Introduction – Take 3

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I don’t know if anyone is still following this thing.  I don’t advertise it but if I write on here, will this trigger an email or something to someone?  If so, then, “Hello again.”  It’s been a few years since I’ve added to this blog, I hope your pursuit of actuarial knowledge in the meantime has been joyful.

I’ve recently adjusted some of my career and life goals and wanted to start writing about my new direction.  I enjoy writing in a blog because it forces to me to think of the reader.  If I just think without writing or even if I write for myself, there is a lot that can be left unsaid.  So whether you’re reading this thing or not, I’m going to be writing.  Not with any real consistency, mind you.  With my time being prioritized between 3 young kids and work and school, I’m not going to add some unnecessary stress of a blog deadline.  However, this is something I genuinely enjoy and want to pursue so I hope to be out here frequently in 2019 and forward.

The New Quest

In December 2017 I began thinking about pursuing more education.  Work was going very well and while I was continuously getting my hands on new things and gaining business and actuarial knowledge there, I wanted to expand my mind in ways outside of work.  Economics is a topic that I’ve always been drawn to so I started researching my options for graduate work in economics in the Bay Area.  After lots of web surfing and a few phone calls and email discussions, I decided to begin a Masters in Economics at CSU East Bay in Hayward, CA.  The professors and staff there impressed me and their program was the most flexible.  Here I could take evening classes and go as fast or as slow as I wanted.

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My first semester at CSUEB (actually, back then they were quarters), was a Macroeconcomic Theory course taught by Dr. Kai Ding.  This class was fascinating.  Even though it was a theory course, Dr. Ding did an excellent job of bringing practical applications into the coursework.  I felt like he and I think a lot alike.  After going over a theory the next logical question was always, “So what?” i.e. how do we use this?  He trained us to come up with examples for each of our theories and formulas so that the learning wasn’t always abstract. After every Monday evening class I walked to the bus station with a big smile on my face.  I would text my wife about how cool class was and expressed my appreciation for her wrestling the kids by herself that night so I could pursue this.

Being back in the classroom has got me thinking more outside of the life of an actuary at an insurance company.  The life of an actuary has been very good to me, but perhaps it has simply been a stepping stone to something more.  I feel a pull in a new direction.  Well, it’s two new directions, really.  Though the two are fairly parallel.

One pull is the academic life.  I love the classroom.  I enjoy being in class and debating with and learning from smart people.  I enjoy teaching others about those topics that interest me.  My plan right now is to finish my masters at CSUEB and then pursue a PhD in some form so I can prepare to teach and lead research at an academic level.  How, what, where?  Well, the details are not worked out yet, but I have time to figure that out.

The other pull is in public policy.  Healthcare in the US is messed up.  Much of the reason it has so many problems is the lack of education and understanding of basic healthcare and economic principles which drive the current system.  I plan to write here and anywhere else I can to bring education on US healthcare and find other ways I can affect policy in providing sound advice to policy makers.

Why the Pursuit of Knowledge of US HealthCare

gettyimages-542797594-600x400It would probably be more interesting if I had a stirring backstory about how someone I know or love was devastated by the crippling debt of medical bills, or that I myself was grossly mistreated by a physician for a particular diagnosis.  But the reality is, I don’t have such a story.  I have been extremely fortunate not only with good health but with employment to always have access to high quality and affordable healthcare.  My motivation comes from spending much of my day using data and analysis to solve problems.  US Healthcare is like a big puzzle that needs to be solved.  Unfortunately, I feel, too many people with a misunderstanding of actuarial principles are proposing the solutions.  It is my view that health actuaries, with their rigorous training in economics, statistics, and insurance regulation, are in a unique position to be key contributors to the healthcare solution.

Why do I care about US Healthcare?  I firmly believe that healthcare is a necessity to pursue happiness.  The lack of healthcare is holding back the US from producing top talent and from further economic progress.  I wrote a series of posts in 2014 in connection with the implementation of Obamacare, you can read that here if you like.  Much of my concern and arguments for a change in US Healthcare from back then are still applicable today…

  • Prior to the enactment of the Affordable Care Act, there were 44.4 million uninsured in the US. While the ACA expanded access to roughly 15 million Americans that did not have insurance previously, there are still around 27 million uninsured today.

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  • Unlike in 2014, medical costs in recent years are not outpacing regular inflation. This is because healthcare spending is non-cyclical.  That is, we tend to spend the same amount on healthcare regardless of if there is an economic recession or boom.  Because CPI has been growing steadily and we’ve had very low unemployment in recent years, normal inflation has surpassed medical inflation since mid-2017.  However, healthcare still makes up an alarming 18% of GDP in 2017 and this will only increase if the economy takes any kind of downturn.
  • The US continues to spend far more on healthcare per capita than any other first world country in the world (roughly double) and for statistically worse care.
  • In my post 5 years ago I mentioned that medical bills are the #1 reason people go bankrupt in the US. Recent studies show that the truth is more gray. The difficulty in determining this is if someone has debt from mortgage, cars, loans, credit cards, and medical bills, which of these actually caused them to declare bankruptcy?  Some will say it was the medical bills but we have very poor data on how much of this debt actually can be attributed to medical bills.  We can say with confidence, however, that bankruptcy due to medical bills is much higher in the US than in any other developed country as we are one of the last to not have universal coverage.

So there you have it, hello again.  This was a short intro into what I hope to be some continued movement on the blog.  What will future posts entail?  Well, I’m the type of person that likes to understand all possible angles of a topic so that’s what I’ll do with US Healthcare.  I’ve begun a list of what I’ve deemed ‘blind spots’ in my own understanding of the healthcare problem.  I plan to research and then write about each of these blind spots.  What is a blind spot?  Could be any piece of the healthcare system that I feel I don’t understand.  Anything I have come across that may be contributing to or affecting the incredible inefficient machine that is US Healthcare. A few blind spots that come to mind at the moment are: building and maintaining a hospital, understanding the CDC and FDA, the economics of medical school, skilled nursing facilities and other end-of-life care, state departments of insurance, medical malpractice, and on and on, you get the idea.

So, I hope you’ll join me as we delve into the various aspects of the healthcare system and we can learn together the many ‘why’s this thing is so screwed up.

As always, I’m open for suggestions or discussion in the comments.  Thanks for reading.

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The Actuarial Entrepreneur

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My Entrepreneurial Itch

For most of my life the phrase, “Owns his own company” was synonymous with wealth and prestige. I mean, it was the epitome of success! Someone that owned their own company must be brilliant and hard-working and a true businessman or woman. To be honest, owning a business felt like an unattainable dream for this humble kid from Sacramento. Not that I gave it much thought, and perhaps that’s the point. I did not know anyone personally that ran their own business so the mythology of it led me to never consider it as a career option.

At the same time, there must be something funny in the water of the San Francisco Bay. It seems like every week I hear of new successful startup companies that are founded here. Obviously, with several of the biggest, most innovative tech companies in the world being headquartered here, the influence is palpable in terms of how ideas get swarming. It was only a short while after moving to the Bay Area that I read in a magazine about need-to-knows of starting your own business, and this article gave several examples of entrepreneurs that were putting everything on the line to build their own enterprise. That got my head swirling a bit. What did these people have that I didn’t? Yes, I was a math nerd but working in the insurance industry started to open my eyes to the world of business and economics and I started to contemplate how things get built from the ground up.

I will admit one other guilty pleasure of mine that helped to sharktank2water the seedling of my entrepreneurial spirit – ABC’s Shark Tank. Without going into too much detail, Shark Tank is a reality show built around venture capitalism. Different small businesses from around the country come to the Shark Tank to pitch their ideas to 5 ‘Sharks’ or investors. They give every detail about their business and how and why they think it will grow to convince the sharks to invest in their company. Some of the ideas are quite good, some are rather terrible. What fascinates me about this program are the sharks. These men and women have all built their own businesses from the ground up. All of them come from humble backgrounds having been born with nothing or almost nothing and have built multi-million dollar businesses in a variety of industries. I love to watch Shark Tank to see how these sharks’ minds work. The questions they ask and the advice they give is intriguing to me. Anyway, there’s my plug, the wife and I never miss an episode.

Actuaries as Entrepreneurs

Many of the qualities that make a successful entrepreneur apply to the actuarial field as well. In order to succeed, both must be adept at problem solving and must be incredibly persistent. Obviously, a business knowledge of corporate finance and economics is also key. Truly successful actuaries do not wait around until someone gives them something to do, they proactively look for ways to improve things and do their own research of the data available. Similarly, a business owner doesn’t have someone telling them what to do, he/she must be driven enough to run things on their own.

So how do we mix the two? How might an actuary start his or her own business? Building an insurance or pension company is a huge undertaking and requires much more than the expertise of an actuary. You need experts to build a network (medical or otherwise), you need legal experts to comply with state and federal regulation, as well as other general business professionals such as sales, marketing and finance. I have known a couple of actuaries in my career who have attempted to start their own insurance companies but there are more accessible ways an actuary can succeed as a business owner.

Consulting –Large consulting companies such as Mercer, Aon Hewitt, Ernst & Young, Deloitte, etc. employ hundreds of actuaries that provide analysis for their clients. Because ‘consulting’ is a rather broad term, these actuaries’ duties can have a considerable range. A few reasons a consulting firm would be hired for actuarial analysis are: provide analysis for an insurance company that does not employ their own actuaries, provide analysis for large employer groups that self-insure their employee benefits, act as a broker between an insurance carrier and a purchasing employer group, consulting actuaries are also hired by government entities to audit or validate the work done by an insurance company.

But consider this: suppose an actuary, as part of a large consulting firm, works with a particular client for several years and builds a solid relationship with them. Who does the client trust and rely on more, the actuary or the consulting firm? Many actuaries in this position realize they can break off from the mother ship and start their own consulting firm as they already have the trust and experience of a few key clients. As a smaller firm, they can easily charge a much lower rate for their services as well. This is the typical route for an actuary with an entrepreneurial itch. They gain experience and relationships in the consulting world and then take a leap by becoming their own boss.

ERM – a less common, though growing field for actuaries is Enterprise Risk Management, or ERM. I will discuss ERM in more detail in a later post, I’ll just say for now that this is an analytical field that is becoming more and more important for all types of businesses. ERM is the identifying and quantifying of risks (ALL kinds of risks) for a company. Risk Management is usually something that gets attention AFTER a major disaster. ERM started becoming more popular after the 2002 failures of Enron and Worldcom and then even more so after the housing and financial collapse in 2008. However, in addition to fixing something after it breaks, companies are trying to be proactive and seeking out the possible risks in advance. Actuaries are uniquely qualified to root out the business, regulatory, financial, operational and other risks that face a business. Some actuaries are providing consulting to large and small businesses around which risks they are most vulnerable to and how to avoid or mitigate them.

Sports Fans Need Insurance

The rest of this post is to discuss some non-traditional ways that I have considered entrepreneurship as an actuary. Passion and drive are key elements to starting your own company, which is why I often think of sports related products when I consider new ventures. I’m going to throw out a couple of ideas that have floated around my head for ways to fill a need or fix a problem in the world of sports. The purpose of these ideas is not to actually give you something to run with, but to get your brain going on other ideas that may be out there.

Black Out Insurance
I hesitate to write about this start up idea because I had the idea in 2010 and though the business may have been able to succeed for a few years back then, the FCC and the NFL very recently changed their regulation which would have completely dissolved my company and product.

I am a huge football fan. Although I prefer watching college football to the NFL game, I have a great respect for the talent and strategy that goes into the pro football game. I also can empathize with the NFL fan, many of whom can more easily be described as fanatics. When I lived in Green Bay, WI, it was eye opening to me to meet people of all ages and genders that knew every detail about the Packers’ roster and schedule. Packers fans are not more in number or more dedicated to their team than other pro sports, however, Green Bay is such a small town that there’s little else to talk about than the Big Green Machine.

The National Football League is a multi-billion dollar organization and although each team is really their own company generating profits or losses on their own, the NFL is the one making the rules about the gameplay, the recruiting, the staffing, even television regulation. In case you don’t know, TV regulation which the NFL has enforced can be a sore topic for many fans. The NFL had, until very recently, what was called the ‘blackout rule’ (in March 2015, the blackout rule was dissolved). The blackout rule decreed that if an NFL game was not sold out 72 hours prior to kickoff, then the game would not be aired on local television. The reasoning being that the NFL wanted their fans to physically go to the games. Obviously, the NFL and the local sports team make lots more money on a fan that attends the game than on those watching at home. They wanted to strong arm fans into putting up the dough to buy a seat.

Keep in mind, this regulation was only a problem for some markets. Fans of the New England Patriots, Green Bay Packers, Pittsburgh Steelers never had to worry. These teams always had large enough markets and good enough teams to sell out every game year after year. But I live in the East Bay of Northern California, where many of my friends and coworkers are Oakland Raiders fans. For Raiders fans, the blackout rule has been a thorn in their side. The team has been terrible for going on a decade now. These poor fans have had it hard enough trying to stay loyal to their pathetic team, yet, to kick them while they’re down the NFL won’t even let them watch their team on Sunday. From 1995 to 2010, the Raiders had 122 home games and 78 of those (64%) were blacked out.

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What would ease the pain of the poor blacked out NFL fan? Black Out insurance, of course. The insurance is this: you pay us a small premium at the start of the season and we guarantee that you will watch your favorite team on Sunday. If your team sells out every game and you watch every game at home on your comfy couch, boom, we delivered. If your team has a blackout?? We overnight to you 2 tickets to the game at no extra cost. While others are bemoaning that they can’t watch the game, you are watching it live.

How much is the small premium mentioned earlier? In steps the actuary. Looking at historical patterns as well as attendance trends and forecasts for quality of the team that year, the actuary estimates the probability that each NFL team will have a blackout. Estimated cost would be the probability of a blackout times the price of the tickets. Obviously, the insurance would vary by team. Because a blackout is much more possible with the Raiders or Buccaneers the insurance premium would be higher. Black out insurance for the Packers or Seahawks would be almost nothing.

NBA Ticket Insurance for DNP-CD

Another sports gripe that is starting to trend is the benching of star players in the NBA. The NBA is the most competitive basketball league in the world. The NBA season is also very long, longer than any other major sport in the US with the season spanning 230 days from opening day to the end of the playoffs. These two things combine to take a toll on the bodies of the athletes involved. Injuries are becoming a major problem for the NBA and although medical technology is improving, many teams this season were missing their star players for at least part of the season. A trend that is starting to form lately is for NBA coaches to start sitting their star players in the middle of the season for no reason other than to give them rest. With the regular season being 82 games long, there are some games that a coach may feel are not as important, that is, maybe they feel they can win the game anyway without their stars.

This is becoming a sour spot for NBA fans. They spend lots of money well in advance of a basketball game and expect to come to the game and watch the best players play. It can be very disappointing to show up only to find out that Tim Duncan or LeBron James or Steph Curry won’t be playing that game.

Introducing DNP-CD insurance! Yes, I’m still working on the name, I know that isn’t extremely catching. DNP-CD is the acronym that is written in the box score for a player that Did Not Play by Coach’s Decision. This insurance is thrown on after you purchase your tickets to a regular season game. After you’ve chosen your seat and game, you are given the option of buying DNP-CD protection on any of the 10 starting players for those two teams. Suppose you are buying tickets for the one trip the Cleveland Cavaliers make to Sacramento to play the Kings. Your son is a huge LeBron James fan and you buy tickets to the game. What if the Cleveland Cavaliers are on a 5 game road trip on the west coast and just played the Lakers two nights ago and will be playing Golden State the next night? Cavs’ coach Dave Blatt may feel like his team could beat the Kings handily with or without LeBron so he decides to give him the night off. You just spent a great deal of money to go watch LeBron and now you’re screwed. With DNP-CD insurance, you pay a small premium on top of the ticket price and if LeBron does not play due to Coach Blatt’s benching, you get free tickets to the next game that LeBron is in town. You are guaranteed to see LeBron play live.

Tim Duncan, Tony Parker

How much would this cost? How would an actuary price this? Well you’d have to take into account any probabilities and factors that affect a DNP-CD. In particular, how often does this coach rest his players? How often does this particular player get rested? What time of year do they typically rest? Against which teams? What kind of schedule surrounds the games where they are rested? There are times when DNP-CD insurance would be very cheap because there is little chance the star will be resting, such as at the end of the season, against rival teams or against teams fighting for playoff positioning. On the flip side, for games in the middle of the season, against bad teams while on a road trip, DNP-CD insurance for Tim Duncan and Dwyane Wade would be more costly.

So there are a couple of ideas to get your creative juices flowing. What are you passionate about, and how could you turn your expertise in that field into a business? Thanks for reading.

Medicare and Medicaid

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medicare

History

Medicare is a federally funded program of health insurance that is provided to all US citizens age 65 and older, regardless of income or medical history.  The program was signed into law as an amendment to the Social Security Act in 1965.  There are many reasons why the program began, a major one being that the over-65 population in the US was largely uninsured.  Because the cost of healthcare for this demographic is so much higher than for the younger folk (and there was no law forbidding insurers from rating them at their true cost) many of the elderly simply could not afford health insurance.  Since 1965, Medicare has expanded to also cover individuals with certain permanent disabilities but by and large the majority of the recipients are age 65 and older.

 

Medicare today

Medicare is funded much like Social Security in the US; the costs incurred today are paid for with tax dollars pulled from wage earners’ paychecks, 1.45% of income.  Medicare has also become thoroughly entrenched with private insurance carriers.  Private companies offer health insurance to Medicare beneficiaries as a supplement on top of the benefit they receive from the federal government.  This is called Medicare Part C, or Medicare Advantage.  Why would someone need supplemental coverage?  Well, because the Medicare Part A and B benefits are pretty bare-bones.  That is, they don’t cover everything you may need done from a physician and the benefits that are covered have substantial copays.  A Medicare Advantage plan brings your deductible and copays much lower.  Because Part A is funded by the government and covers the really expensive hospitalization treatments, Medicare Parts B through D can be purchased at a somewhat reasonable price.  In 2010 only 14% of Medicare members received only Medicare benefits.  That is, 86% of those receiving benefits had some kind of coverage on top of traditional Medicare.

The benefits offered under Medicare are very complex, to get us started, I have created a chart which will give you a general idea of the benefits available under Medicare.

Funded By Benefit
Medicare Part A 100% Government Funded (payroll tax) Inpatient Hospitalizations
Medicare Part B Enrollee premiums, employer & Gov funding Outpatient services, other medical care
Medicare Part C Enrollee premiums or employer Supplemental Coverage: this coverage is purchased through a private insurance carrier and provides coverage on top of parts A and B.
Medicare Part D Enrollee premiums, employer & Gov funding Prescription Drugs

 

 

The Good of Medicare

Obviously, providing essential health benefits to those over 65 is a good idea from most people’s point of view.  I’m not going to get into that as much as the actuarial standpoint.  CMS (Centers for Medicare & Medicaid Services, governing body for Medicare and Medicaid) has many qualified actuaries working for them and I want to discuss a couple of intriguing pieces that make this insurance different than commercial insurance.

Less Anti-Selection: An oft-used word in the insurance industry and particularly in the actuarial and underwriting departments.  Anti-is essentially the idea that when you buy insurance you know more about your own personal health history than the insurance company does so you will attempt to cater the benefits to maximize your own utility.

A quick example that is often discussed in dental insurance is orthodontics.  Suppose you offer a dental insurance plan that covers orthodontia services and you have one competitor in the marketplace which does not offer ortho.  Your plan is slightly more expensive because you know that, on average, a small % of the population actually receives ortho treatments.  Now think from the point of view of the consumer.  Two dental plans, one is slightly more expensive and offers ortho, the other is cheaper and does not offer ortho.  Which one will you choose?  Depends on if you need ortho, right?  If you or your family needs ortho, you’re willing to pay a few extra bucks for the benefit.  If you don’t need ortho, you’ll buy the cheaper plan.  This is anti-selection.  What ends up happening is that the plan offering ortho ends up being loaded down with a disproportionate number of ortho-needy members.  As an actuary, this is a very tricky problem.  How do you rate for this?  You have to rate not using an assumption of the ‘average population’ that is purchasing insurance but of the average population that is purchasing YOUR plan, which depends on factors outside your control (i.e. benefits offered by the competition).

OK, sorry for the tangent, but what I’m trying to get at is anti-selection is a serious concern for private insurers, but, Medicare does not have this concern because EVERYONE is enrolling.  They are the only game in town.

Risk Adjustment Factors: For private insurance companies offering Medicare Advantage, there is a significant risk taking on new patients at an advanced age. A risk so high that some insurers don’t want to bother playing.  However, something that has mitigated the high cost risk of these patients is a Risk Adjustment Factor system.  In 2007, CMS implemented a formula for reimbursement to the private insurers which includes an adjustment for the health history of the Medicare beneficiary.  That is, if a particularly sick (costly) individual enrolled with United Health Care, for example, CMS would reimburse more to them than for a healthy individual.  The Risk Adjustment Factor does not eliminate the cost risk for UHC (to eliminate it completely CMS would simply reimburse UHC at the end of the year for all incurred hospital costs), it simply helps mitigate the cost.

 

Problems with Medicare

First and foremost, in my mind, is the benefits are INCREDIBLY complex!   Which is absurd when you think of who the beneficiaries are.  It would make more sense to have a simple benefit structure when offering something for the elderly, but nothing can be simple when there are politics involved.  Much like the tax code, any time a politician is adventurous enough to change something with Medicare, it becomes more complex.  I’m not going to go into too much detail about the benefits (not extremely fascinating).  They include a $147 deductible and the $304 nightly copay on hospitalization.  Yes, $147 deductible.  Why not $150?  I don’t know, that makes too much sense.

Another major problem for Medicare is that, similar to Social Security, Medicare will be running into funding problems very shortly if no legislative action is taken.  With the large influx of baby boomers leaving the workforce there are fewer people paying taxes to fund Medicare and more people receiving the benefits of Medicare.

But there is another issue at play here as well.  Medical cost inflation is consistently higher than inflation of any other US product.  Advances in technology have made it possible to prolong life and increase the quality of life for the elderly, however, at a significant cost.  CMS does not increase their payments at the same rate that costs are rising.  This creates a huge disconnect between the true cost of providing care for Medicare patients and the revenue hospitals receive for treating them.  So put yourself in the shoes of a hospital administrator.  There are plenty of for-profit hospitals but let’s suppose you run a non-profit hospital.  Even if your main objective is not to produce a profit, you still need to collect enough income in order to pay your expenses, otherwise your hospital will go bankrupt.  Anyway, you know that for every Medicare patient you treat you will not be reimbursed sufficiently for the cost of care in treating that person, what do you do?  What are your choices?  Do you try to take on less Medicare patients?  Do you tell the government and insurance carriers that you will no longer accept Medicare patients?

This leads me to a third problem Medicare is currently facing: fewer and fewer physicians want to take on new Medicare patients.  The steep regulation involved in administering and being paid by Medicare as well as the low reimbursement schedule leads many doctors to say, “No thanks”.  A similar issue is that the larger hospitals that are still accepting Medicare patients have to offset the low reimbursement rate from Medicare with higher costs elsewhere.  That is, what they charge to non-Medicare patients goes up to make up for the shortfall.  The continual rise in medical costs has been leveraged by the low reimbursement of Medicare to hit those receiving commercial insurance with a double whammy.  I discussed how incredibly high the US costs of healthcare are in this post last year in case you missed it.

 

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History

Uncoincidentally enough, Medicaid began with the same amendments to the Social Security Act which started Medicare in 1965.  Medicaid is a program which is jointly funded by the federal and state governments to provide essential healthcare to those of low income.  The law signed in 1965 does not obligate each state to offer a Medicaid program, although all states currently do.  Because the administration of the program is run on the state level, the scope and eligibility of Medicaid can and does vary widely from state to state.  This became a point of controversy with the passing of the Affordable Care Act in 2012 because this law brought additional federal funding to states if they expanded Medicaid coverage to a certain federally-ruled level and many states chose not to.

 

Medicaid Today

In order to explain how Medicaid works today and who receives what, it is easiest to use a table, illustrating the different definitions of government assistance for medical care.  Every citizen in the US fits into one of the four categories below.  FPL stands for Federal Poverty Level which simply stands for how much annual income a family makes.  In a nutshell, if you live in a household of four where your combined income is less than $24,200, you live below the FPL, however, the actual definition takes into account the size of your household.  This link gives a more detailed explanation.link

 

Federal Poverty Level

FPL equivalent for family of 4 Government Assistance Program

What Government provides for you

<138% FPL

< $33,500 Medicaid Full health coverage (medical, dental, vision, etc) coverage at no expense in either premiums or copayments.

<200% FPL

< $48,500 Child Health Insurance Plan (CHIP)

Full health coverage for your children.

<400% FPL

< $97,000 Health Insurance Premium Subsidy

This was introduced in 2010 with the Affordable Care Act and allows people that are not eligible for Medicaid or CHIP to receive government assistance in paying for their own health coverage.

>400% FPL > $97,000 None Nada

 

 

A quick note that the table above represents the benefits for California citizens.  Each state has the discretion to adjust their eligibility requirements as they see fit.

 

Solvency of Medicaid

Medicaid for most states is doing better, financially, than Medicare.  Keep in mind that Medicaid is run on the state level.  Each state receives federal funds to help run their Medicaid program if they meet certain, somewhat loose, guidelines.  However, for the most part, each state has the discretion of administering the program how they like.  Therefore, in order to meet their budgets and the needs of their own individuals, a state may expand or shrink their Medicaid benefits over time.  And this is quite common.  During the economic recession of 2008-2013, CA shrunk Medi-Cal (CA’s version of Medicaid) so that fewer individuals qualified for benefits and those that did qualify had leaner benefits.  In 2013, benefits were expanded back to a level close to where they were pre-recession.  Because any one state is (usually) less divided, politically, than the lawmakers on the federal level, adjusting the program to meet the budget and people’s needs is easier than it is for Medicare and Social Security on a federal level.

 

Final note: OK, on first glance, this month’s post may not appear to have a great deal of actuarial science when compared to previous posts, however, keep in mind that many different factors influence the risk of an insurance coverage.  In order for an actuary to appropriately assess and price a risk, he/she must understand the many economic factors at play, including: who is covered, who is purchasing the product, who is being marketed, solvency of the purchaser, options at the disposal of whomever is purchasing and using the coverage, and several others.  Part of being an actuary is being curious about how and why everything works the way it does in order to predict how it will behave in the future.

Thanks for reading!

 

Social Security – part 2

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¿Hay Problema?

So if you understood the math and reasoning of my last post you may be asking, so what’s the problem?  Why do people worry about SS or presume it may not be around for their own retirement?  Does the SS fund really have problems?

Yes and no.

The American Academy of Actuaries (AAA) released a public statement last month which was addressed to President Obama and Congress the morning before the State of the Union address.  In it, Academy President Mary Miller calls on US lawmakers to focus on the solvency concerns of US Social Security as well as US Medicare.  The AAA is concerned that the aging population and the large influx of baby-boomers will strain the system if no changes are made.  And they are correct.  The system cannot continue to function the way it always has if more and more people are receiving SS and less are paying into it.

Similarly, Steve Goss, Chief Actuary of US Social Security recently did a reddit AMA (a very casual interview where he answers questions from anyone on the internet that cares to submit them) in which he said the fund would be insolvent as early as 2033 if no changes were made to the current legislation.  However, he also stated, rather confidently, that SS will be around for a long, long time.  Based on current projections, without legislative action the fund can function as it does today until 2033, and at that point would still pay out $0.77 for every $1 paid in.  Thus, the concern that SS will disappear completely is unfounded.

Keep in mind that SS is largely a political issue.  My opinion is that because it affects so many Americans (particularly the elderly who tend to be more likely to vote), the debates arise around election time to stir up controversy and candidates use this hot topic to make a political statement.

 

Why SS Needs to Change

If the population were to stay static over time, there would be no issue with the current Social Security legislation and funding.  However, a couple of large shifts in the US population are going to put a major strain on the funds if no legislative action takes place.

Longer life – the advances in medicine, nutrition and medical care over the last 50 years have led to significantly longer life expectancies.  By most accounts, this is a good thing.  For the health of the SS fund, this is a bad thing.  This means those that are retired are receiving more paychecks instead of doing the patriotic thing and, ahem, passing on.

Baby Boomers – check out this graph.  This says it all.  Ever since the late 40’s, birth rates have fallen and then flattened out in the US.  Those baby boomers are starting to retire and have just now started receiving Social Security checks.  They are also leaving the workforce, i.e. have stopped paying SS taxes.  It’s not that complicated, less people paying into the fund, more people pulling money out of the fund, funds get depleted.

babyboomers

Possible Solutions

If you find at the end of the month, every month, that you just can’t pay your bills, what do you do?  Simple.  Well, mathematically it is simple.  You either go out and earn more money or cut back on your expenses.  Same works here.  Solution one is to raise taxes.  If everyone working paid slightly more than the current 6.2% rate into the Social Security fund, the problem would be solved.

The next solution is to cut benefits.  If everyone currently receiving SS checks suddenly got a smaller check, or, if people couldn’t start drawing SS until a later age, the taxes coming in would be enough to cover the benefits paid out.

The third solution is to do nothing.  Considering the first two options, you can see why any politician would be slow to suggest them.  You are going to upset someone or a lot of someones with either raising taxes or cutting SS benefits.  This is why Congress’ solution for about the last 25 years has been to do nothing.  I’m not saying it is a good solution, but no one is willing to make that jump.  As I mentioned earlier, doing nothing will really not affect anyone financially for the next 15 to 20 years.

 

Recommendation

If you read my post last year about Health Care Reform, you may be hoping I have some cool solution to solving Social Security.  I’m afraid the solution here, however, is not all that cool, it’s really simple.  We either let the fund die, we raise taxes or we drop benefits.  Some reading this blog may be a fan of raising taxes, I am not one.  By default, that means I think SS could be saved by lowering benefits.  There is a (somewhat) politically correct way to do this, however.  You can’t just lower the paychecks right now of those receiving SS.  You would have to phase the change in.  Something like this:  those born after 1970 cannot begin receiving SS until age 63, those born after 1971 can’t draw until age 64 and so on until the Gen Y and Millenials are waiting until 70 to draw SS.  This way those that are affected wouldn’t have been retiring for another 20-30 years anyway so they have time to save and prepare.

The reason this makes sense is because life expectancies and quality of life at advanced years is better now than it has ever been.  Many in their 60’s and 70’s are still working today because they are fully capable of doing so and with more and more people living into their 90’s, they will still have time to enjoy a long retirement.

If you don’t want to work into your 70’s, well, save more now or prepare yourself to live off of less when you retire.  A cultural shift needs to occur in the US towards saving, in my opinion.  By almost any measurement, US households just don’t save as much of their paycheck as those in other countries. We should not be saving what we have left over, but spending what we have left over after saving.  Anyway, there’s my solution, you asked for it.  Time will tell what the real solution for solving SS will be, we’ll know in at-most 18 years.  Thanks for reading.

Social Security – part 1

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Social Security is a fascinating and somewhat controversial actuarial topic.  In this month’s posts I plan to give some general background around what is Social Security and how actuaries play a major role in its success or failure.

History/Background of Social Security

Social Security has been around a long time, it’s hard to imagine our country without it.  But think for a second, what did retired people do before Social Security existed?  They didn’t.  Retire, that is.  The concept of retirement was invented in the late 19th century with the first pensions.  Most people just worked until they died or couldn’t work anymore.  Social Security came into play as a way to care for the elderly and disabled who could not work.Roosevelt_Signs_the_Social_Security_Act.49204944

The Social Security Act was signed by Franklin D. Roosevelt in 1935 in the wake of the Great Depression.  It was the first federal assistance program signed into law.  Before 1935, anyone that was unable to work would have to rely solely on family or charities to provide for them.  Since the act was passed, there have been dozens of additions and changes to US Social Security including setting the payment amount on a cost of living index, adding Medicare, broadening the scope of coverage to include the disabled and children from low income families, and several rounds of increasing taxes to fund the program.

Today, the retiree benefit side of SS is run much like a big communal savings account.  Everyone earning an income is taxed 6.2% of their earnings for SS and these funds keep the program going.  At any point after age 62 you can decide to start receiving SS funds.  It’s like forcing everyone to save for retirement.  The major difference between SS and you saving for retirement yourself is that the taxes taken from your check today are spent on retirees today.  There is no individual account you can see which tells you how much you’ve contributed to SS and thus, how much you will have in that account when you retire.  This leads some to fear that SS could shrivel up and disappear before they retire, leaving them up a creek.  We’ll discuss this a little later.

 

Types of Retirement Plans

The actuarial aspect of Social Security has to do with the uncertainty of life.  SS guarantees you a monthly check until you die.  The total paid out in SS funds for someone’s lifetime could be very little (they die young) or a large sum (those that live longer than average).  For the government to sufficiently fund the plan, they need to know how many beneficiaries will get SS and how much they will get, which is the role of the actuary.  But before we get into the math, let’s talk about retirement plans in general.

There are two major categories of retirement plans: Defined Benefit (DB) and Defined Contribution (DC).  In a DB plan the payout received while retired is preset.  That is, when you enter the pension plan, you already know what your payout will be once you retire.  Some private companies in the US have DB plans, though they are dying off, and most government jobs have DB plans.

In a Defined Contribution plan, the amount contributed monthly or annually is defined- but not the benefit.  You put in a set amount each month or each year and it accrues interest and you just have this big (or small) pot of money when you retire.  You don’t know when you start how much you’ll have when you retire because it depends on how much you put in and what kind of return you get on your investments.  The most common DC plan is a 401K, which is offered by many of today’s businesses to its employees.401k

So the real difference between a DB and a DC plan is who takes on the risk.  For DB plans, the employer takes on the risk.  They are guaranteeing a benefit, regardless of how the stock market and general economy perform.  If the economy performs well, they reap the benefits.  If the economy tanks, the employer is stuck with providing the same benefit.  In a DC plan, the employee takes on all the risk.  The employer is simply paying a set amount up front and if the economy does well, the employees’ account grows with the gains in the market, if the economy tanks, it is solely up to the employee to figure out their retirement.

 

A Mathematical Example

Let’s suppose I work for the State of California.  I don’t know what their pension structure looks like but let’s suppose that if I work for the State for 30 years and retire at age 63 I am guaranteed an $8,000 check every month as part of my pension.  How does CA know they will have an extra $8K in their monthly budget in 2045?  Well, they better start funding the pension now.  How much do they put aside now to assure they will have enough to pay my pension in 30 years?  In steps an actuary.  With mathematical models he/she will take into account several variables to determine how much CA has to set aside today to fund my pension and that of my co-workers in the future.  Some key assumptions that are at play here are: retirement age, life expectancy, lapse rate (probability of moving to another job or quitting early), and rate of return on pension fund investments.

You can see from this scenario that a huge amount of risk is being taken on by CA for guaranteeing a pension of $8,000/month.  The most sensitive variable in this formula is the interest rate.  If the actuary assumes CA can get a 5% annual return on their pension savings fund, they will need to put away roughly $1,800/month now so that in 30 years this will accrue enough interest to pay out $8,000/month.  On the other hand, if the actuary uses a more aggressive assumption of 8% annual return, CA only has to put away about $800/month.  $1,800 vs $800/month is a huge difference when an employer is offering pension benefits to thousands of employees; that’s millions of dollars every month.  In a defined benefit plan, an employer funds the pension using a certain set of assumptions but if those assumptions don’t play out as expected they are still obligated to pay the benefits in the retirement agreement.  For this reason, the employer and the pension actuaries will work together regularly to review the assumptions and determine the correct amount to fund.

On the other hand, suppose CA had a defined contribution plan.  They take a middle road and contribute $1,300 per month to their employee’s pension fund but put it into a 401K plan.  After the initial contribution the employer doesn’t touch it or get involved again.  If the account earns 8% annual interest, great, if it earns 5% or less, not their problem.  It is up to the employee to contribute more funds and allocate them into the right investments to ensure he/she has enough saved for a happy retirement.

 

US Social Security is a Defined Benefit

So how does this relate to US Social Security?  Does SS work like a DB or DC plan?  Are your SS benefits defined already?  Actually, yes.  The benefits are already defined for each person in the US that has a social security number.  In fact, you can go on the SS website right now and use a calculator they have created to estimate what your SS payout will be when you decide to start drawing it.  Obviously, your benefit is not as simple as getting a flat $2,000 per month.  That wouldn’t be entirely fair.  The level of your benefit depends on what age you start receiving it, how much money you’ve made in your career (i.e. how much you’ve paid in taxes toward SS), and other variables.

So play with the calculator and reflect on what life without SS would be like.  In my next post we’ll discuss the controversial side of US Social Security and why, if congress continues to do nothing, SS will slowly fade away.