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Health Insurance Risk Management

By August 13, 2013Commentary

People generally think actuarial science is one of the most boring topics ever, and that may be right, be it is one of the most critical for anyone who bears any risk for health care utilization and spending.  A publication from the American Academy of Actuaries sets out general principles for dealing with such risk and in particular for anticipating likely spending and setting reserves to account for such spending.  (Actuarial Report)   While reserve setting for health insurance is easier than for property insurance, since the risk period is relatively short in duration, large amounts of money are at stake and being off by a percent can mean a huge swing in exposure, as the results of public health plan companies have reflected over the  last two decades.  A health plan typically receives a set premium for a set period of time and while it is relatively simple to identify the premium amount (a little harder for experience adjusted premiums), identifying all the payments that may have to be offset against that premium is tricky, and involves, among other things, setting a reserve for services which were incurred during the premium period but for which claims have not yet been received.  Even harder is the case where a large group is self-funded and is trying to project its future health expenses so that it can set aside appropriate reserves for all that spending.  And while this has traditionally been mostly an issue for health insurers and self-funded employers, if we see a significant shift to risk-taking by provider groups such as ACOs, they will have to be able to employ the same actuarial techniques or they will be at substantial risk of financial failure.  We saw this in the past with capitation and regulators will need to be alert to ensure that provider groups have both the technical skills and the financial reserves to take on health spending risk.

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