The role of the actuary in healthcare reform

SOA President Brad Smith talks about the role of the actuary in healthcare reform.

By Bradley M. Smith, SOA 2011-12 President

BradSmith The Patient Protection and Affordable Care Act (PPACA) is undeniably a complicated piece of legislation. One of its elements that will affect actuaries and our work are the four primary subsidies the law creates among different constituencies.

Let me preface my remarks by saying that I am in no way criticizing Congress or President Obama. It is the legislature’s responsibility to determine who should pay for what and whether differentiation of cost by a given criteria is socially acceptable or desirable.

The four subsidies created by the legislation are:

1) Affluent to poor

2) Healthy to unhealthy (via the elimination of underwriting)

3) Young male to young female (via the elimination of gender-based pricing)

4) Young to old (via the 3-to-1 limitation on pricing)

While any one of us may disagree with the social benefits of such subsidies, it is pretty clear what the underlying thinking was on at least the first three. However, I was having a problem understanding why the fourth subsidy was enacted. After all, many of the uninsured were young adults who felt invulnerable and did not see the need to purchase health insurance. The new law requires them to purchase insurance or pay a penalty. If we were going to subsidize any age group, shouldn’t we be subsidizing them? Instead, not only are we not subsidizing them, we are forcing them to pay artificially high premiums that subsidize an older, generally more affluent cohort. This didn’t make sense to me.

I discussed this with someone who works on Capitol Hill. I told him I understood the criteria for the first three but was struggling to understand the reason for the young to old age subsidy. Was Congress and the president trying to emulate the group insurance market? Were they making a statement about the appropriateness of age-based pricing? The person just looked at me and smiled. He said, “Brad, you are such an actuary. You try to impute logic where there is none. There is one reason and one reason alone for the 3 to 1 limit that subsidizes the old at the expense of the young.” I said, “OK, what is the reason?” He said, “It is the price that AARP (American Association of Retired Persons) extracted for their support of the bill.”

“It is the price AARP extracted to support the bill.” Totally non-actuarial. Totally political. Old people vote, young people don’t. If you are under age 35 this should make you pay particular attention.

There is a lesson here for us as a profession. If we are to sit at the grownups’ table, we have to recognize that not all decisions are driven by actuarial considerations. We are not always “the smartest people in the room.” In fact, in some ways we have been the most ignorant.

We as professionals should not be shy about pointing out these ramifications. The newly subsidizing cohort (young, healthy, middle-class males) is going to be hit with substantial rate increases as a direct result of these mandated subsidies. The laws of actuarial science, like the laws of physics and economics, are immutable.

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