section partners and coordinates with the AAA Health Practice Council to leverage resources to educate the membership on policy issues and perform supporting research.

The Health Section also partners with the basic education committees of the SOA. There are three basic components of the education process. First is the education committee, which designs the syllabus for the exams. The second is the examination process which provides credentialing, the cornerstone of our profession. The third component is e–Learning, a concept introduced as part of the recent education redesign. The emphasis in the e–Learning component is hands–on learning. Students are asked to read materials both on and off line and are then tested using "real–life" methods: completing excel worksheets, writing short papers, etc. The Health Section liaison to basic education is Joan Barrett. For those interested in learning more about the health basic education redesign, you can hear her speak during the Health Section breakfast at the Spring Meeting in Los Angeles.

The Health Section is working to bolster core educational opportunities, adding a seminar series in pricing, professionalism and valuation. Sessions on policy and public health have been incorporated into the SOA Spring and Annual meetings. The council has set aside funds to enable actuaries to speak at non–actuarial meetings, and help pay for non–actuaries to speak at ours. To increase dialogue, the section is adding to its diversity by actively recruiting affiliate members from other professions. Ian Duncan has worked tirelessly to develop strong bonds with other professional associations, which we hope will lead to still greater leverage in the future.

In terms of research, there is little hope that we can match the dollars spent by other organizations, but we can find ways to partner with other organizations and leverage our core skills. We need to determine the means by which the SOA can give the health actuary credibility in the marketplace. As noted earlier, one of the key issues facing the system today is the need for a better understanding of how incentives drive both cost and quality. This issue clearly plays to the strengths of our profession: quantification and fairness. By the time this article is published, a call for papers on the quality and efficiency of the U.S. health care system should have been posted on the SOA Web site.

Conducting groundbreaking research is not enough if people throughout the health care industry don't know about it. We are concerned that our intellectual capital –publications and research–are not more widely distributed in the industry. The SOA is working to provide easy access to information for professionals and policymakers, as well as better serving member needs.

It is within the scope of the SOA to address marketplace issues for health actuaries. Growing employment for actuaries is part of the Strategic Plan. There are two very distinct opportunities for health actuaries. In the traditional market(s), there is an immediate need to increase the supply of mid–career actuaries with expertise in a wide range of areas. The health industry is changing and growing faster than other sectors of our economy. From a solutions standpoint, this is more a supply side issue than demand.

Because the health industry at large is so dynamic, there are areas not currently served by health actuaries that are attractive in addition to the traditional markets. Just as broader financial services are a potential market for life and finance actuaries, there is a broader market potential for health actuaries as well. This is both a demand and a supply issue, a longer term, strategic opportunity.

Conclusion

It is important that we consider the future of the health discipline and the steps the SOA can take to shape it as deliberately and proactively as enabling sections in 1982 or when risk management was established as a separate discipline two years ago. These are forward thinking actions that took courage and vision. Sections must periodically reevaluate and refresh their mission statements, and it is important that the SOA respond effectively to the needs of a discipline in transition.

With employment in the health care industry poised to grow another 30 percent in the next 10 years, there is clearly opportunity for growth in the health discipline, perhaps more than any other. Should we choose as an organization to try to tap it, we increase employer and member satisfaction, produce a positive impact for the public and enhanced visibility for the profession. If we are successful, we will position the profession to be an active participant in the health discussion in this country, to the benefit of all. If not, employment options and membership growth suffer, and employer and member satisfaction is reduced. The health discipline will lose vitality, energy and creativity, and our work risks being driven by regulatory proscription rather than entrepreneurial spirit.

We are at a critical juncture for our discipline, not just the health care system. If we do not actively seek to participate in the discussion and clearly demonstrate the value of the actuarial skill set independent of our current particular market niche, we risk being left out, or worse, ignored and eventually forgotten. It is incumbent on us to take a broader view and fulfill our charge to look out for the interest of the public first, not just the insured population. If we accept this challenge, we will be acting in the best interests of the profession.

Jim Toole, FSA, MAAA, is managing director, life and health, MBA Actuaries, Inc. and chair of the Health Section.

Footnotes

  • 1 Controversy continues as to what the definition of "is" is.
  • 2 Other associated terms include efficiency, error reduction, out comes and evidence–based medicine.