It is often a challenge to have meaningful discourse on such a charged topic as healthcare. After all, it impacts all of us and oftentimes in ways that seem to grow increasingly confusing and costly. Additionally, proposals to modify or restructure our current system can take on many forms as interest groups, politicians and consumers equally vie for what’s important to them. This can, at times, feel like a tug of war leading to unintended outcomes. Compounding all of this is a seemingly real shortage of independent advice from professionals - including economists, healthcare providers, actuaries and more. Meaningful discourse therefore should consider all the moving pieces and how they interconnect. Moreover, healthcare is not an unlimited resource. It’s for this very reason that discourse cannot be emotive only. Consideration for financial sustainability, provider infrastructure and what ultimately drives human behavior should afford us all a richer dialogue and hopefully will lead to better comprehension and outcomes.
Keeping Up: The Reform Challenge
We now spend $3.5 trillion per year on healthcare. Rising costs have impinged on wage increases, retirement savings, and other critical programs, including government spending on education, security and infrastructure.
Our healthcare economy is large and complex with far-reaching effects across society. The Concerned Actuaries Group (CAG) has recently developed a Comparative Analytical Assessment Model (CA2M) to serve as a powerful tool for healthcare reform analysis and management. Their model acknowledges the inherent complexity of our existing healthcare system and attempts to approach reform proposals holistically – providing guidance as to how proposed changes will impact healthcare delivery, access, and cost without losing sight of possible broader implications that impact the economy as a whole. CAG has designed this model to facilitate public understanding of the performance of our healthcare system.
CA2M analyzes reform proposals across a series of marketplace signals and includes system and management variables that take into consideration access, cost, coverage, health status, the economy, and sustainability given a particular segment such as Medicare, Medicaid, or small group health insurance. The model thus considers numerous inputs, resulting in an aggregate score* that reflects a proposals overall movement toward or away from a desired result.
The model thus provides a comparison between two projected future states, one being a projection of baseline conditions (or the control group) and the other projecting the proposed change and the consequential impact on the “status quo” or baseline condition. The output of the model is therefore intended to be used as an assessment of a given healthcare related policy proposal. Policymakers and the public can then ascertain the overall benefit of a proposal while taking into consideration intentional and unintentional consequences that may or may not be deemed favorable.
Assessing Reform with the CAG Model
CA2M reports a positive or negative score for the policy change being considered. In general, a positive score indicates an improvement in affordability, expansion of coverage and access, improvement in health status, a positive influence on GDP, or a positive contribution to long-term sustainability.
Typically, of course, a given policy proposal will produce a combination of expected positives and negatives. Merit, therefore, must be assessed by considering all of the ways in which a proposal is likely to positively or negatively affect different aspects of the system, as well as the magnitude and duration of those effects. By considering multiple interactions and dependencies when projecting any change to policy, including economic and behavioral outcomes, one can hopefully avoid making decisions that have far-reaching negative impacts and which may be exceedingly difficult to reverse once instituted. The model provides a mechanism for such an evaluation and should be considered by policymakers and the interested public if system-wide changes are proposed in the future.
Defining the Baseline
The model is seeded with a baseline of data and assumptions comprising medical costs and numerous economic variables.* The relatively large number of components included in these baseline years provide the means for the model to trace the various implications of a proposed policy change. A complete list of data sources is included in the model documentation.
With regard to medical costs and healthcare, expenditures are estimated for a number of distinct “population segments.” These separate markets are distinguished by a combination of demographic, health status, and coverage characteristics. Healthcare expenditures by market are based on actual Medicare and Medicaid costs as well as an estimate of private market expenditures using a cost model developed by Milliman.
*Baseline years include 1992, 2008, and 2017. Economic baseline assumptions include Federal and State/Local Government expenditures, revenue, and GDP. Additional baseline assumptions include payments for Healthcare by source and subsidies between payer and Government Liabilities and Deficits.
Our healthcare system requires consistent, persistent, long-term, multi-generational management. Hence, system performance needs to be monitored to enable management of the program so actual experience is likely to achieve expectations. The model has been developed utilizing recognized actuarial, economic, and management principles, based on data and experiential driven assumptions. Because the model attempts to maximize algorithmic sensitivity to new data and experience so that the assumptions evolve to reflect the most current information it, therefore serves as a meaningful management tool, providing interested parties with a clear overview of the current operational state of our healthcare system.
System-Wide Ripple Effects
The model considers how a change in any important dimension of the healthcare system affects other significant components. Too often, healthcare policy debate focuses on only one or two of the most obvious implications of a particular policy change, while other ramifications are ignored.
For example, consider the recent expansion of Medicaid coverage. Discussion often focuses exclusively on the most obvious and direct implications of this change, namely that expanding Medicaid coverage improves access to healthcare for those previously uninsured (a benefit) and must be funded by federal and state taxpayers (a cost). A one-dimensional assessment fails to consider how such a policy change affects access to care for existing Medicaid beneficiaries, employer-sponsored beneficiaries, and the pool of individuals paying for care out of their own pocket. Additionally, it fails to consider how such a decision impacts the supply side of the equation by ignoring how financial risk is shifted onto the providers themselves or the commercial insurance market.
Why Actuarial Principles Matter
CA2M explores economic, accounting, medical, and actuarial principles. The latter considers risk and risk classification which underscores arguably any and all insurance products whether auto, home, or health insurance - the goal being largely to protect against large, unexpected, and economically feasible losses. In other words, the size of the potential loss should be large enough to entice individuals to pay a monthly premium to protect against such losses (i.e., a liver transplant or cancer therapy). Adverse selection occurs when risk pools allow for covered losses from constituents who face little or no barrier to entry. For example, if one did not have to purchase auto insurance until an accident occurred – there would be no incentive to do so and consequentially, a limited pool of reserves to cover losses. When this occurs in healthcare, sicker populations enroll resulting in higher premiums as the healthier populations opt-out due to cost. Additionally, moral hazard occurs in situations whereby risks are predictable and small. People are not incentivized to take action to protect against such risks and it can lead to overutilization of limited resources. This can be avoided through careful plan design.
Arguably ACA accomplished in large part what it set out to do – granting more Americans healthcare coverage. A reported 27 million were added to Medicaid alone and an additional 10 million more received some type of subsidy to offset the cost of their health plan. According to the Commonwealth Fund, more Americans are insured but they also report that upwards of 45% of the US adult population is now underinsured. This is most evident amongst employer-sponsored plan beneficiaries.
Additionally, when we expand coverage and assume that coverage equates to access to care we may be misinformed. The Association of Medical Colleges projects a shortage of over 100,000 practitioners over the next 12 years.1 According to a 2017 Mayo Clinic survey, nearly a third of practitioners surveyed reported that they plan on leaving the practice of medicine altogether. As policymakers consider yet wider expansion and coverage, the importance of predictive modeling sets a precedence.
Other, perhaps unintended consequences of ACA point to further market distortions. In 2016 the Society for Resource Management - reported a decrease in the number of small employers offering health insurance and many formerly “self-insured” individuals are now simply opting out of the system and going without coverage. Kaiser Foundation reported an exodus of over 4 million Americans who dropped coverage in the early institution of ACA due to cost. For any insured pool, this can create what is known as an anti-selection spiral. The insurance company must charge higher premiums going forward to cover claims of the new, less healthy group.
CAG examined the effects of ACA and coverage, comparing a baseline year of 2008 with outcomes, post-ACA, in 2017. The model indicated that the number of people “covered” as opposed to “without care” and “uninsured” had increased by just under 27 million. However, as the model factored in system-wide effects, data supported an increase in utilization and system costs but reduced access to care for some populations. According to Kaiser, 2017 marked the first point in time since ACA implementation that the number of uninsured actually increased – by over 700,000. The Trump administration did institute changes, however, that served to temper market distortions and ACA's popularity today has improved.
For an updated analysis of ACA's impact on individual markets under the Trump administration please consider reading The Tetradic Trumpcare Tally.
As policymakers continue to deliberate yet more healthcare reform be it a public option, voucher system, or Medicare4All - CAG is uniquely positioned to assess such proposals. Medicare4All, a popular platform supported by both Democratic and Republican candidates seeks to broaden coverage for the U.S. population. And while this is a noble undertaking it could be costly depending on how it’s structured. Today, Medicare is arguably on an unsustainable path and expansion could only occur with a substantial payroll tax that may possibly approach 30%. Indeed, studies have suggested funding for such programs could run as high as $30 trillion over the next decade. This could potentially lead to a crowding-out effect with negative consequences for the economy. Advocates point to administrative savings overall, and while the cost of the program would replace the cost of insurance premiums the public should carefully consider the loss of alternative means to care if such proposals favor eliminating privatized insurance products. In the least, a sound structure would make consideration for defined budgets and hence defined contributions to keep the program sustainable.
To control cost, the government may likely enforce narrow networks, and care rationing through limited access. Waiting lines may likely further impinge upon access to care – especially for specialty services. A recent Kaiser Family Foundation poll suggested that the favorability of such proposals wanes substantially when individuals learn about delays in treatment. CAG recognizes that to a certain extent medical disparity may be alleviated but only if facility and provider reimbursements can be meaningfully addressed. Careful consideration for the financial sustainability of any proposal is crucial. CAG's model can provide much needed insight as the public carefully considers the impact of such proposals.
Experience has taught us that poorly designed, ad hoc changes can distort and distress markets, exacerbate existing problems, and create new, unintended ones. CA2M provides a more complete framework for dialogue and the consideration of a proposed healthcare policy change. To the best of our knowledge, CA2M is the first and only model intended, and designed to analyze and evaluate the complex and interactive totality of the American healthcare system. As such, its scope is more comprehensive than other existing models. CA2M reflects primarily actuarial analysis with additional contributions to date from a combination of economists, medical professionals, health data, and communication specialists. A model process that is dedicated to helping policy-makers and their constituents determine whether the changes being proposed might actually achieve their stated objectives, while accounting for unintended consequences should be widely adopted.
This blog post was adapted from a white paper published by the Concerned Actuaries Group in 2020. More information about CAG can be found at www.concernedactuaries.org.