Inside the Black Box:
Adjustments and Considerations
for Public Policy Proposals
AcademyHealth Annual Research
Meeting: June 8, 2004
Cathi Callahan, ASA, MAAA
Actuarial Research Corporation
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Adjustments and Considerations
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Issues of Pricing a Particular Plan
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Plan and population specific adjustments
Issues of Total Cost of the Proposal

Who benefits and how
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Adjusting for Public Policy:
Pricing a Plan
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Starting population / starting costs
Benchmarking
Adjusting for particular plan / program
Adjusting for population targeted
Adjusting for lack of prior insurance
Adjusting for who takes up insurance
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Where We Start
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People with insurance
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Private sector (this discussion)
Public sector
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Medicaid
SCHIP
Medicare
Their costs
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Costs of the group over a given time interval
Costs of a person / person’s group over a longer period
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Premiums
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Where do we get starting premiums from?
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Industry data
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Survey data
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Biased by clients
Biased by respondents
Public program data
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Often dated / limited release
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Adjusting the Premium:
Benchmarking
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Why Benchmark?
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Need to control to federal or state specific data
Need to control level and / or trend
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Adjusting the Premium:
Plan Richness

What is the particular plan being proposed
vs. starting data?

“Actuarial valuation”

Adjusting benefits of a specific reform plan vs.
what is perceived as “average” (or starting point)
coverage
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Adjusting the Premium:
Population

Who participates
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Different underlying costs by different
populations
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Prior Insurance
Age
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Adjusting the Premium:
Induction

Changing spending habits based on richness
of new plan

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Increased spending for previously uninsured
Increased or decreased spending for previously
insured (plan dependent)
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Induction Effects
(the required actuarial slide)
Total spending for covered services is assumed
to be proportional to:
1/(1 + *P)
where  is the "induction parameter" and P is
the average fraction of the cost of services
paid by the consumer.
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Adjusting the Premium:
Selection
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Persons who participate may be above average risk
(cost)
How does this happen?
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Not all eligible participate
Who does?
 Some average risk
 Some above average risk
Not all experience selection
 Effects of subsidy schemes
Spread selection effects across entire group of participants
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Selection Effects:
Examples
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Use claims distributions to look at differential
assumptions
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25% participating vs. 10% participating
The more who participate, the less the effect on the
overall group
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Selection Effects: Examples
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Example 1
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25% participation in an uninsured subgroup draws:
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Half (12.5%) from top of distribution
Half (12.5%) from rest of distribution
For Children, this is a 375% increase
If subgroup were 10% of total population, this has effect of 1.275
Example 2
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10% participation in an uninsured subgroup draws:
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40% (.4*.1 = 0.04) from top of distribution
60% (.6 * .1 = 0.06) from rest of distribution
For Children, this is a 836% increase
If subgroup were 10% of total population, this would be increase
of 1.736
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Example of Premium Calculation
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Source information:
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Kaiser Project on Incremental Health Reform,
Kaiser Family Foundation
Premiums calculated for the proposal detailed in:

“Extending Health Insurance Through Tax Credits”, Mark
Pauly, October 1999.
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Example of Premium Calculation
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Pauly Plan:
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Income Related Tax Credits
Tax credit covering full cost for under 150% of
poverty
Sliding scale to no credit at 500% poverty
Insurance purchased in current market
Reconciled on tax return

Choice of this or tax exclusion for ESI
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Example of Premium Calculation

Starting point: Average market premiums for
children, 2005 terms
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$2107 overall
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Based on $1139 per child in 1998, inflated by NHE per
capita change in private health insurance of 1.85
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Example of Premium Calculation:
Population Adjustment
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Participation by:
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Uninsured children
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Non-group children
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~10% of participants at 0.5 * non group cost
~90% of participants at 1.0 * non group cost
No participation by Medicaid or ESI kids
$2002 per child
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Example of Premium Calculation:
Induction adjustment
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Previously uninsured only
Proxy utilization replacing actual induction
equation

40% increase for the uninsured
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

Approximately 2% overall
$2042 per child
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Example of Premium Calculation:
Induction adjustment (alternative calculation)
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
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Induction equation: Q= 1/(1 + *P)
α = 0.555
Uninsured:
P = 1.0 (Person pays 100%)
Q = 1 / (1 + (.555 * 1) ) = 0.643

Insured:
P = .2 (Person pays 20%)
Q = 1 / (1 + (.555 * .2)) = 0.900

0.900 / 0.643 = 1.40
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Example of Premium Calculation:
Selection
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For those not fully subsidized
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Children > 150% of poverty
Selection of 1.67 on partially subsidized uninsured
Use 1.00 for all fully subsidized children
Use 1.00 on those with current coverage

Coverage does not change

Spread over all children who participate
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$2124 per child
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Summary of Adjustments

Starting per child cost:
Population adjustment:
Induction assumption:
Selection assumption:
$2107
$2002
$2042
$2124
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Final premium:
$2124
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Considerations of Public Policy Plans
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Who benefits
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The already insured who may not have access to
current subsidies
The uninsured
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Long vs. short term uninsured
Children, parents, working adults
How we spend tax dollars

New vs. existing coverage
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Issues with Tax Credit Proposals
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Availability of Credit

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Prospective vs. Retrospective
Cost of covering
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All recipients of credits vs.
Covering newly covered

Usually a small percentage with retrospective credits
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