Actuaries: Folk Heroes or Evil Incarnate?

Folk Hero or Evil IncarnateI’d like to take a moment on this late Friday afternoon to tell you a story.  It’s about an actuary.  Now, most people outside of the insurance industry probably don’t know what an actuary is or what an actuary does.  An actuary is a professional statistician. Unlike the statisticians who work for Major League Baseball, actuaries are more concerned about the financial impact of risk and uncertainty.  These are the guys that work for the insurance companies and calculate what your health insurance premiums are going to be based on your group’s demographics, health history (claims), plan design and the insurance company’s expectation of profit (<<<sorry, couldn’t resist a little joke).  They actually look at expectations of medical inflation (also called “trend”).  Interestingly, the ‘father of actuarial science’ was Edmond Halley, the guy who discovered the comet that bears his name, when in the late 1600’s he developed a life insurance table to calculate how much in premium someone of a given age should pay for a life annuity.  

So based on the above information, you’re probably thinking that these guys were put on earth to make your life miserable.  Well a story in today’s LA Times may change your mind.  It’s the story of David Axene and his work in reviewing Anthem Blue Cross’ paperwork that accompanied their 25% average rate increase (39% on the high end) in California.  Hired by the state of California Department of Insurance, David and his associates determined that Anthem had made a mistake in their figures and that they could reduce their average rate hike to 15% down from the 25% figure.  The Anthem folks were stunned and red-faced.  In the end, Anthem submitted new rates to the state.  Average rate increase – 14% with a maximum of 20%.  David and his team were able to cut the rate increase by half of the original figure and save the citizens of California untold millions.  How did they do it?  They found a discrepancy in the insurer’s projected cost of healthcare (medical inflation or trend).  Anthem was using a 19% trend rate, when Anthem’s own data suggested only a 13% trend rate.

This raised a couple of questions in my mind.  First, did Anthem’s actuaries just make a mistake due to random human error or were they purposefully inflating their estimate?  If it is the latter, it lends credence to claims that health insurance companies are “padding” their increases due to the threat of health care reform.  Second, I wonder how many other insurance companies in other states have done the same and are not being audited by their state’s insurance commisioner? 

Ironically, Anthem’s mistake was probably the reason that health care reform was able to succeed.  When their initial rate increases came out, the administration seized on the numbers and Democrats and Republicans alike singled out Anthem’s increases, often citing the 39% figure.  By the time the error was discovered and Anthem had lowered its rate increases, the health care reform bill had already been made law. 

Moral of the story:  Never judge an actuary by his spreadsheet    OR     All that glitters is not worth a 39% rate increase.

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3 Responses to Actuaries: Folk Heroes or Evil Incarnate?

  1. Pingback: Cavalcade Of Risk – Colorado Rocky Mountain High Edition

  2. Pingback: Cavalcade Of Risk – Colorado Rocky Mountain High Edition | Go HealthReform

  3. Pingback: The Secret of Health Insurance Quotes « Business Risk Management

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