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Chapter 7 of TAP 15: Forecasting the Cost of Chemical Dependency Treatment Under Managed Care: The Washington State Study

Chapter 7—Procuring an Actuarial Study

There were two tasks that Washington State undertook in order to hire an actuary: (1) specifying the plan, setting forth in detail the benefit package and the covered population, and (2) choosing an actuary.

Defining the Benefit Package

Defining the package of benefits to be offered under the plan was the task of the State. The actuaries who competed for the contract had some knowledge of chemical dependency treatment, but knew very little about the desirability of including various kinds of services or about the persons and situations for which each service is appropriate. The State chose to make these determinations before the actuary was retained so that the actuary's time would not be spent on tasks for which he or she was not well trained and so that the actuary could provide an accurate bid for the study. After the actuary was hired, there was considerable fine-tuning of the benefit package as questions arose in the course of the study.

Although Washington initially prepared one benefit package for the actuary to estimate, the State later concluded that it needed to evaluate the effect of optional benefits on the net cost per person per month (PMPM) before it could recommend a benefit package to the Health Services Commission. This turned out to be one of the major strengths of an actuarial study: the actuary could separately estimate PMPM's for various optional benefits so that the State could evaluate whether it could afford to expand coverage. In the Washington State study, tobacco cessation benefits were treated as such an option. The actuary also evaluated alternative limits or caps on benefits for their effects on PMPM.

Scope of Services

Treatment

The first questions raised were: Which basic chemical dependency treatment services would be included in the plan? Will outpatient services be included? Hospital-based inpatient services? Non-hospital-based residential care? Partial hospitalization, day treatment, or intensive outpatient treatment? Opiate substitution treatment? Detoxification? Washington State considered whether to exclude services for policy reasons (for example, methadone treatment, toward which some policymakers have declared their antipathy) or for cost reasons (for example, hospital-based care). Other States may find it necessary to exclude services in order to obtain financing (for example, non-hospital residential care for medicaid populations).

Washington State considered whether certain modalities should be available to everyone. Currently, publicly financed hospital-based treatment in Washington is available only to pregnant women, and hospital detoxification is limited to rural areas where no non-hospital-based detox center is available. Washington also limited all modalities to chemically dependent persons only. Except for adolescents and pregnant women, persons who are abusing or misusing substances would not be covered for any treatment. Limiting services to a particular population meant that the actuary needed to generate a separate PMPM estimate for that subgroup, which increased the cost of the study.

Prevention

Prevention services were a major consideration. A health plan can be designed to include coverage for prevention, and it is easily argued that it is cost-effective for a plan to do so. Generally speaking, preventive services oriented toward the individual, rather than the community as a whole or some specific population, are consistent with a health plan's notion of "benefits" for a "covered person." Thus, screening and early intervention types of preventive services are easier to sell to policymakers and managed-care networks. Washington recommended that the chemical dependency treatment benefit include only screening and relapse prevention services.

Actuarial estimation for preventive benefits can be difficult. For secondary prevention (also known as early intervention or indicated prevention) benefits, data on cost, duration, and utilization may be hard to find. For "primary" or "universal" prevention, the basic actuarial model breaks down. "Utilization" and "duration" cannot have the same meaning for primary prevention activities as they do for treatment services. There is no one "patient" who has been "admitted" and will eventually finish the service and be "discharged." These services could still be estimated by determining and mandating a total budget for such activities, which the insurer would treat as an overhead cost to be prorated over the size of the covered population to determine the PMPM.

Outreach

Outreach services pose dilemmas similar to those posed by primary prevention services. They are not "demanded" by patients, so utilization is a function more of supply than of demand. If the State chooses to include outreach services to increase treatment admissions by, say, injecting drug users or pregnant women, estimation probably would follow the "overhead" method described for primary prevention services: determine the total budgeted level of effort, and divide by the covered population.

Tobacco Cessation

Even though it is viewed by many as prevention, tobacco cessation has the characteristics of a chemical dependency treatment service. There is an identifiable "patient" and a beginning and end to the services. Since most data bases track tobacco cessation services separately, Washington's actuary study estimated tobacco cessation separately from other outpatient treatment. Because there are no standards for tobacco cessation programs, Washington's actuary found widely varying practices and costs. The State therefore developed a tobacco cessation protocol, specifying the number and length of visits, techniques used, group versus individual sessions, and the inclusion of nicotine transdermal patches and gum. The actuary then used this protocol to screen tobacco cessation data until appropriate costs could be determined.

Chemical Dependency Benefits Versus Behavioral Health Benefits

Chemical dependency treatment has enjoyed or suffered its sibling relationship with mental health for decades, depending on issues and local personalities. Currently the movement for closer ties between the fields is characterized as "the behavioral health model." The two fields are inevitably joined on issues of managed care and health care reform as well. Policymakers are likely to hold the view that whatever is true for one is true for the other. Since mental health is financially more significant than substance abuse, the fate of managed care or health care reform for chemical dependency often hangs on how sanguine the policymakers are about including mental health.

For the mental health field, health care reform questions often hinge on what policymakers call the "worried well," or people who have no serious pathology but who still access mental health services. There is widespread concern that these individuals are numerous enough and will demand enough services that utilization and duration will increase dramatically. Considerable attention is therefore paid to controlling mental health utilization, including such measures as case management, utilization review, prior authorization of admissions, and, ultimately, caps on benefits.

Chemical dependency benefits typically come under whatever cost controls are deemed necessary for mental health. Policymakers view chemical dependency as a variation of mental health, so they presume that demand for chemical dependency treatment behaves like demand for mental health services and therefore requires similar cost controls. Since mental health costs about four times as much as chemical dependency, chemical dependency policy is often subsumed.

The case for separate consideration of chemical dependency should be presented, however, for two reasons. One is the elasticity of demand, discussed in Chapter 6. There is no evidence that copays affect the utilization or duration of chemical dependency treatment, and one study affirms that demand for chemical dependency treatment is highly inelastic and does not change much in response to copays. Mental health services, on the other hand, do seem to be utilized less when copays are increased. The other reason is the effect of caps on total benefits. If chemical dependency treatment does not have a population of worried well individuals, who would seek treatment when it is not needed or is inappropriate, then caps on benefits serve only to deny adequate care to those who need the most treatment. Since most patients in chemical dependency treatment seek care only after some form of external pressure is exerted (such as being arrested for driving under the influence, being disciplined at work, or being heavily persuaded by family, friends, or health care providers), it seems likely that admissions of persons who do not need chemical dependency treatment will be very few.

Covered Populations

Washington State did not need to make any decision about its covered population: the legislature had already decided on the goal of universal coverage. Other States, particularly those looking to managed-care contracts for their current publicly funded populations, need to decide on the scope of their covered population in advance of any actuarial studies. Will all residents be covered, or just those meeting certain income requirements? Will there be restrictions regarding age or residency?

The State must also decide whether everyone will be covered at the same time or whether the plan will add new groups to the covered population over time, as Washington did. If the covered population is to grow, the schedule for including each new group is important. Any assumptions regarding the schedule could have a great impact on the PMPM estimate as cost shifting is reduced or eliminated.

The State must also decide if it wants a single premium for all participants in the plan (a community rate) or separate rates for various groups, depending on their expected costs. Community rating has the advantage of impartiality and predictability. If coverage is voluntary, however, those with relatively low expected costs may consider purchasing coverage to be a waste of money and may not buy the plan. This "adverse selection" effect would increase the community-rated premium for those who stay in the plan, which in turn would discourage even more low-cost members from joining or staying in the plan. Furthermore, if the plan is a complete health care plan that includes chemical dependency treatment benefits, young adults are the group most likely to opt out of the plan. Young adults, unfortunately, are the ones who most heavily utilize substance abuse treatment. For these reasons, community rating is rarely used, except where coverage is mandated.

Procuring an Actuary

"Procurement" means any solicitation by the State for proposals or bids, whether they are called a request for proposals or an invitation for bids or any other name. A State's procurement of an actuarial study likely will focus on three issues: the experience of the primary actuary, the quality of the data bases owned or available to the actuary, and the cost of the study.

Qualifications

Washington State wanted a lead actuary who was a specialist in health care, who understood the basic services included in the proposed benefit package and who could at least consult with a staff actuary experienced in dealing with chemical dependency treatment issues. Actuaries with strong chemical dependency treatment experience are rare; except in the largest States, it may be too much to expect direct experience by the lead actuary in producing estimates for chemical dependency treatment. Washington determined that it was not essential; the State staff had more than enough expertise to guide the actuary.

Actuaries are credentialed through the American Society of Actuaries; "fellow" is the highest ranking credential bestowed. The lead actuary typically would be an American Society of Actuaries fellow. Like virtually all consulting businesses, actuaries will lead and direct less skilled staff—ranging from other, less senior, actuaries to clerks—who do much of the detail work.

Data

Actuaries work primarily from their proprietary data bases; thus the data vary from one actuary to the next. Most of the data in actuaries' data bases are from other clients, primarily insurance companies. Unless the actuary has done a study for a State medicaid project in the past, he or she will not have those data. The actuary may have the Federal medicaid data, but this is a limited data set and it is somewhat dated. It also does not cover all States. The State may have to supply raw data or statistics from its medicaid management information system regarding that population. Because medicaid data bases meet the same standards as insurance data bases, Washington officials did not consider previous experience dealing with medicaid to be a critical evaluation criterion.

Washington did not do a detailed evaluation of the proprietary data bases offered by the actuaries—a decision that the State might make differently if called upon to repeat the exercise. If the actuary's data are from plans that are very much like the one that the State is proposing, fewer assumptions are required and the amount of data modeling is minimized. For example, an actuary with a data base that includes data from a managed-care plan that uses the same principles and practices envisioned for the State project would not need to make assumptions about the cost impact of the State's proposed method of managing care, nor or would he or she have to undertake the complex modeling of aggregate demand for treatment followed by determination of the effect of managed care on modality utilization distributions. Similarly, the actuarial data that include the populations to be covered by the plan and the various services in the benefit package would minimize the number of assumptions required.

Costs

Costs of actuarial studies can vary widely. The Health Services Commission staff advised Washington State to set aside $100,000 for its actuarial study and that fellows of the American Society of Actuaries can charge $500 an hour. Washington State's actual cost was considerably less, about $9,500. The amount of the winning bid did not differ greatly from the second bidder. It may be that the competing firms believed that the experience to be gained in doing this study would be useful to market other studies, for other benefit packages under Washington's health care reform plan or for other States contemplating similar efforts.

States can control the costs of actuarial studies with careful planning. the biggest driver of costs in such studies is complexity, which is in turn a function of the number of separate PMPM net cost estimates that must be made. To the extent that the benefit package and the covered populations require these separate PMPM net cost estimates, study costs cannot be controlled without making some rather risky assumptions. It may be that separate estimates are required because the State wantes to evaluate options for persons or benefits to be covered in the plan or because it has failed to anticipate plan details requiring revisions in estimates. These causes can be minimized if the State carefully spells out the plan (or plan options) in advance of the procurement.

Selection

Washington's health care reform required many actuarial studies for many different health care benefits, ranging from small to massive. To accomplish all this, the Health Services Commission first held a formal competition, from which three firms were selected as well qualified with fair rates. The State's Division of Alcohol and Substance Abuse could then select an actuary for its chemical dependency study from the group of three firms, using an informal procurement. This removed much of the tedium of interviewing and reviewing qualifications and data bases.

Other States may be able to piggy-back chemical dependency actuarial studies onto large-scale procurements. Since States contract for actuarial studies (although typically not for chemical dependency treatment and usually only for State employees as the covered population), most States should at least have a procurement document to use as a model. The State's pension authority or employee benefits authority is the agency most ikely to have procurement documents, and it may be a good source of advice on selecting actuaries and drafting contrat instruments.

One final note: Washington State hired an independent consultant for "quality control." The consultant's task was to help State officials understand the implications of the decisions they were making and to judge the quality and appropriateness of the actuary's services. In retrospect, this was a very valuable step. The State officials had an independent source of counsel for controversial issues, they felt less vulnerable to the risk of poor advice, and they were able to communicate more effectively with the actuary. As a result, the State was able to provide better direction to the actuary and got more of what it wanted than might otherwise have been the case.

Last Updated 11-7-02