At a Glance

  • Many healthcare organizations use self-insurance programs to control professional liability and workers’ compensation exposures, such as self-insured retention, a large deductible program, a trust fund, or a captive.
  • The impact of the Affordable Care Act on self-insurance programs may take years to determine. 
  • Communication among all areas involved in the self-insurance program and the evaluation of different cost perspectives will be key to keeping the self-insurance program financially healthy
  • Empowering actuaries to create different scenarios also will help leaders stay on top of the issue. 

The impact of the Affordable Care Act (ACA) on self-insurance programs to control professional liability and workers’ compensation exposures—including its effects on both the frequency and severity of claims—may take years to determine. 

Insurance industry professionals are debating the actual impact of the ACA on loss development, frequency trends, and severity trends. Some components of the ACA may result in higher losses than in the past, while other components may contribute to lower losses. In addition, it may be hard for an entity to project future exposures and utilization with accuracy. 

Until the impact is known, an action plan is needed to help leaders develop reasonable valuation of self-insured liabilities and forecasts to help ensure strong balance sheets for self-insurance programs. A few simple strategies can keep actuarial estimates on target.

Evaluating the Potential Impact

To understand the potential effects of the ACA on self-insurance programs, consideration should be given to arguments and predictions on both sides of the coin, particularly when evaluating two significant pieces of self-insurance programs: professional liability and workers’ compensation. 

Actuarial estimates for both professional liability and workers’ compensation exposures rely on long-term history and assume that the past is indicative of the future (e.g., similar reporting lags, closing lags, reporting of claims, reserving philosophies, and payments of claims). The actuary analyzes past exposures and uses the analysis to estimate losses. 

In addition, the actuary adjusts past performance by frequency trends (changes in number of claims per exposure) and severity trends (changes in payments per claim). The actuary also should account for any change in state-specific benefits for workers’ compensation. Losses are assumed to be proportional to exposures. 

For professional liability, exposure may be measured in occupied beds, outpatient surgeries, emergency department visits, or the number of births; for workers’ compensation, exposure is typically through payroll. Consideration is given to when the retention per claim changes or will be changed in the future.

If an organization’s loss experience changes significantly, the insurance market will respond, and programs may need to balance any change in excess or reinsurance premiums by changing their retentions. 

Exhibit 1

Accounting_Exhibit1

Strategies to Consider

Because of the long-tail nature of professional liabilities and workers’ compensation claims, the actual impact of the ACA on self-insurance will not be known for many years to come. One acknowledged outcome, though, is that actuarial estimates should take into consideration the possible effects of the ACA in evaluating how predictive the past will be when estimating future frequency, severity, and overall loss levels. 

Healthcare leaders will be better prepared to ensure that actuarial estimates will meet loss accruals and forecast needs by implementing these strategies.

Exhibit 2

Accounting_Exhibit2

Inform all parties of legislation updates and implementation. Although the components of the ACA have been determined, implementation has hit a few snags. Even with a strong effort to explain the proposed changes to the public, there have been multiple interpretations. Further clarification and revisions—and even repeal—are possible. Healthcare leaders should focus on keeping all parties—including the broker, actuary, auditor, third-party administrator, outside defense counsel, and captive management—involved in the self-insurance program apprised of any changes. In return, these parties also should communicate any changes with each other and with the organization’s senior leaders. 

Gather opinions from various sources. Senior leaders of each provider organization may not share the same views as leaders of other organizations regarding how the ACA may effect their organization’s role and function. The leaders of each organization will want to ensure the organization’s service providers are on the same page and are working toward its goals and directions, particularly if strategic goals and directions have been revised because of the ACA. During these conversations, leaders also should share their interpretation of what is occurring in the industry.

Monitor loss activity. Healthcare leaders should work closely with risk managers, third-party administrators, and other claims personnel to track any changes in frequency and severity of reported claims. Service providers should be alerted immediately about any noticeable changes. It should be noted whether such changes are believed to be due to the ACA or a different cause, such as a change in claims handling. It will be critical to determine whether any loss change reflects an actual trend and is expected to continue or whether the change is related to a one-time event. Internal meetings also might be held more frequently to better monitor activity.

Perform additional interim analysis. When the actual loss experience is different than expected or varies significantly from past experience, it may be the right time to conduct an analysis with current information. More frequent analysis allows the actuary to become more familiar with changes and understand how they may impact the analysis. Senior leaders will then be able to use any revised estimate to adjust year-end expectations to avoid any last-minute surprises. During a period of significant changes, quarterly analyses are not unreasonable.

Request different scenarios. Actuarial estimates often rely on long-term historical averages. When changes occur that may not be represented in historical data, the actuary can consider different scenarios to evaluate the sensitivity and impact of future expected changes. Senior leaders should have the actuary test different inputs and assumptions to create a range and highlight the variability of possible outcomes. 

This step will help determine the need for any accrual adjustments and whether a conservative estimate also should be provided to avoid any potential budget shortfall.

Communication among all areas involved in the self-insurance program and the evaluation of different cost perspectives will be key to keeping the self-insurance program financially healthy. Empowering actuaries to create different scenarios also will help leaders stay on top of the issue.


Richard C. Frese, FCAS, MAAA, is a consulting actuary, Milliman, Chicago.

Publication Date: Thursday, May 01, 2014