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Health Care Reform Debated at Academy Annual Meeting THIS MONTH 2 From a Guest Chairperson : Parting Observations 3 Capitol Views

4 Scheibl Honored for Service I Special Subject Supplement : Health Care Reform :

The Actuarial Profession's Role Rep. Pete Stark (left), chair of the House Ways and Means Health Subcommittee, and Dr. Ken Thorpe of the administration's Health Care Reform Task Force.

ENCLOSURES Included with this month's issue of The Actuarial Update are the following: In Search Of ASB Boxscore Actuarial Compliance Guideline No . 4

By Jeffrey Speicher ealth care reform dominated the public policy forum at the 1993 Academy Annual Meeting, held October 6 at the Capital Hilton Hotel in Washington . President Clinton's plan-its design, financing, and prospects for enactment-and competing proposals from both sides of the aisle were discussed by speakers at the morning, luncheon, and afternoon sessions . In remarks to the meeting's morning session, Ken Thorpe, the Department of Health and Human Services deputy assistant secretary who chaired the Quantitative Working Group of the

administration's Health Care Reform Task Force, stressed the security and savings to be achieved by enacting the president's plan . According to Thorpe, the plan's universal coverage provision would guarantee continuity of coverage to the estimated 60 million Americans who lose their health insurance at some point in their lives . Thorpe also claimed the president's plan would limit health care spending growth to the amount of increase of the Gross Domestic Product, eventually bringing U .S . health care expenditures into line with spending in other industrialized nations. Luncheon speaker Rep . Pete Stark (D .-Calif.) brought quite a

different perspective to Academy members . Long an advocate of national health insurance, Stark voiced acerbic criticism of the Clinton plan and the idea of managed competition on which it's based . In remarks laced with humor, Stark suggested a new role for Ira Magaziner, the president's chief health care adviser and midwife to the plan developed by the administration task force : ambassador to Somalia . Stark decried the administration's "willingness to shrug off major problems in the plan and say, `Oh, we'll solve those later .' The problem is that the plan completely undoes a [private] system that has been delivering $600 billion of health care . . . undoes the relationships between beneficiaries and companies, between insurance companies and major employers, between unions and employers." Stark stated that the American health care industry, while flawed, had attained a kind of equilibrium and urged that rather than undertake slipshod reform, the country "continue with those parts of the system that work ." He predicted that Congress would ultimately adopt a bill less ambitious than the president's . Stark also called for "awareness on the part of the public that this ain't a free lunch, which is how the president portrays it," he said. Another view of the upcoming congressional debate came from the perspective of a leading acaContinued on page 4

THE ACADBIIY Al MEAITE WE With this issue of The Actuarial Update, readers will find enclosed an 8-page Special Subject Supplement on the Academy's role in the public policy debate on health care reform . We hope you find it informative . Reprints of the supplement are available from the Academy at no charge .



guest chairperson

President-Elect Charles A . Bryan Vice Presidents Howard J . Bolnick Howard Fluhr Paul F . Kolkman Stephen P. Lowe Jack M . Turnquisl Secretary -Treasurer James R. Swenson Executive Vice President James J . Murphy

EXECUTIVE OFFICE The American Academy of Actuaries 1720 1 Street, NW 7th Floor Washington, DC 20006 (202) 223-8196 Fax : (202) 872-1948

MEMBERSHIP ADMINISTRATION Woodfield Corporate Center 475 N . Martingale Road Schaumburg, IL 60173-2226 (708) 706-3513

THE ACTUARIAL UPDATE Committee on Publications Chairman E . Toni Mulder Editor Adam Reese Executive Editor Erich Parker Associate Editors William Carroll Ronald Gebhardtsbauer Patrick J . Grannan Managing Editor Jeffrey Speicher Contributing Editor Ken Krehbiel Production Manager Renee Cox

Statements of fact and opinion in this publication, including editorials and letters to the editor, are made on the responsibility of the authors alone and do not necessarily imply or represent the position of the American Academy of Actuaries . the editors, or the members of the Academy .


Parting Observations By Jack M . Turnquisl

ext month marks the end

insolvencies and pension plan funding problems have caused of my tenure as a member and chairperson of the concern with both the public and the regulators . Public concern Actuarial Standards Board . In reflecting on the changes combined with high visibility have that have taken place within the too often served to target profesactuarial profession since the forsions for litigation of questionable merit . These facts underlie the mation of the Interim Actuarial Standards Board (IASB), the preneed for an increased awareness by all actuaries of the responsibilidecessor of the ASB, I feel comties of being a professional . pelled to make some parting Actuaries must maintain an observations and suggestions . At the time the IASB was understanding of the obligations of the actuarial profession and the formed, references to actuaries in the media or literary works were need of the profession to assure quality in actuarial performance . so rare as to warrant mention in Actuaries must be aware of the actuarial newsletters . Most of us were accustomed to the inevitable role that standards of qualificaneed to explain just what an actution, conduct, and practice and procedures for counseling and ary did when we were introduced discipline play in maintaining to someone . And many of us and demonstrating this quality of seemed content to operate in the anonymity of our profession . performance . How can actuaries In the last several years the satisfy this responsibility? For actuarial profession has experistarters, I strongly recommend enced a significant growth in that all actuaries periodically review the Preface to Actuarial recognition. This is due in large Standards of Practice in the stanpart to the public relations efforts of the profession itself and in pardards manual . Rereading the ticular the Academy. Currently Preface is an excellent refresher actuaries are much in the public course for maintaining perspective on our profession and the eye, with frequent references not only in the media but by the variresponsibilities it imposes . The IASB recognized early that ous branches and levels of govstandards of practice cannot exist ernment. Evidence of this can be in a vacuum, and that for stanfound in the regulations relating dards to be meaningful, actuaries to appointed actuaries, the opinions rendered in recent court have to understand the role that cases, and in the rhetoric surstandards play within the profesrounding the current proposals s sion . In 1987 the IASB commisfor national health care . sioned Edward A. Lew to develop But this increased recognition an exposition of the nature of the also carries with it some unpleasactuarial profession and the frameant baggage already encountered work within which actuarial stanby other more visible professions dards of practice are intended to such as law, accountancy, and operate . The Preface was the medicine . This includes coverage result . This document addresses by the media that raises questions the profession in general and the about the efficiacy or integrity of role of standards relative to the the actuarial profession and its profession, its membership, and practitioners. Insurance company the publics it serves, It traces the


The Actuarial Update ∎ November 1993

background of actuarial standards, the creation and operation of the ASB, and the standards dev ment process. It explains the tionship of fundamental actuarial concepts, principles, and practice . It identifies the roles and relationships of standards of qualification, conduct, and practice, and the discipline process . Finally the document addresses the relationship of the actuarial profession to the other professions and the role that standards play in this relationship . But don't stop there! It goes without saying that all practicing actuaries need to remain current on the Code of Professional Conduct, Qualification Standards for Public Statements of Actuarial Opinion (including Continuing Education Requirements), Actuarial Standards of Practice, and Actuarial Compliance Guidelines. A review of the ASB Procedures Manual provides additional insight into the standards development process and the responsibilities, authorities, and operations of the ASB . You will find all of these documents conveniently la in your Standards Manual . Continue on! Although the Preface was written before the Actuarial Board for Counseling and Discipline was created, it does provide an excellent insight into the role of the disciplinary process. The Rules of Procedure for the ABCD provide an understanding of how the current processes of counseling and discipline operate. The Rules of Procedure identify how the independent entity responsible for these functions is structured and what its responsibilities, authorities, limitations, and operating procedures are . A review of this document offers proof of the strict requirement for due process under which the ABCD operates. Familiarity with these requirements and procedures can prove beneficial to both actuaries and the actuarial profession, especially when actuaries are able to communicate them in an eff manner to regulators, prove als, and the other publics we s

Turnquist is Academy Vice President with responsibility for professionalism .

ealth Care Reform : The Actuarial Profession's Role Current proposals for sweeping reform of the United States health care system have focused unprecedented attention on the analytic skills of the actuarial profession . Now that the Clinton administration 's Health Security Act will soon be officially before Congress, specific questions of financing, cost savings, and plan design increasingly will dominate the public debate. In the coming months, the profession will be called upon to provide analyses of the financial impact of the Clinton plan and the other competing proposals. The Academy, as the public policy voice of the profession, has been instrumental in bringing actuarial expertise to the attention of health care policy makers . This section of The Actuarial Update has been researched and written by the Academy 's Government Information Department to serve as a convenient summary of how the profession , and particularly the Academy, have already contributed to the policy making process, and to what efforts we plan to provide our skills as the debate on health care unfolds .

Assisting the Clinton Administration U nder the leadership of Academy Vice President Howard Bolnick and with the outstanding efforts of many health actuaries, the Academy and the profession have achieved a never-beforeattained level of participation in a major national policy debate . Even before President Clinton s inaugurated, the Academy's lth Practice Council had gun to organize its efforts to study critical elements of the type of managed competition proposal promised during the 1992 presidential election campaign . During the initial meetings of the administration's work groups with Senior Presidential Adviser Ira Magaziner, who orchestrated the work of Hillary Rodham Clinton's Task Force on Health Care Reform, the Academy was one of a select few outside groups invited to the White House to hear executive branch agencies discuss their analytic capabilities . At that meeting, Academy representatives Howard Bolnick, John Bertko, and Bartley Munson offered the profession's technical assistance and noted its ability to provide expert advice and objective review . The profession's offer was heard, and during the next few months the profession was invited repeatedly to comt on quantitative work and '__it independent work . A complete accounting of all communication with the administration work groups is too lengthy to reproduce here . However, a recounting of major interactions gives a flavor for the types

of input the administration sought and the extent of the profession ' s participation .

Community Rating One of the first requests the Academy received was from the Department of Health and Human Services . Ken Thorpe, a deputy assistant secretary at HHS and chair of the administration's Quantitative Analysis Work Group, asked the Academy to produce the best estimate possible, within 2 to 4 weeks, of community rating's impact on the premiums of currently insured small employer groups .

The Health Practice Council immediately assembled a work group, co-chaired by Harry Sutton and Greg Herrle, to collect existing analyses from a wide range of commercial insurers, HMOs, and Blues plans . Guy King, chief actuary of the Health Care Financing Administration (HCFA), offered the use of HCFA's facilities and databases to the group for assembling its final estimates . With data in hand, the group assembled at the HCFA headquarters for 3 days to prepare its estimates . Representatives of the group then met with Thorpe to discuss their findings and present a written report . Health Risk Adjustment Central to providing proper incentives within the administration's proposed managed competition scheme is the successful

adjustment of insurers' premiums to reflect differences in the risks posed by their insured populations . The Health Practice Council, recognizing early the importance of health risk adjustment, established a working group in this area . In several meetings with administration task force member Gary Claxton, the group emphasized the importance of risk adjustment . In May, the group completed a report and presented its findings to the Clinton administration . In its September 7 draft proposal, the administration adopted the Academy working group's suggestion for resolving this risk adjustment issue in the short run, using language taken almost verbatim from the Academy's report . In speeches before professional groups, senior administration officials have repeatedly acknowledged the importance of health risk adjustment. Subsequent to release of the report, Alice Rosenblatt, who chaired the Academy working group, testified before the Physicians Payment Review Board and was asked to attend numerous meetings on health risk adjustment.

Standard Benefits Packages Julia Philips chaired an Academy work group in this area that also completed its initial report in May . The report discussed the implications of providing a standard benefits package and the hard questions that must be considered before implementing such Continued on page ii

The Actuarial Update ∎ November 1993 i

High Profile for Actuaries THE WHITE HOUSE

Office of the Press Secretary October 8, 1993 STATEMENT BY IRA C . MAGAZINER In early spring of 1993, the 4hite house assembled a group of actuaries-from nationally recognized accounting and actuarial firms-to be involved from the beginning in examining the cost estimates for the President's health care reform proposal . We considered it essential that experts who were independent of the policy process review the methodology used to develop the premium and subsidy numbers, which represent the fundamental building blocks of the reform proposal . This outside Cost Audit Group was riot required to support the policy itself-just to verify the validity of the cost estimates . The actuaries were asked to question the assumptions, substantiate the numbers, examine the models and communicate independently with each agency involved-to verify that bath the process and the estimates were valid and accurate . As the attached letter indicates, these actuaries maintain that

. . .the process was very thorough"

and the methodology and assumptions " . . .sound and reasonable ." They confirm that

11 . . . these cost

estimates are the best available at this time and are suitable for planning purposes ." The expertise of the Cost Audit Group was appropriate for the premium and subsidy estimates . They were not asked to validate the estimates of savings projections from administrative simplification, competition and prevention or the estimates of the federal (Medicare and Medicaid} savings . Another group of outside experts was consulted regarding the savings projections from competition and Medicare and Medicaid experts-fron the Department of health and Human Services and the Office of Management and Budget-participated in the development of federal spending projections . We insisted on this unprecedented degree of outside review and validation in developing the health reform proposal for one reason . We wantod to get the best data available validated by the best people possible so that the national debate would be able to focus on the policy itself and its implications for the American people .

ii The Actuarial Update - November 1993

n his September 22 address on health care reform before a joint session of Congress, President Clinton said, "We gave these numbers to actuaries from major accounting firms and major Fortune 500 companies who have no stake in this other than to see that our efforts succeed. So I believe our numbers are good and achievable ." The president was overly broad in his statement-a prerogative exercised by all presidents, sometimes for the sake of simplicity, sometimes by design, and sometimes for lack of precise information . Happily, Clinton did not assert that the actuarial profession supported his proposal, only his cost estimates . Had there been no further public reference to the profession's role, any misperception of the president's comment among policy makers could have been easily corrected when the administration's proposal was more fully laid out in legislative language. And, in fact, the cost estimates will be revisited by the Health Practice Council's work group that is reviewing the overall structure of the president's proposal and the estimates of its cost . The work planned by this Academy group is discussed elsewhere in these pages . (See page vi .)


Unfortunately for the profession, and perhaps for the president as well, on October 8 the New York Times published an article with the headline "Health Insurance Data Called Faulty." The article included many quotes from members of the Ostuw group as well as other actuaries and left the reader with the impression that there was no real basis for the cost estimates the actuaries had reviewed. The White House and members of the Ostuw group were quick to respond. On the same day the New York Times article appeared, the White House released a statement by Ira Magaziner that clarified how the process worked and the scope of the actuaries' review . Attached to Magaziner's statement were letters from three members of the review group-Ostuw, John Bertko, and

Kenneth Porter . Magaziner's full statement (left) and Ostow's letter (page 5) are reproduced in pages . To its credit, the Street journal on October 12 published an article that attempted to set the record straight . It is difficult to assess the impact of the "numbers controversy" on public opinion or the profession's public image . It is even more difficult to determine what, if any, public action the profession should take in this regard . Correcting any misperception among policy makers is much easier. Most Washington policy makers are sophisticated enough to know that cost estimates for untried policies are difficult to make and fraught with uncertainty. Moreover, now that a more detailed administration proposal is on the table, the profession has an opportunity to comment more fully on the range of the probable costs and their sensitivity to the assumptions that necessarily underlie the estimates . The Academy's curr t

involvement and expected contributions are examined in an article on page vi . ∎

CLINTON ADMIIIISTRATION, continued from page i a mandate. As a result of that work, Philips represented the Academy at a White House roundtable discussion on the cost of mental health benefits. Philips was also asked to assemble a group of private sector actuaries to review estimates of the cost of mental health benefits developed by economists working through the National Institutes of Mental Health.

CCRCs Although the president's proposal does not include continuing care retirement communities (CCRCs), their inclusion was consid The administration's task requested general information from the Academy Committee on CCRCs . In extensive discussions with Academy CCRC Committee Chair Hal Barney, the administraContinued on page iv

To : Ira Magaziner

Wctober 8, 1993 Dear Ira : The members

of the Cost Audit Croup appreciate

the opportunity

to assisu

with the President's

'health care reform proposal .

Role of Cost. Audit Group The primary role of

:he Cost Audit Group is to review the methodology and assumptions used to

estimate the base-year cost of tre standard fee-for-service benefit plan for the non-Medicare, non-Medicaid population . We also reviewed the assumptions for subsidies for individuals and employers and provided input on the implications and alternatives for several technical aspects of the proposal . We understand than other groups conducted the review for other aspects of the proposal, including long-term care benefits, prescription drug coverage under Medicare and the savings from managed competition .

Policy issues were outside the scope of our role . We did not, for example, address the implications for changing Medicare or Medicaid orr the associated savings estimates . Process The elements of the health care reform proposal and the associated cost estimates have been under development since early this year . Beginning in April, the Cost Audit Group wet with your staff and others to understand the proposals and the key assumptions and methodology . We spent significant time with the staff at HCFA and AHCPR, for example, on their cost models and preliminary estimates . We made numerous suggestions to refine the assumptions and methodology used in developing their estimates . We focused our attention primarily on the premium cost of the proposed standard benefit plan on a fully phased-in basis . Our review of the cost of subsidies was less comprehensive because of the nature of the databases used by those performing the calculations . We are pleased to have participated in this process and appreciate the openness and recep-

ivity of everyone we worked with . We found everyone interested in our input where it could i mprove t h e i r wor k . General findings We found that the general methodo-logy and assumptions used in- developing the cost estimates


the non-Medicare, non-Medicaid population were sound and reasonable . The process was very thorcugh . The staff is very capable and we are confident of their ability to apply the assumptions and methodology accurately . In conducting our review, we recognize that --he United States health care system is extremely complex and dynamic . As a result, complete historical data are not availab"_e and future results are not fully predictable . However, companies in the private sector commonly make business decisions on more limited data and analysis than this .

Because of the evolving nature of the proposal and the cost estimates, it has not been possible to "sign off" on a specific set of numbers . Rather, we have addressed the current development of the numbers at various limes and found them to be reasonable . Recognizing those limitations on available data and the timetable to make decisions, we believe that these cost estimates are t'ne best available at the time and are suitable for planning purposes .

Additional tasks

The health care reform proposal will likely continue to evolve . The cost estimates will evolve to reflect changes in the proposal, refinement in the assumptions and methodology and the availability of new data . We look forward to assisting in the process to make -he cost estimates as reliable as practicable and to provide other needed technical support . Please feel free to contact any members of -he group if you have any questions or requests . Sincerely,

Richard Ostuw Chair, Cost Audit Group

Members : Howard Atkinson, Jr ., John Bertko, Brent Greenwood, Richard Helms, Richard Ostuw, Kenneth Porter, Jack Rodgers

The Actuarial Update- November 1993 iii

CLINTON ADMINISTRATION, continued from page ii

The profession's achievements to date in the health care

tion work group assigned to this issue asked whether CCRCs should be part of the health care reform agenda . After consulting with Barney, the task force decided that CCRCs would not be part of the administration's initial proposal but should be considered at a later date. The comments of Barney and his committee are reported in a letter written to the administration summarizing the discussions in this area.

debate are highly noteworthy . The profession 's insight into the operational difficulties posed by policies , its ability to articulate the technical

means of achieving public policy objectives , and its nonpartisanship have earned the trust of policy makers .

Review of Cost Estimates The profession's role in this area has received more public attention than any of the profession's other activities during the development of the administration's health reform proposal . While the profession's involvement here was not an official Academy activity, our Health Practice Council did participate in recruiting actuarial talent to participate in the cost estimate process . Ira Magaziner contacted actuary Richard Ostuw personally to request that Ostuw assemble a group to review the administration's methodology and initial cost estimates . Magaziner requested that the review group include economist Jack Rodgers . Ostuw worked through the Academy's Health Practice Council to assemble a cost audit group of six actuaries in addition to Rodgers and himself. At different points in the development of the administration's proposal, the cost audit group came to Washington to meet both with Magaziner and with those within the administration who were developing the cost estimates . The group did not review the administration's entire proposal . The group's focus was limited to the premium and subsidy estimates . Neither did they review the estimates related to possible savings through administrative changes or changes to other programs such as Medicare and Medicaid . The work of the cost audit group gained prominence when the president referred to the

iv The Actuarial Update ∎ November 1993

group's participation in his September 22 address before a joint session of Congress . Press reports following the president's reference to the profession are addressed on page ii of this issue . (See "High Profile for Actuaries") . Other Actuarial Involvement In addition to the direct efforts of the Academy and the work of the cost audit group, others who are members of the Academy played prominent roles in providing actuarial input to the administration's proposal . The team of actuaries at HCFA, headed by Chief Actuary Guy King, is one of the two executive branch groups responsible for producing cost estimates of alternative reform packages . King, like other members of the profession, is dedicated to producing objective estimates and analysis . He seeks advice from his colleagues within the Academy and has helped the Health Practice Council create opportunities for the Academy to provide technical expertise to Washington policy makers . King's technical input, though often invisible to the outside world, is invaluable within the executive branch .

The Debate in Congress ince Labor Day congressional committees have been holding S hearings on nearly every major aspect of the president's health care reform proposal . The public has been told that Congress will complete this hearing process by year 's end, which means Thanksgiving , and that, when Congress reconvenes in January 1994, committee markups will begin . Anyone familiar with the legislative process must find this information baffling . What exactly is it that the several committees of jurisdiction in the House and Senate are going to mark up when Congress reconvenes in January?

As in the past, Academy member Gordon Trapnell provid d extensive actuarial advice to executive branch . Trapn , whose firm is retained by the government to produce actuarial analysis, is often restrained from speaking publicly but has always been helpful to Academy staff, aiding our understanding of the process and informing us whom to approach on a particular issue of concern to the profession .

A Trusted Profession The profession's achievements to date in the health care debate are highly noteworthy. The profession's insight into the operational difficulties posed by policies, its ability to articulate the technical means of achieving public policy objectives, and its nonpartisanship have earned the trust of policy makers . Working groups of the Clinton administration's Health Care Task Force used the Academy's papers in their deliberations . Committee member both the U.S. House and Se have requested copies to use in preparing for hearings on the administration's proposal this autumn . And the Academy working group papers have been requested by lawmakers and regulators in several states . ∎

At this writing, the president's proposal has not yet been introduced formally as a bill before Congress . Moreover, even if it had been, practically none of the most influential members of Congress has spoken in support of the president's package . To the contrary, there is a wide divergence of opinion on what direction health care reform should take and how far it should go in altering current health care financing and delivery . T e information compiled by Ac my staff in the chart on pag gives some notion of just how far from consensus Congress is on these matters. Each of the proposals summarized in the chart Continued on page vii




Sen . Paul WELLSTONE (D-Minn .)i Rep. Jim McDERMOTT (D-Wash .)



President CLINTON

Rep. Bob MICHEL (R-III .)

i i Universal coverage universal coverage by upon enactment . Federal end of 1997, achieved by government would pay requiring all employers most health bills . to contribute to their virtually eliminating workers' health private insurance. 1 insurance, and giving Medicare and Medicaid financial assistance to and other government unemployed and people health programs would with incomes below 150% be folded into the of the federal poverty level . new system . Would also give federal subsidiesto small, low-wage businesses. Payroll tax of about 7.9% on employers, 2% on employees; tobacco tax . States would fund 15% of the new program .

Sen . John Rep . Jim COOPER CHAFEE (R-R .I .)- (D-Tenn .)Sen . Bob DOLE Rep . Fred GRANDY (R .-Kans .) ( R-Iowa)

Universal coverage by 2000 , Does not achieve achieved by requiring universal coverage . all individuals to obtain Increases coverage health coverage by providing subsidies Would offer vouchers to to people below people with incomes poverty level . below 240% of poverty level to cover some

or all of premium .

Does not guarantee universal coverage . Requires employers to offer a federally approved health plan for their workers, but does not require l them to pay for it . Federal subsidies to l provide health plans i for the poor .


l Employers would pay j Would limit tax deductions 80% of regional average I for premiums beyond health insurance a certain amount ; premium far each full- spending caps on time worker. Would raise :. Medicare and Medicaid . cigarette taxes by 75 cents per pack and increase tax on other tobacco products . Payroll tax of 1 % or big corporations that opt out of regional insurance pools . Would cap Medicare and Medicaid spending .

Limits on employer tax Shift of funds from deductions for premiums I other government beyond a certain amount; programs plus savings from $5 billion over abolishing Medicaid 5 years in cuts and cuts in Medicare . in various programs and higher premiums for high-income Medicare enrollees .

Health plans must

BENEFITS Standard package for Standard acute-care acute care (doctor, package plus hospital , etc .) plus prescription long-term nursing home drugs , some dental and in -home care, and mental health prescription drugs, benefits , and in-home dental and mental care but no health care. long -term nursing home benefits.

Two standard packages of benefits set by the federal government. One to provide only catastrophic coverage. The other would be a comprehensive package, but narrower than the Clinton plan .


Medicare and Medicaid To rely on market forces spending caps . to hold down costs. Would cap tax deductibility Would set up insurance of employer health I purchasing pools to benefits at the average help increase consumer price of the least clout . These would expensive one-third be small and have of the health plans less regulatory authority offered by a regional than the Clinton health purchasing pool . alliances ; employers Workers also would pay with r fewer tax on value of workers 10111 must join, health benefits but they would not exceeding that amount . have to pay for their Optional, workers' coverage. competing insurance Administrative savings. purchasing pools for I Malpractice reform . employers with fewer than 100 workers. Administrative savings . Malpractice reform .

Limits on increases (and rate variation) in health insurance premiums charged to small businesses, Anti-trust law reforms that would allow health care providers to work together. Would allow employers to band into large purchasing cooperatives . Administrative savings . Malpractice reform .

Would remain as is for immediate future .

Remain as is. States could enroll Medicaid patients in standard insurance plans .

State governments would negotiate annually with doctors, hospitals , and other providers to establish a cap on payments for medical services . Administrative savings .

MEDICARE/MEDICAID I Abolished . Recipients covered under universal government plan .

Would cap allowable annual increase in private health insurance premiums .' Would establish regional insurance buying pools of businesses and individuals- called health alliances -to bargain with health plans . Employers with fewer than 5,000 workers must join alliances . Medicare and Medicaid spending caps . Administrative savings . Malpractice reform .

Medicare would remain as is unless a state opts to give recipients the general policies available through alliances . Medicaid retained for long-term nursing care, I but for other care patients i would be shifted to policies issued through cooperatives .

Standard acute-care benefit package. Other benefits may be added later,

meet a defined standard of coverage including medically necessary services and preventive care.

Sen . Phil GRAMM (H-Texas)

Would not guarantee universal coverage . Would allow people to put money their employers now spend on their health coverage into a tax-free account to pay doctors' bills or buy coverage. Special tax i credits for the poor .

Cuts in Medicare and Medicaid.

No standard package specified .


Medicare would remain as is . Medicaid acute-care patients shifted to policies sold through purchasing pools, with government paying ; Medicaid long-term care costs gradually assumed by states.

Would remove regulatory and legal impediments that restrict the ability of small businesses and other organizations to group together voluntarily . Administrative savings . Malpractice reform .

Remain as is .


The Actuarial Update ∎ November 1993 v

Involvement in the Congressional Debate

ACADEMY WORK GROUPSA CALL FOR VOLUNTEERS By Howard Bolnick H ow our nation's health care is financed and delivered is•an issue in which we all have a stake . To assure that the profession delivers its expertise to those who will be determining the future of our nation's health care system, the Academy Health Practice Council has established fourteen work groups, each of which will examine a single , well-defined aspect of the health care reform proposals now. before Congress. The results of each work group 's labors will be forwarded to Congress and the Clinton administration as soon as available,, and the final results of each work group's investigations will be refined into monographs for even more widespread distribution . Those health actuaries who have traditionally volunteered over and over again can no longer shoulder. the load required by such a high level of activity . New volunteers are essential to this critical work . The general topics covered by each group and the person chairing the group, are : Structure of the President's Proposal and Cost Estimates (Howard Bolnick and John Bertko)

Guaranteed National Benefits Package (Julia Philips) Mental and Nervous Benefits (Ron Bachman) Administrative Costs ( Dick Niemiec) Solvency ( Bill Bluhm) Budget Development and Enforcement (Bob Dobson) . Health Plan Pricing (Paul Fleischacker) Health Risk Adjustment (Alice Rosenblatt) Long-Term Care (Hal Barney) Medicare (to be determined) . . Medicaid (Steve Meskin)

W ell before the administration had begun making final decisions on its health reform proposal, the Academy was gearing up for the congressional debate . In March, the Academy staged a breakfast briefing for Capitol Hill staff that highlighted ongoing work on health risk adjustment, standard benefits, and the key elements that distinguish managed competition from other approaches . Later the same day, the Academy spokespersons addressed the same issues at a press briefing at the National Press Club, Soon after the Hill briefing, Academy staff began contacting congressional staff on important committees such as House Energy and Commerce, the committee responsible for the insurance industry . Throughout the summer, members of the Health Practice Council began contacting and visiting members of Congress including Sen . Phil Gramm (R-Texas), Sen . Dave Durenberger (R-Minn .), Rep . Jim Cooper (D-Tenn .), and Rep . Cardiss Collins (D-Ill .) . Academy staff also arranged meetings with senior staff from the Congressional Research Service (CRS) and Congressional Budget Office, two of the research arms of Congress. Congressional staff have also been asked to participate officially and unofficially in a number of the Health Practice Councils work groups .

Transition Rules (Alan Ford) ERISA Changes (Don Gasparro) Health Alliances (Jay Ripps) Although a few of the groups are already fully staffed with volunteers, most still have room for fervent new blood . fully staffed groups can use reviewers, and commenters are needed and welcome . If you can't get a seat at the table, at least advise those who have one . To assure that you and your profession helpp make health care reform the best it can be, fax your name, area(s) of expertise, and the issues you would like to tackle to Academy Health Policy Analyst Mike Anzlck at 202-872-1948 .

vi The Actuarial Update ∎ November 1993

Congressional Projects Efforts to inform Congress of the Academy's interest and work products to date have already proved fruitful . Last spring, at the request of the Congressional Budget Office, Harry Sutton put together a group for the Health Practice Council to review a CBO paper on freezing health insurance premiums . Many of the group's comments were incorporated into the CBO's final report . At an August meeting, Academy Vice President Howard Bolnick and Society of Actuaries Vice President Sam Gutterman


agreed to a CRS request that organizations undertake projects to assist CRS staff in fulfulling requests for congressional analysis . The Academy is currently examining the effects to date of state efforts to reform the small group insurance market and medical expense distributions . The Society of Actuaries is undertaking projects on retention rates by size of employer group and the effects of managed care on utilization and cost. During November, the Academy will testify before at least two congressional committees. The House Energy and Commerce Subcommittee on Commerce, Consumer Protection, and Competitiveness has asked the Academy to prepare testimony on potential solvency problems associated with implementation of the president's proposal . In addition, the Academy will testify before the House Ways A9 Means Committee on health adjustment .

Work Group Efforts Partly in response to anticipated requests for technical assisstance and partly to assure that such requests are generated, the Health Practice Council has also expanded the number of its working groups to cover the full range of topics with significant actuarial content addressed in the president's proposal . To continue and expand upon the profession's contribution to better cost estimates, the council has created a high-level group in this area . That group plans to meet with those responsible for the administration's, as well as Congress's, cost estimates . The group will raise issues regarding the sensitivity of estimates to underlying assumptions . Of special interest are assumed trends in premiums and wages . Small differenc these assumptions could 0, produce very large differences in required government subsidies . Other areas are also of great interest . The issue of the cost of relieving employers of their liabilities for early retirees has

already been raised informally . This issue may be raised more Wally if subsequent estimates of appear to appropriately account for this potentially large cost .

Two other recently created work groups, one studying solvency issues and another analyzing administrative costs, are well on their way to producing issues papers and may begin to have quantitative results near the end of the year . As noted above, the solvency group has already been asked to testify. The administrative cost group is of such great interest that, at the Academy's invitation, a staffer from one of the research arms of Congress sits as an ex officio member. In all there are now fourteen health care reform working groups . A full list of the groups and their chairs is included in Academy Vice President Howard Bolnick's call for volunteers on page vi . The Casualty Practice Council 11 lso creating work groups in ral areas . These groups will 0 examine issues related to integrating the financing of health care under workers' compensation into a managed competition scheme, integrating the medical portion of personal automobile insurance, and malpractice reform . The workers' compensation and auto insurance portions of the president's proposal are not expected to survive Congress's first pass at health care reform . Malpractice insurance, because it falls within the jurisdiction of the judiciary committees, is also not likely to be enacted as part of any 1994 health care reform legislation . However, each of these issues is important in its own right and could become prominent in subsequent health reform legislation . Although large portions of the president's proposal will not be enacted in 1994, work groups covering the entire range of issues assure that the Academy is pared to respond to specific requests and will not be blindsided as the debate shifts toward greater emphasis on some parts of the administration's proposal and less immediate emphasis on other parts .

Dissemination of Results All Academy work products will be disseminated to every member of Congress as soon as available. In some cases, multiple work products will be disseminated from the same working group . Many of the groups expect to produce an initial issues paper followed by one or more monographs discussing all or some subset of the major issues identified . Moreover, Academy members will be informed in these pages of the availability of work

DEBATE IN CONGRESS, continued from page iv has at least as significant support in Congress as the president's proposal with the possible exception of the proposal of Sen . Phil Gramm (R-Texas) . Gramm's proposal really represents the significant minority in Congress that would prefer no change to the current system . With so little consensus, there is little reason at this point to believe that the President's proposal is much more than a discussion document . In fact, the real bill (or bills) around which the 1994 health care reform compromise will revolve have not yet been introduced in Congress and probably won't be until January 1994 at the earliest and perhaps not until April or May . In January the process on Capitol Hill will still be almost as open as it is now . Beginning about May, however, the process will become more closed . Fewer and fewer parties will be permitted to have input into the process as members of Congress begin the arduous work of reaching a final compromise, and staff begin shaping the final details and drafting final legislative language . By early summer the process will probably be closed to all outsiders except a select few powerful interests . At this point, trusted expert advisers will also still have an oppor-

products as soon as they are issued . In some cases, timeliness will demand that a work group's efforts be disseminated before a written document is completed . As working groups identify issues that are of major importance, these issues will be brought to the attention of congressional staff and policy makers within the administration . Academy staff will attempt to keep Update readers abreast of these less formal communications as they occur. ∎

tunity to suggest technical improvements to key congressional staff. The Academy is working hard to assure that it is among these trusted experts . Before the August recess, both the House and the Senate should have passed a health care reform bill, and during the recess, staff will begin working with the House/Senate conference committee to resolve differences between the two bills. In all likelihood, the 1994 health reform act will be far less expansive than the President's proposal . Thus, health care reform 1994 will be the first of a series, with new legislation likely to follow in 1995 and 1996 . Two events could change this final outlook . First, President Clinton may by some near-miracle persuade Congress to enact a reform package that is not well understood and filled with unknown, yet serious, political risks . If this is the outcome, Congress will focus on technical corrections to the 1994 act in 1995 and 1996 rather than on expanded reform . The second event that could change the outlook is a clear signal from voters during the 1.994 mid-term elections that further changes to health care financing during Clinton's presidency are not acceptable . But as for 1994, Congress is almost certain to enact some form of health care reform, however limited such reform maybe. ∎ The Actuarial Update ∎ November 1993 vii

Purpose of Congressional Hearings any people discount the current hearings on health care reform as mere posturing and a public charade . In fact, these hearings, like others, serve several important purposes . First, the hearings are a means for congressional staff to begin to learn about and understand the primary proposals . It is naive to think that all, or even most, proposals that come before Congress are well understood in advance of their appearance as serious policy options . The president's health care reform proposal is certainly a case in point . Four years ago no one had heard of managed competition, and it was barely 2 years ago that Rep . Jim Cooper introduced a bill into Congress that gave political recognition to this approach . When Bill Clinton won the presidency last year, only a few in Congress had more than a vague notion of how managed competition might operate in practice . Second, hearings afford members of Congress an opportunity


Will a proposal do what its proponents claim it will do? During the hearing process , it is often discovered that not only will a proposal not do what was initially claimed, but in fact will do just the opposite .

to evaluate the persuasiveness of different interests groups' points of view and the political risks associated with alternative proposals . Since nearly all serious legislation creates both winners and losers and most members of Congress prefer to be reelected, this part of the process is critical . Proposals that are likely to meet with dissatisfaction among large blocks of voters are not likely to be enacted no matter how meritorious their longer-run impact might be .

Third, the hearing process allows members and their staffs to begin to assess the major weaknesses of an approach . Will a proposal do what its proponents claim it will do? During the hearing process, it is often discovered that not only will a proposal not do what was initially claimed, but in fact will do just the opposite . For example, when small group insurance reform was first presented to Congress, its proponents claimed that it would lower health insurance

Wanted: Casualty Actuaries A s the Academy mobilizes the talent of the actuarial profession to participate in the effort to reform the health care system in the United States, it is important to remember that not all the issues involved are the province of health practice actuaries . In fact, several questions addressed I by the president's and other reform proposals require the expertise of casualty actuaries . The Casualty Practice Council has asked the Committee on Property and Liability Issues to establish work groups to examine two such issues . One group will focus on proposals to integrate workers' compensation into a managed competition health care system through a plan for 24-hour coverage . This concept has received widespread support in several states, and the Clinton Health Security Act

viii The Actuarial Update ∎ November 1993

includes a provision to fold workers' compensation health care into a nationwide network of health alliances . Workers' compensation costs have been skyrocketing, and this provision is being touted as a real money saver. An Academy work group under the leadership of Manny Almagro will examine the actuarial implications of alternative proposals and will report its results to the administration, congressional committees, and other key players in the health care debate . A second Academy work group under the Committee on Property and Liability Issues will examine the issue of medical malpractice insurance reform . The rising price of medical malpractice premiums is often cited as a crucial factor in the crisis of spiraling health care costs in the

costs and increase coverage . Subsequent testimony by the Academy's Health Committee de strated that the average co health insurance would rise and, if anything , coverage was likely to decline. Finally, hearings are usually the first time most transition issues are identified and begin to be understood . These issues are often not immediately obvious and can be critical . No matter how desirable the final outcome, if a new policy would cause sufficient short - run dislocations or visible short - run losses to a strong bloc of voters, the proposal becomes far less attractive politically . Those who think the current hearings on health care reform are useless should reconsider their position . This is a time when the Academy and others can do a significant public service not only by testifying but by meeting privately with the many congressional staffers who develop the topics for hearings, se t the witnesses , and prepar questions that members f Congress will ask . ∎

United States . Reducing the risk of huge liability judgments against medical professionals is an element in nearly all plans for health care cost containment . The Clinton bill includes such a provision, and since malpractice reform has long been a cornerstone of Republican health care proposals, it is likely to be part of even the most modest reform package . The Academy work group on malpractice reform will scrutinize the real impact such reform will have on health care costs . These two work groups need the services of casualty actuaries, both as members and as reviewers of their work product . If you are interested in contributing your skills to the most vi public policy question in r country today, fax your name and area of expertise to Academy Director of Government Information Gary Hendricks at 202872-1948 or to Manny Almagro at 203-843-7001 . ∎

0 Ohio's uninsured would be eligible for health care coverage under a Medicaid reform proposal unveiled by Gov . George Voinovich . The plan would replace the current Medicaid program with a statewide system of managed care . Under the plan, the state would negotiate rates with providers and organize several purchasing regions that would encompass both urban and rural communities . Participating managed care plans would receive payment based upon the number of individuals served each month, and enrollees would choose from at least three competing plans . The program would be phased in over a 6-year period, beginning in 1995 . Funding for the plan is expected to be provided by state and federal monies now used for Medicaid . .Lore implementing its plan, the would need to obtain a fed'Rewaiver to allow it to reshape its Medicaid program . Vermont unveiled a plan for providing access to health care for all state residents . Acting in accordance with a health care reform law enacted in May 1992 (Act 160), the Vermont Health Care Authority (VHCA) submitted two models for universal access : a single-payer plan financed by new payroll and income taxes and a multi-payer plan funded by employers and individuals and supplemented by increased taxes on cigarettes, gasoline, and beer. The proposal calls for a new system of "integrated systems of care" (ISCs), which are networks of health care providers and facilities managed and financed through a single administrative structure . Each ISC would be governed by a board of directors consisting of em participants, providers, W inistrators, and facility representatives . Legislators will consider the VHCA proposal next year and by mid-spring are expected to have adopted a plan for implementation by the end of the year.

The Managed Competition Act of 1993 was introduced in the U .S . House of Representatives on October 6 by Rep . Jim Cooper (D-Tenn .) . The bill proposes a series of insurance reforms and new tax incentives designed to encourage price competition among private health care plans . A cornerstone of the legislation is a plan for creating regional health plan purchasing cooperatives (HPPCs) that all businesses with fewer than one hundred employees would be required to join . However, unlike the president's plan, small businesses enrolled in the HPPCs would not be required to pay for coverage for their workers . Furthermore, the Cooper proposal would not include an employee or individual mandate . Moreover, the proposal would provide strong tax incentives to encourage providers and insurance companies to form accountable health plans (AHPs), which would resemble HMOs, PPOs, and other group practices . AHPs would not be allowed to exclude coverage of pre-existing conditions and would not be permitted to charge higher rates for individuals who have a history of higher medical expenses . AHPs would be allowed to vary premiums based only on geographic location and, to a limited degree, on age . The bill would limit the amount businesses could deduct for health insurance premiums to the cost of the lowest-priced plan offered by a qualified AHP in their region . All businesses, including the selfemployed, would be allowed a deduction of up to 100% of the minimum-cost plan . On October 28, the Senate approved the Pension Annuitants Protection Act . The proposal would permit courts to award pension beneficiaries appropriate relief in cases where a pension plan fiduciary has violated ERISA in purchasing an annuity . Among the remedies authorized by the act is purchase of a backup annuity. The legislation, co-sponsored by Sens . Howard Metzenbaum (D-Ohio) and Nancy Kassebaum (R-Kans.), is intended to partially reverse the June Supreme Court decision in Mertens v, Hewitt. The House

Education and Labor Committee received the bill for further consideration on November 2 . The Clinton administration has sent to Capitol Hill the Retirement Protection Act of 1993, legislation aimed at reform of the Pension Benefit Guaranty Corporation (PBGC) . Sponsored by Rep . William Ford (D-Mich .), HR 3396 would reduce the level of underfunding in defined benefit pension plans and to cut the PBGC's $2 .7 billion deficit, which is likely to grow in coming years . The legislation contains a controversial provision affecting age-weighted profit sharing plans . New language added to Section 401(a)(5) would specify that defined contribution plans, other than target benefit plans, not be tested for non-discrimination on the basis of benefits rather than contributions . A defined contribution plan, other than a target benefit plan, could be aggregated with a defined benefit plan for non-discrimination testing, but must be tested on a contribution basis, The provision would be effective for plan years beginning September 30, 1993 . For plans that were in existence as of that date, the provision would be effective for plan years beginning in 1995 . Other measures include the phase-out of the cap on the variable rate premium; elimination of quarterly contributions for profit-sharing plans that are 100% funded; and the rounding down of various benefit and contribution limits-such as cost-of-living adjustments-to the next lowest multiple of the increment. The legislation would also eliminate the double counting of gains and losses that has occurred under the 1987 funding rules for singleemployer pension plans . Pension reform legislation will be examined by the House Ways and Means Committee after it concludes consideration of health care reform . The Academy Pension Committee is now preparing comments on the administration proposal .

CALENDAR Actuarial Board for Counseling and Discipline Meeting December 3 National Association of Insurance Commissioners Winter Meeting December 5-9 Actuarial Standards Board Meeting January 19-20,1994 Actuarial Board for Counseling and Discipline Meeting March 10, 1994

For more information on the legislation mentioned above, contact Christine Cassidy or David Rivera of the Academy's Government Information Department.

The Actuarial Update ∎ November 1993 3

AIf119V AL

l ULL111 1171,

continued from page 1

The Academy Committee on Life Insurance Financial Reporting has formed a task force to study fair valuation of liabilities for financial reporting under generally accepted accounting principles (GAAP) . Over the next 4 to 6 months, this task force will study various methodologies used to evaluate liabilities . In the second quarter of 1994, the task force intends to issue a report of its findings, which will be used as a springboard for planned discussions with the Financial Accounting Standards Board . Several methods of fair valuation have been proposed . In that regard, the task force seeks information and guidance, in the form of papers or otherwise, from individuals and organizations that have been working in this area . If you have information to contribute to this effort, please contact task force chairperson

Jim Hohmann at (312) 609-9270.

demic health policy analyst . Luncheon speaker Dr. Henry Aaron, director of economic studies at the Brookings Institution, compared the process to a game of chess, which will see an endgame resolution shortly before the 1994 midterm elections . Aaron was unwilling to speculate which elements would be included in the final package, but predicted it would be a centrist compromise between administration allies and moderate Senate Republicans, wholly satisfactory to no one.

One of those key moderate Republicans addressed the meeting's afternoon session . Sen . David Durenberger of Minnesota emphasized the need for a market-based health delivery system that would maintain high quality and contain costs . According to Durenberger, the goal of universal coverage for all Americans is not attainable under the current cost structure of health care . "The American people should not give us the money for universal coverage until they can see actual cost containment," he said . A pure managed competition scheme was propounded by the final meeting speaker, Rep . Jim Cooper (D-Tenn .) . Cooper arrived at the Academy event fresh from his own Capitol Hill press conference where he announced the introduction of his proposal, the Managed Competition Act, His bill, Cooper explained, was close in spirit to the work of the Jackson Hole Group, which developed the ideas behind managed competition . Among its differences with the Clinton proposal, the Cooper plan does not provide for universal coverage or a global budget, and limits tax deductions to employers for health insurance li premiums . The 1993 Academy Annual Meeting was attended by congressional staff members, regulators from federal agencies including the Department of Labor and the Pension Benefit Guaranty Corporation, and by journalists representing, among others, the Associated Press, Reuters, Dow Jones, the National Underwriter, and the Bureau of National Affairs . ∎

4 The Actuarial Update • November 1993

At the October 6 Academy Annual Meeting, former Academy President John H . Harding (left) passed the reins of authority to his successor, David G . Hartman. In his speech to members after accepting the president's gavel, Hartman, senior vice president and actuary of the Chubb Group of Insurance Companies in Warren, N.J ., announced the formation of an expanded planning committee to set Academy goals and urged increased cooperation among actuaries of all stripes .

Scheibl Honored for Service

Jerome A . Scheibl (left) accepts the congratulations of Academy President David G . Hartman after receiving the second annual Jarvis Farley Service Award. The award is bestowed to the Academy member who best represents the tradition of volunteer service exemplified by the late Jarvis Farley . Scheibl, vice president for industry affairs of the Wausau Insurance Companies, was honored for his career-long service to the actuarial profession . A former Casualty Actuarial Society president Academy board member, Scheibl currently serves as a founding me of the Actuarial Board for Counseling and Discipline and as chairper on of both the joint Committee on the Code of Professional Conduct and the Editorial Advisory Committee of the Actuarial Standards Board . The award was presented to Scheibl at the Academy Annual Meeting on October 6, the thirty-first anniversary of his marriage to Marlene Scheibl (center) . At left is former Academy President John Harding .

November 1993 Actuarial Update