Monthly Archives: April 2010

Health care, apples to apples

The other day I was highly offended that I could find no one in government had assembled an apples-to-apples comparison of the two key cost estimates for Obamacare, those of the Congressional Budget Office and of the Office of the Actuary. So I’ve dug around for a couple of days and drew up my own comparison.

The comparison is of some importance as a number of people have said the actuary’s estimates show increased federal spending on health care. A few have claimed that the Obama administration suppressed the actuary’s report till after the legislation passed. (The chief actuary emphatically denies this.)

The discussion continues here, here and here.

So I compared what the actuary’s report compares to the freshest information on the table when Obamacare passed. That would be the CBO’s letter to Nancy Pelosi, dated March 20. (The main bill passed March 21. The reconciliation cleanup passed a couple of days later.)

This table says it all:

Billions of Dollars CBO Office of the Actuary CBO-Actuary % Difference Who has more favorable view?
Coverages 938 948 -10 -1% CBO
Cost Savings -436 -469 -33 8% Actuary
Net cost 502 479 23 4% Actuary

This table looks like it was easy to do. Believe me, it wasn’t and to explain why would put you to sleep.

The table tells you that the two arbiters were within 1% on the cost of new coverage – stuff like Medicaid and CHIP expansion. CBO saw things slightly rosier than the Office of the Actuary.

It also tells you that the actuarial office projected more cost savings and a lower net cost than the CBO did, but not by much. Howlers have said the Office of the Actuary proved Obamacare was more expensive than promised, but this table shows that CBO and the actuarial office were telling substantially the same story.

As any actuary will tell you, if two independent projections are within 10% 10 years out, they are telling you the same thing. And if anything, the Office of the Actuary seems to like the bill more than CBO.

This is particularly true if you look at coverage cost by year, as the following chart does:

Who's the optimist here?

This shows the cost of enhancements to Medicaid , CHIP et al., by year. The blue red line is the Office of the Actuary’s estimates. The red blue line is CBO’s estimates.

The table shows that the costs don’t really start building until 2014. For the first two years, the actuaries project higher costs, as the red line is above the blue one. But starting in 2016, the actuaries project lower costs. That’s why the red line falls below the blue one.

To summarize: The actuaries project lower coverage costs overall, and they project costs to decelerate faster than CBO does.

The bill has other components; there are new Medicare taxes on high incomes, a tax on excessively rich employer health care packages, etc. Both the CBO and the actuaries are skeptical of a couple of elements – a voluntary long-term care program that seems to beg to be adversely selected against; and medical cost cutting that seems hard to implement.

Even where they are skeptical, the two arbiters agree on the direction of the skepticism, though they may disagree on magnitude. Both see the long-term care program as raising a lot of cash now as it incurred liabilities at an unsustainable level.

So the LTC program would reduce net health care spending while it accumulated huge liabilities in the out years. That’s why I excluded any long-term care analysis from my comparisons.

But I really don’t see where anyone can claim the actuaries’ report sheds new light on the health care legislation passed this year. And what is new is slightly favorable to Obamacare, not the other way around.

Update: National Journal is hosting debate on this topic here.


April 30: Anthem fail

Anthem pulls the infamous (39% increase) Obamacare resuscitator. When the company refiles, it will be shooting for the Obamacare 80/85% MLR instead of the California standard, 70%.

An independent actuary found several errors, the most substantial of which were overpessimistic trend factors. For example, the filing didn’t properly address the fact that loss costs for a cohort rise as the cohort ages, so that Anthem’s 19.8% trend should have been 16.7%.

(The report is available via the California DOI.)


Loss ratio games

Obamacare creates an insurance puzzle: How do you raise your loss ratio but keep profits the same?

The NAIC of all people has the answer.

Loss ratio, of course, is losses divided by premium, and the definitions of the two terms is pretty important. I think every actuary eventually runs into the underwriter whose loss ratio is calendar year paid losses divided by written premiums, except when the paid loss comes from ‘an old claim that we’ve known about for years.’

And at the risk of really belaboring the obvious, if you want to raise your loss ratio, you can either increase your numerator or decrease your denominator. NAIC is saying it’s OK to do both.

Turns out the health care reform bills didn’t define medical loss ratio too precisely; it left that job to the states. So Rick Diamond, an actuary with the Maine DOI, has drafted an NAIC memo that interprets the law to allow:

  • Raising the numerator (losses) by including as losses “activities that improve health care quality,” according to this Bloomberg article.
  • Lowering the denominator (premium) by excluding state and federal taxes from the definition of premium.

As it is, health insurers are already pretty close to the goal (80% for smaller plans, 85% for larger ones). Last year, for example, WellPoint booked an 83. UnitedHealth booked an 82.

Capital modeling and the weather

The question, over at the Risk, Regulation and Reporting area of

Can you really measure and model risk?

Risk is not a physical quantity and as such doesn’t exist in Nature. It is not subject to any laws of physics. The question, then, is: can it be measured and managed? We think it cannot.

What do you think?

I repost my 2¢:

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The most famous actuary

That would be Richard Foster, chief actuary for the Center for Medicare and Medicaid Services.

He’s the actuary the Bush Administration silenced so it could build support for Medicare Part D, the prescription drug benefit. Foster’s view is here. Rumor has it that his bosses at Health and Human Services squelched this week’s reports on Obamacare until after the vote passed. (I commented on Foster’s report this afternoon.)

The rumormongers should have asked Foster, cuz he says they ain’t true.

The Economist on Solvency II

Not the most focused article from the venerable mag, but it does (obliquely) make the case that insurers don’t belong in the systemic risk pool and that the European regulators may have gone a bit overboard in setting Solvency II standards.

Health care: The actuary’s new estimates

Media world is atwitter with the new actuarial analysis of Obamacare. Kaiser Health News summarizes here.

As anytime politics is involved, the left and right start fighting.

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April 23: Pennsylvania’s piggy bank squeals

The lede:

Pennsylvania provides the latest insurance hijinks, with the state’s Commonwealth Court ordering the state to reimburse the $600 million or so it liberated from MCare, the state’s excess medical malpractice program. This is pretty serious stuff, as it blows a decent (2%) hole in the state’s $28 billion budget, or about $50 per Pennsylvanian. Naturally, the state plans an appeal.

This is another fun tale of a state government treating an insurance fund like a piggy bank, though it is a more subtle operation than the one in Wisconsin I wrote about a couple of weeks ago.

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Hurricane season: Bull’s eye in the Northeast

Well, I’m overstating a little bit, but that’s my takeaway from Guy Carpenter’s updated hurricane forecast. They project the mean number of hurricanes landing this year in the Northeast (Hatteras to Maine) at 0.62, vs. 0.60 for Florida, 0.59 for the Gulf and 0.22 for the Southeast. The projection for the Northeast is more than twice the long-term average.

Health insurance: Federal prior approval on its way?

Fearing nasty insurers making – gasp! – profits, the Senate starts down the road to a two-layered prior approval process. Basically, if a state doesn’t approve rates in advance, the feds will.

The Senate’s actions aren’t that big a surprise, as regulating health insurance rates was part of the HCR package. Check the last item under “Insurance” on Page One of this handy HCR timeline.

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