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April 30, 2006
Request for Proposal - Modeling Long Term Medical Trends for Valuation: The Society of Actuaries
Closing date: 30 April 2006 (please notify of intent to submit by 15 April 2006)
Background: Rising healthcare expenses continue to consume a significant portion of many North American employers’ overall compensation costs. At the same time, the previously assumed limit on the proportion of the GNP represented by national healthcare costs has been exceeded annually. To the extent that private sector employers provide healthcare coverage to their retirees, the cost of these benefits needs to be recognized in the U.S. as a long-term liability under FAS 106. In addition, the U.S. Government Accounting standards board (GASB) recently mandated similar accounting for governmental employers.
To value these benefits, the prevalent practice has been to assume a first year trend at or near current levels (in the range of 9 to 12 percent) decreasing one or more percent per year to an ultimate underlying trend of approximately 5 percent. The rationale for this trend pattern assumption is that employers and society at large cannot indefinitely sustain medical cost increases of 9-12 percent per annum. This trend pattern assumption has consistently proven to be overly optimistic with many employers revising it annually and deferring the year that the ultimate medical trend will be attained.
In light of this history of increasing healthcare costs and the seemingly ever-shifting ceiling of the percentage of GNP represented by healthcare, what are appropriate assumptions for valuation? Furthermore, recent efforts by the SEC could result in increased scrutiny and challenge of the validity of these long-term assumptions with an expectation of reliance on credible sources.
Research Objective: The Society of Actuaries is interested in a three-phase long-term medical trend research project with the development of a working model as the ultimate objective.
The three phases are:
- Phase 1: Identify the parameters and cost drivers (e.g., medical technology) that impact health care spending and their value ranges.
- Phase 2: Identify publicly available sources of information that can be used to quantify the parameters and their ranges of value. The sources should be routinely updated to reflect changes in economic conditions.
- Phase 3: Prepare a working model that can be used by practicing actuaries to develop long-term medical trend patterns with explicit identification and documentation of the underlying economic assumptions. To the extent that data is not available for some parameters, reasonable assumptions for these parameters should be modeled.
The SOA strongly desires to have a working model produced within 18 months. Consequently, researchers may need to limit the scope and focus of the project to only the primary drivers of health care inflation in order to meet this time frame.
The primary objectives of the model are:
- Credibility: based on accepted economic principles and methods.
- Current: based on recent publicly available data with regards to medical spending, demographic information, and the overall economy.
- Flexibility: inputting varying economic assumptions (e.g. economic growth) within reasonable ranges should result in differing long-term medical trends.
- Usable: the accompanying user manual and documentation should be thorough and user-friendly.
- Transparent: the underlying economic assumptions should easily be summarized to an interested third party such as a plan sponsor, rating agency or a government entity.
Although the primary purpose of the research is to help the actuary in the selection of long-term trend assumption, rather than produce a standard of practice, it is expected that the model would be useful for future discussions on a standard.
Proposal: To facilitate the evaluation of proposals, the following information should be submitted:
- Resumes of the researcher(s), including any graduate student(s) expected to participate, indicating how their background, education, and experience bear on their qualifications to undertake the research. If more than one researcher is involved, a single individual should be designated as the lead researcher and primary contact. The person submitting the proposal must be authorized to speak on behalf of all the researchers as well as for the firm or institution on whose behalf the proposal is submitted.
- An outline of the approach to be used, emphasizing issues that require special consideration. Details should be given regarding the techniques to be used, collateral material to be consulted, and possible limitations of the analysis.
- Cost estimates for the research, including computer time, salaries, report preparation, research costs, etc. Such estimates can be in the form of hourly rates, but in such cases, time estimates should also be included. Any guarantees as to total cost should be given and will be considered in the evaluation of the proposal. While cost will be a factor in the evaluation of the proposal, it will not necessarily be the decisive factor.
- A schedule for completion of the research, identifying key dates or time frames for research completion and report submissions.
- Ideas regarding the form and distribution of the final report, both for immediate release and for permanent reference (e.g., submission to North American Actuarial Journal or other refereed publication, SOA Monograph Series, CD ROM).
- Other related factors that give evidence of a proposer’s capabilities to perform in a superior fashion should be detailed.
Selection Process: The Pension Section Research Team is responsible for the selection of the proposal to be funded. Input from other knowledgeable individuals also may be sought, but the committee will make the final decision. The SOA’s Research Actuary will provide staff actuarial support. A Project Oversight Group (POG) will be appointed to oversee the project upon selection of the proposal.
Questions: Any questions regarding this RFP should be directed by e-mail to: Steven Siegel, SOA Research Actuary, ssiegel@soa.org
Notification of Intention to Submit Proposal: If you intend to submit a proposal, please send written notification by April 15th, 2006 to Jeanne Nallon, SOA Research Assistant, jnallon@soa.org
Submission of Proposal: Please e-mail a copy of the proposal to Jeanne Nallon at janllon@soa.org
Proposals must be received no later than April 30th, 2006. It is anticipated that all researchers who have submitted proposals will be informed of the status of their proposal no later than May 30th, 2006.
Note: Proposals are considered confidential and proprietary.
Conditions: The Society of Actuaries reserves the right to not award a contract for this research. Reasons for not awarding a contract could include, but are not limited to, a lack of acceptable proposals or a finding that insufficient funds are available to proceed. The Society of Actuaries also reserves the right to redirect the project as is deemed advisable.
The Society of Actuaries intends to copyright and publish the results of this research. The research will be considered work-for-hire and all rights thereto belong to the Society of Actuaries. However, appropriate credit will be given to the researcher(s).
