We’ve made a huge mistake

Actuaries are guesers. They are  systemic guessers, but they make guesses none the less. The larger the population and the richer the data history, the closer to reality their guesses tend to be as long as we can assume no massive step functions in the input-outcome matrixes. Actuaries really don’t like making guesses when they are working with mostly unknowns or at best extraordinarily wide parameters of plausible values as they know that their error bars will be significant.

The Exchange has been a source of night terrors for actuaries for eighteen months now.  It was the ultimate in vaguely defined parameters.  No single company knew what other companies were doing, no one knew exactly how people would choose plans, no one knew who exactly was in the eligible population and more importantly who would be in the sign-up generation.  No one had a representative claims history.

Companies made massive efforts to get some structure to their guesses.  For instance, my company participated in a consortium that interviewed 100,000 people with in-depth focus on several thousand people in order to get a feel for what potential Exchange customers wanted and what types of medical needs they would have.  My company had a role play team that attempted to game out various strategies we could use as well as our competitors.   Another company conducted over a hundred focus groups in a single market.  Data miners created proxy consumers from claims data. But the actuaries and finance people priced 2014 Exchange products with at least severe glaucoma in their eyes.

Vision is improving now as the unknowns are shrinking and the known knowledge space is increasing.  The 2015 product development round should see significant mistake correction on pricing.  But let’s review a few common sources of error.
The biggest challenge for the 2014 Exchange product pricing was figuring out who was going to be buying any individual company’s Exchange product. Four million on-Exchange plans sold later, the actuaries are able to start to make solid assumptions about who will be on the Exchange next year.  What metal bands were people buying and using?  Did actuaries assume 35% Bronze or 62% Silver or 31% Gold, and how did that play out on the risk pool composition? Were plans getting the age mix that they anticipated.  Right now, it seems that age mixtures are close to what people projected.  Some firms are seeing younger/healthier mixes, other firms are seeing slightly older and sicker, but noise around central trends is expected from a variety of similar but not identical processes with different initial assumptions. 

The strategic interaction of how plans and networks played against each other in a given regional market is the next critical piece of information.  Some plans will find out that their super-narrow networks that excluded major regional academic medical centers were too narrow and attracted no one.  Other narrow plans will find that they attracted the young and disconnected from the medical system, while broader networks attracted people with known medical issues.  

Some plans will be discontinued, and other plans will be seriously tweaked in response to what other companies are doing in the same market.  Business strategies will evolve as one insurer might choose to embark on a young and health strategy with concurrent risk corridor  and risk readjustment payments going out, and others might choose to specialize in older or less healthy consumers with risk readjustment payments coming in. 

Finally, people weren’t sure about claims scenarios.  How would newly covered people use their insurance?  Would it be a trickle of unmet need, or a deluge or just a regular marginal addition of utilization.   Claims data will  determine if an expensive specialist who is replacable is seeing enough members to keep in a network.  Claims data and out of network authorizations can be used to determine if new providers need to be brought in.

2015 should see a more structured markets as some of the obvious sources of variance from projections to reality are disappearing. 

29 replies
  1. 1
    Lee says:

    I’m going to post this on FB and see how many of the wingnuts fall for the heading :)

  2. 2
    Mudge says:

    I like gueesers..sort of a cross between geezer and guesser…eyeshades and a bottle of scotch…

  3. 3
    randomworker says:

    What is the huge mistake?

  4. 4
    Cervantes says:

    Nice summary of learning opportunities, thanks.

  5. 5
    Librarian says:

    Actuaries are geezers? That makes sense.

  6. 6
    big ole hound says:

    The sad sad thing is that people I know say they will pay the fine rather than being forced to sign up only to have them tell me in private that they have a new plan. It seems these folk’s have an image to maintain. I think next year the number of sign ups will be huge as this stigma disappears and more GOP controlled states have to jump on the bandwagon.

  7. 7
    MomSense says:

    Another great post, Richard!

    One of the things I’ve been wondering about is how more people accessing medical care, especially the wellness and screenings covered by Obamacare, before retirement age will affect the cost of Medicare. Anecdotally, I see a lot of people where I live who have never had health insurance and once they hit retirement age and access health care through Medicare are in pretty rough shape and require a lot of services.

  8. 8
    rikyrah says:

    thanks for the info

  9. 9
    debit says:

    @big ole hound: I know two people who have said they’ll pay the fine. One is a coworker who smokes and is really upset at about the difference in pricing (for smokers). The other is my brother, who has spent too much time listening to my wingnut dad and is refusing to sign up, despite desperately needing insurance, because, and I quote, “I hate Obama.”

    Everyone else I know, including me, were the ones hammering on the server the first day, shouting, “Take my money!”

  10. 10
    aimai says:

    @MomSense: This is something that people have been anticipating but of course, in the Red States, where this has always been the case, there was no medicaid expansion.

    That is to say that it was already well known that the sickest people, those who have had the least access to health insurance and therefore health care, were poor and working class people in Red States. Relatively few employers offered health insurance/care to their employees and the laws restricting medicaid were tough. So a large proportion of the state population would finally rise up to medicare age and have been living with debilitating, chronic, illness for years. That is still going to be true in those states where the medicaid expansion was denied–those people either still don’t qualify for medicaid, or fall into the medicaid/exchange subsidy gap and don’t qualify for subsidies on the exchange.

    One way to fix this, if we ever got a democratic house and senate again, would be to create subsidies all the way down to the medicaid level and below. In other words: in states that didn’t accept the medicaid expansion create a new subsidy level that would completely pay for the exchange insurance cost for people making below 138 percent of the poverty line. Then people could finally sign up for the equivalent of medicaid on a federal basis, rather than having to wait on their states.

  11. 11
    OzarkHillbilly says:

    @aimai: TYRANNY!

  12. 12
    Cephalus Max says:

    @Lee: ha ha. Yes.

    Another helpful post, Richard.

  13. 13
    MomSense says:


    There are lots of fixes I would love to see happen to the ACA–unfortunately the Republicans hold just enough power to mess things up for everyone especially their own constituents. That is an incredibly sad state of affairs.

    That we know that lower wage and minimum wage workers are sicker is one of the reasons why I am so opposed to raising the age at which people are eligible for Social Security and Retirement. Yes, on the average life expectancy is longer but when you look more closely at life expectancy you find that for people who have been living without health insurance and in poverty or just above poverty level–the golden years are shorter and not so golden.

  14. 14
    Mike E says:

    Gotta vent about marketplace phone reps: I moved a month after the Dec deadline and tried to change my address, 1st by calling (awful rep) then went online…no luck, both the health ins and dental plans didn’t receive the update; the dental folks hadn’t gotten any patient info yet. Since I’ve been getting my mail forwarded it’s merely an inconvenience, but still, accuracy in healthcare delivery hadn’t reached the initial threshold.

    During one of several convos with my dental ins co I learned that the gold plan I selected makes you wait 12 mos before copay reduction kicks in for major work (crowns, root canal etc) and this won’t help me at all (h/t B-J’er whose name I don’t recall) so I went back to the marketplace to try and fix this. Horrors. Once a premium is paid, said a rep & then a supervisor, you can’t make any changes until the next enrollment in Nov. I tried to explain that no action had taken place with my dental plan, no doctor selected nor any visits initiated because the plan had yet to be activated…alas, I had crossed the Rubicon and was now a resident of Hotel California. Cancel my dental then, I said, since paying over $600 for absolutely nothing seemed less than a bargain to me.

    Sorry, the dept that handles removal of policies was unable to do it at this time. I wondered if my health plan covered head ‘splodins. I was transferred to another rep (#4) to get the ball rolling, very slowly, on this change…once Chelsea got on the phone I had reached my limit; I said I supported PPACA but was disturbed by the lack of abilities demonstrated by reps during my enrollment and wondered aloud if this endeavor could succeed if a mundane thing like moving couldn’t get handled. “You changed zip code?” Yep. “We’ll go over your application and confirm your info, then” and I thot, what fresh hell is this? “Moving allows changes by special provision.” I came to learn that adding a family member triggers this exception as well, too, and we reapplied with the proper dental plan level this time. Sweet paragliding Jeebus, you play incompetent rep bingo before getting someone who knows what to do.

    Sorry for the pony pout…it remains to be seen if any of this sticks, but thanks for listening.

  15. 15
    Davis X. Machina says:

    @Mike E: <blockqupteSweet paragliding Jeebus, you play incompetent rep bingo before getting someone who knows what to do.

    This will get better, because reps will start to get experience. Right now it’s “We can’t do that” not because they can’t do that, but because the script in the notebook doesn’t fork there, Nothing Can Be Done.

    Expertise, and experience, beats a $9.35/hr temp and a ring binder.

  16. 16
    Mike E says:

    @Davis X. Machina: There’s that for sure, and system bugs that by now are legend but from a customer service perspective it’s been more than a 50% unpleasant rate in regards to reps’ ability to handle that basic “human” interaction…I’m not a career counselor so I won’t advise phone workers to try something else they actually like.

  17. 17
    Three-nineteen says:

    @Mike E: I skipped the marketplace completely after I got the name and number of the company I bought the insurance from. It took three calls DIRECTLY TO THE INSURANCE COMPANY to fix my misspelled name. So, it may be a problem on the marketplace end, a problem on the insurance company end, or a problem on both sides.

  18. 18
    Mike E says:

    @Three-nineteen: 10-4, and as a consumer, getting a primer on useful terminology helps cut through to the proper channel so that your call into the marketplace is hopefully successful… so far, I reckon spawning upstream is the easier task. Still sucks tho, and hard for us advocates of the thing to remain enthused when obvious shortcomings and intransigence are the norm.

  19. 19
    catclub says:

    Why do the subsidies drop to zero with a qualifying income just above the threshold, but they seem
    to be very large right below it? If I put in income of $62039, my premium for two people
    on one plan is $764 out of $1890.

    If I put income of $64000, there is no subsidy and the premium is $1890.

    This seems crazy.

  20. 20
    Richard Mayhew says:

    @catclub: The law restricts premium subsidy to family units earning less than 400% FPL. At 399.999% FPL, the expecation is that you’ll pay 9.5% of your income in premium and the subsidy will take care of the rest (for the 2nd lowest Silver). at 400.01% of FPL, you’re on your own.

    It was put in place to save money and get a good CBO score.

  21. 21
    catclub says:

    @Richard Mayhew: Thanks! So it could pay to limit your income to just below. I wonder if the CBO scoring takes THAT behavior into account.

    Next I’ll wonder what happens if you estimate 399% but end up earning 400% of FPL by the end of the year.

  22. 22
    Richard Mayhew says:

    @catclub: A bit — CBO is very well aware of no-work incentives built into means tested transfer programs — their guess is that it won’t have a significant impact as people at 399% of FPL or 401% of FPL tend to not have to go into the individual market for insurance in large numbers as they tend to have better jobs with better benefits than average. But they definately account for subsidy cliffs.

    If you estimate in good faith that your income is just below the subsidy cliff, but it turns out to be just over, you’ll pay back the entire credit Consumer Reports has a good explainer. There are a couple of legal ways to drop your income used for subsidy calculation to below FPL (big IRA contribution, HSA contribution, push back income to 2015 etc)

  23. 23
    Mike E says:

    @catclub: My “reapplication” now requires me to send in proof of income to dhhs in May, whatever, I work part time so figuring my yearly was a guesstimate anyways…I thot the IRS was a checkpoint on this when filing, and adjustments were then to be made on your income tax after that comparison. These extra hoops, I’m thinking my change request must’ve pissed somebody off )-;

  24. 24
    iLarynx says:

    Systematic vs. systemic.

  25. 25
    Chris T. says:


    The other is my brother, who has spent too much time listening to my wingnut dad and is refusing to sign up, despite desperately needing insurance, because, and I quote, “I hate Obama.”

    On his birthday, send him a card that says “I would have gotten you a birthday gift, but then I remembered you don’t want nice things because you hate Obama.”

  26. 26
    E. says:

    Talk about burying the lede. Except I think you may have buried it completely outside the article itself. Or was there a lede? What was the mistake?

  27. 27
    Bill says:

    My exchange based plan has sent out three bills so far and in each case the postmark date is 8-9 days after the invoice date so if one happens to out of town for a day or two it is impossible to get the payment to them by the due date, especially since the clowns insist on doing everything by mail instead of allowing payment through a website like the rest of the world. Are they trying to get people to default?

  28. 28
    Brendanyc says:

    @E.: E. speaks for me as well.

  29. 29
    VFX Lurker says:

    @E.: It took me a moment to figure out, myself. I think Richard Mayhew’s point was that the health insurance companies were making their best possible (but uninformed) guesses on how to price their health insurance wares on the exchanges for 2014. In 2015+, they’ll be able to base their prices on how actual customers bought and used their exchange-sold insurance in 2014, instead of merely guessing.

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