American Academy of Actuaries Comment Letter on Health Care Reform Legislation

The American Academy of Actuaries sent a letter to Speaker Pelosi and Majority Leader Reid providing comments on the Senate-passed health care reform legislation.

From the press release:

“The individual mandate language should be strengthened,” Uccello said. “The viability of health care reform depends on attracting lower-risk individuals. Strengthening the mandate through higher financial penalties and non-financial incentives would increase the likelihood that these individuals will purchase coverage.”

Here are a few highlights from the letter:

On individual mandate:

  • An individual mandate is an integral component of both bills. Such a mandate is necessary to ensure that adverse selection will not lead to dramatic premium increases or a premium spiral. However, the financial penalties associated with the bills’ individual mandates are fairly weak compared to coverage costs, especially during the first years of the Senate plan when the financial penalties are being phased in.

On age rating:

  • Moving to a narrow limit on premium variations by age, such as the proposed 2-to-1 and 3-to-1 limits, could result in dramatic premium changes, compared to what individuals are facing currently. In particular, younger individuals in states that currently allow underwriting and wider premium variations by age could see much higher premiums than they face currently (and may have chosen to forgo).

On MLR requirements:

  • Imposing unrealistically high medical loss ratio requirements may threaten plan solvency by making it difficult for premiums to cover claims and expenses. In particular, it would be difficult for insurers in the individual market to satisfy the loss ratios that are typical in the current small and large group markets. Imposing such requirements could result in individual market insurers exiting the market.
  • From a practical standpoint, it would be difficult to impose a minimum loss ratio requirement in 2010, as contained in the House bill. Plans typically file their premiums six to 12 months before they become effective, and need time prior to rate filing in order to develop the rates. Therefore, a sufficient lag time would be needed between the enactment of the legislation and the effective date of the minimum loss ratio provision.


  • However, given the way the program is structured, severe adverse selection would result in very high premiums that are likely to be unaffordable for much of the intended population, threatening the viability of the program.
  • Without significant program changes to minimize adverse selection, the program would not be sustainable in the long term without premium increases or benefit reductions.

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