CPD requirements for actuaries

We Don’t Need a Continuing Professional Education Regulation[1]
By Ian Duncan

The Board of Governors of the Society of Actuaries, at their most recent meeting, passed a far-reaching requirement that will force all actuaries to demonstrate that they have met a Continuing Professional Education (CPE) requirement. This requirement may sound like the actuarial equivalent of motherhood and apple pie, but the Board’s decision has far-reaching implications that the profession deserves to know about, debate and agree upon first.

At the outset, let me say that I do not oppose the notion of continuing education. Far from it: I speak regularly at SOA and other professional meetings, perform research and publish in actuarial and industry publications, and chair the Health Section’s professional community team which develops relationships with healthcare researchers. My objection is based on principle and the requirement’s economic implications. I would recommend that all actuaries consider seven principles:

The board has not explained what problem it is trying to fix. In the U. K. Actuarial profession, a CPE requirement was introduced a couple of years ago in response to the supposed failure of the profession in connection with the insolvency of the Equitable. But it is not clear to me how continuing education of actuaries would have prevented this failure. The disciplinary body found two of the Equitable’s actuaries guilty of not adhering to the profession’s Guidance Notes (equivalent to ASOPs), but the connection of CPE to lack of adherence isn’t clear. In any event, what is appropriate in the United Kingdom doesn’t necessarily translate to the United States. We have the American Academy of Actuaries (Academy) as the body that maintains oversight over standards of practice and administers the Actuarial Board for Counseling and Discipline (ABCD). Failure on the part of an actuary to perform according to actuarial standards may be referred to the ABCD. In addition, we have a more aggressive legislative legal climate in which a professional failure by the actuary may lead to litigation, a powerful check on the professionalism of those who practice publicly, and, via their employers, on other actuaries. The environment already contains sufficient checks, balances and incentives for the actuary to practice professionally.
We are a profession, and a professional has a duty to his profession. “I hold each man to be a debtor to his profession” said Francis Bacon, the 16th Century philosopher. We each benefit from the profession that has been built by our predecessors, and owe a responsibility to pass on a flourishing profession to our successors. Many actuaries take this responsibility very seriously and volunteer hours of their time in the service of the profession. Equally, the professional has an obligation to maintain his professional standards. By satisfying the profession’s rigorous entrance (examination) requirements we have demonstrated that we have the perseverance, seriousness and study skills necessary to be actuaries. These skills don’t evaporate on qualification, so why the board thinks it is necessary to demand that they be demonstrated annually after qualification is not clear.
Who should be responsible for determining an actuary’s continuing education requirements? I would argue that it is the actuary and his employer and/or client who are in the best position to judge what education and training are necessary and, in the case of the employer, to provide it. In imposing a requirement for CPE on actuaries, the board is saying that it needs to regulate the profession in order to fix a “market failure,” presumably that the actuary, his employer and his client don’t require enough continuing education. Even if it were true that the actuary isn’t spending enough time on continuing education, isn’t it the responsibility of the actuary and his employer or client to determine the necessary level of education, policed by the purchaser of the actuary’s professional skills who is in the best position to assess whether the actuary is performing at a required standard? As an employer of actuaries and seller of actuarial services, I know that my firm would not last very long if we ceased to stay abreast of (and actually develop) the latest tools and techniques in our field, and train new hires in these techniques. The Board has not even begun to demonstrate that these market-based mechanisms have failed and require supplementing with a CPE requirement.
What, exactly, does an actuary need to know? One of the most troubling aspects of a general CPE requirement is that it is so vague: the actuary should demonstrate that he is studying something – anything! The U.S. profession is in a difficult position with respect to its educational requirements because it operates a two-class membership system; Associates and Fellows are considered professionals qualified to practice. The problem is simply this: if there is a standard of education that a qualified actuary must demonstrate in order to practice (and that he must maintain, through CPE) what is that standard? Is it demonstrated by knowledge at the Associateship level, or the Fellowship level? The U.S. profession with its multiple levels of professional qualification is in a box: it can’t tell us what additional education we require to be considered qualified actuaries until it imposes a single, minimum initial standard of qualification on all actuaries.
One of the least compelling arguments made by the board for CPE is that other professions have such a requirement. Even if one accepts that actuaries should follow other professions, the existence of CPE requirements for lawyers and doctors has not eliminated medical errors or legal malpractice. If there are ills to be cured in the actuarial profession, let’s figure out what they are and how to cure them directly.
It is unclear what sanctions will be associated with the final CPE requirement. So the board has imposed an administrative burden to what end? Will the Society bust an FSA in rank (as happens with army officers and NCOs) down to ASA, or put an asterisk by their name? Do employers or clients care? As an employer of actuaries, I care about what level of educational attainment a new hire has achieved, but once he joins my company, I am responsible for determining his training needs. The one sanction that probably does mean something to actuaries is the loss of membership in the Academy, for those actuaries who require membership to sign statements; actuaries who can’t afford the time and expense of the Society’s CPE requirements may choose to hold only that designation. The Board might more usefully occupy its time and energy thinking about how to promote the value of the FSA and ASA credentials.
There is a conflict of interest inherent in the Board’s actions. We need to ask cui bono, or who will benefit most from this requirement? Those who would truly benefit (employers and clients) are not clamoring for regulation. Who provides most of the continuing education in the profession? Why, the Society of Actuaries! And what is one of the biggest profit centers for the Society? Why, it’s the continuing education division! Members of the Entrepreneurial Actuaries Section, who generally have limited CPE resources but are concerned about the cost this requirement imposes on our members, serve direct client needs and are probably as aware as any of client demands. And our members are very concerned about the multiple continuing education demands being required by different actuarial bodies. As a small employer who also has to comply with the Canadian Institute of Actuaries’ requirement for 100 hours of CPD in a two-year period, I am absolutely opposed to the CPD regulation as a tax on my company. Why I would want to pay this price to employ an actuary when I can hire a non-actuary with healthcare experience to do the work is a question that the professional bodies appear not to have considered.

We all have a responsibility to continuously upgrade our skills and remain abreast of techniques that we, as professionals working with our clients and employers, deem necessary. But the ultimate determinant of the required skills is the needs of our employers and clients. I urge the profession to reject the imposition of a regulatory standard and to exercise their professional responsibility in this area. I urge Board members to reconsider and to leave education decisions to members and employers. At the same time, I urge the profession to be aware of the power wielded by its Board, which, while elected, can enforce far-reaching regulations over all actuaries with little opportunity for member feedback. And I urge members of the profession to be alert to their Board and its actions, and, if necessary, to let members know if those actions are not in the best long-term professional interests of members.
[1] In this article the male pronoun should be interpreted as having general application to all actuaries.

President’s proposal has vast unintended consequences; will destroy the employer group market.

George W. Bush proposed a dramatic change in the way health benefits are treated in the tax code in his State of The Union address. The proposal (only brief details are yet available) would allow every taxpayer to take a standardized deduction of $15,000 for a family and $7,500 for an individual for health insurance. The deduction would apply regardless of the cost of the insurance and regardless of who pays for it. Therein lies the opportunity for unintended consequence Number 1, for everyone gets the same deduction, regardless of coverage, health status, nature of the group or plan to which the individual belongs, geography, etc.
Commentators have focused favorably on the fact that this tax credit would result in higher taxes for those with “Cadillac plans.” As an actuary working in this field, I don’t see Cadillac plans very often; rather, I see some fairly basic and similar designs with different degrees of cost-sharing in the form of premiums (up-front charges) or deductibles and other member cost-sharing (back-end user fees). In terms of the car analogy, the plans are more like a Honda that offers different types of maintenance contracts – some have three years of free service and others have none – in the long run, you end up paying about the same, and only the timing is different.
However, most working adults and their families in the United States obtain their coverage through group plans. Group plans are an extremely efficient mechanism for spreading risk and providing employer subsidies in a neutral manner, and unintended consequence Number 2 is the early death of group insurance. Why is this? The following example shows three employer groups with different demographic make-ups: employer A (could represent a high-tech firm or financial institution) has a relatively low average age and therefore premium; employer B has a relatively high average age (could represent a traditional manufacturing company, for example). Employer C also has a relatively high average age but also provides continuation of coverage for retirees. Because retiree coverage coordinates with Medicare as the primary payer, the average premium in such a plan is lower than that of the employer who doesn’t provide retiree coverage, and could even be lower than that of Employer A in some circumstances.

In all cases, an individual employee in each of these companies would get a tax deduction of $7,500; however, the taxable income reported by each would be the average premium for the group coverage – significantly different, even for the same benefit plan! The unintended consequence, then, is the difference in taxable income to the employee – a difference that has little to do with the “Cadillac plan” factor, and everything to do with the average age, health status and geographic location of the employer group.
But let’s move on to unintended consequence Number 3: anti-selection and the death of employer group insurance. This phenomenon should be obvious to all from the example above – an age 25 average premium for a personal policy is less than half of the average employer group insurance cost. Any individual younger than the average age of the group and in reasonable health has an excellent chance of being able to purchase underwritten individual insurance for a lot less than the employer group price. Expect to see an exodus of healthy young individuals from the employer group plan. But let’s follow what will happen when that occurs:
In this example, in Employer A, we assume that all members aged under 30 are able to find a cheaper personal policy (with a premium closer to the $3,064 in this example than the employer average of $4,583). Removing these members from the group coverage, however, raises the average cost of (and therefore the tax consequence to) the remaining members to $5,595 – an increase of 22% that has absolutely nothing to do with the Cadillac (or Chevrolet) plan design, the claims experience of the remaining members, whether they were wise or foolish consumers of healthcare, or what providers they used. Instead, providing individuals with the opportunity to select a cheaper alternative with no consequences to themselves (although causing massive externalities to others) they will select the alternative. (This factor is one of the reasons for the large number of uninsured today, because for many, the existence of a safety-net is a cheaper alternative than any insured option available.) Note that when the young employees leave the plan, the average premium and therefore taxable income to the remaining participants rises (in this example to $5,595) the plan is no longer an attractive option to a number of the age 30 to 50 participants, who will also seek cheaper coverage elsewhere in order to maximize the difference between their tax deduction and the cost of insurance. This is simply the “assessment spiral applied to the employer plan.

If we look a little deeper within this example, however, we will find unintended consequence Number 4: coverage will become more difficult to obtain for the old and the sick and other vulnerable members of employer groups, leading to more, not less, regulation of the insurance market. In this example, we look only at the first employer with its relatively young work-force. We assume that the members aged under 30 consist of healthy members (with low average costs) and unhealthy members whose average cost is higher. The average cost of the unhealthy members is higher than the employer’s average cost, so these members will tend to stay with the employer plan, while the healthy will obtain coverage elsewhere. Not surprisingly the effect of this selection on the employer plan is to drive up cost (and therefore taxable income) for the remaining employees.


A consequence of the selection and incidence of health conditions, however, will be the magnification of a trend seen today: the young who are unable to obtain coverage at a price equal to the low rates enjoyed by the healthy will put pressure on regulators and legislators to regulate the private insurance market. The likely consequence is a return to a community-rated basis in which rates are equalized between healthy and unhealthy, young and old. In such a case it is unpredictable what the effect on the employer group market will be, because rates will depend on both regulation and health status, making their impact uncertain.

Unintended consequence Number 5: it will become less attractive to do business and attract employees in certain high-cost geographic locations. Current employer group coverage and its tax treatment neutralizes the effect of geographical differences in costs on health coverage. However, with a fixed tax deduction and variable cost structures, geographic locations such as New York or New Jersey will become considerably less attractive to employees than, say, the mid-west of south. Indeed, it is highly-likely that relatively older employees in high cost areas such as New York or New Jersey will be unable to find comprehensive individual coverage for the amount of the tax deduction. Young employees will be handed a windfall – let us hope that they use it wisely by investing in an HSA or other pre-funding vehicle, because the time when they will need additional funds is surely approaching.

The president clearly wants to do something about healthcare financing, but his proposal appears to have been thrown together in response to his other political problems, without thought to the impact on the existing system, and it deserves to fail quickly.

Part D (again)

This week, surveys were published (see http://www.phrma.org/news_room/press_releases/part_d_providing_lower_costs,_improved_access,_study_shows/)
showing that something like 80% of seniors are either very satisfied or satisfied with their Part D coverage. (Considering the subsidies that they receive from us taxpayers, one wonders what more the remaining 20% would like.) The usual complaints about the donut hole were rehearsed.

It occurs to me that we should be attempting to change the discussion from the area in which subsidies are limited (the donut hole) and emphasize the positives. The positives are:

1. The design is a catastrophic one: under the standard plan, seniors with drug expenditures over $2,400 have 95% coverage of expenditures.
2. A significant subsidy or cash transfer is made to senior who enrolls in a drug plan in the form of reimbursement for 75% of costs in excess of the first $265.

So instead of criticizing the donut hole, perhaps we should change the discourse and recongize that the standard part D design provides catastrophic insurance and significant cash payment to all seniors who enroll.

Social Security Reform - actuaries' views

In the November issue of the Actuarial Update, Steve Goss (Social Security Actuary) responded (http://www.actuary.org/update/pdf/1106.pdf) to a note published in the August issue of the Update by Mark Shemtob http://www.actuary.org/update/pdf/0806.pdf. Mark argued that the Social Security System requires modification, and that the Academy should work on a reform plan. It seems reasonable to me that actuaries, given our training, may have something to contribute to this discussion, so I was disappointed to read Steve’s response, which can be summarized as:

- The government financing problem (which will begin to appear in 2017) can be addressed by government issuing more bonds to cover deficits no longer financed by surplus social security contributions;
- Some combination of tax increases and benefit reductions is needed to address the financing gap that will be apparent after 2040.

These responses may seem attractive to politicians, but what of taxpayers? As an employer, the largest check I pay each month is to Social Security and Medicare (a combination of company and employee contributions). Unlike the check that I write for the company pension plan, which funds individual employee accounts, and whose benefits are directly visible, Social Security contributions simply disappear; I have to take “on trust” that politicians will one day honor their implied (but not contractual) obligation to pay my and my employees’ benefits. And judging by the comments of their chief actuary, we should count on neither the current amount of benefits, nor on the current level of cost being assured in the future.

Steve questions what role actuaries (and the Academy) should have in this debate, arguing (essentially) for neutrality. I would argue that our actuarial training leads to a couple of positions that may seem non-neutral in this debate. The first of these is that a funded system is superior to a non-funded one. From day one of my actuarial training I learned that there are two ways to establish liabilities: one is to reserve excess premiums, and the other is to discount the future value of promised benefits. I understand that the Social Security system is a pay-as-you-go system, and that in some circumstances this may be considered actuarially sound. But in the current environment of declining contributors relative to beneficiaries, can we stand back and assume a neutral position, or should we be advocating for a sounder (actuarially) principle?
The second area in which we may be non-neutral is in understanding the value of the market. Mark Shemtob’s proposal includes consideration of personal accounts. Unfortunately personal accounts, which are the link to the market, have been demonized by the politicians. One way that the system can be made more financially secure would be to raise the rate of return on investments. Investment in higher-yielding assets will occur if the market is allowed to operate. Most actuaries operate in the market and are comfortable with its mechanisms and instruments. We understand that the market delivers choice and efficiency. While the political decision may ultimately be made to leave the provision of retirement income security to a social program, we owe it to the public to explain the benefits that the market could deliver.

Finally, actuaries have some idea of benefit structure and costs. Some components of the program can and should be examined from the perspective of how best to deliver them: an example is the Social Security death benefits. Given the widespread access of the public to death benefits, why should these be provided by a social program? The bundling of benefits makes it more difficult to deconstruct the program and answer the question: what is the return on my contributions to the system? This is a question that I have asked Social Security actuaries in the past, without obtaining an answer. But I think I am entitled to an answer, if only because, if Steve’s proposal (raise taxes and cut benefits) is followed, whatever my current rate of return on my contributions, it will be lower in the future. At the least, when I sign my checks over to Social Security and the company pension plan each month, I can make a rational decision about which program provides me greater value.

You can't make stuff like this up

The New York Times (August 23rd) reports that CMS expects average premiums for Medicare Part D plans will be flat next year at $24 – 40% lower than CMS’s original estimate. “Competition and Choice in health care are working” said Dr. Mark B. MacLellan, administrator of CMS.

Every silver lining, however, has a dark cloud. Vicki Gottlich, a lawyer at the Center for Medicare Advocacy said: “We do not know enough to determine whether low premiums in 2007 are good for beneficiaries.” You can’t make up quotes that good.

What now (post-election thoughts)

There is no doubt that changes will come, post-election. Nancy Pelosi is said to be planning to pass a bill to allow CMS to "negotiate" drug prices with drug companies, so we can expect CMS to have almost as many happy drug vendors under contract as it has doctors.

The Medicare Part D design, which has come in for a lot of criticism, deserves a second look, before it is junked. Overlooked by all (critics and friends alike) is the fact that the Part D design, like the old floor wax/salad dressing commercial, is in fact two designs in one. One part, the basic subsidy part, provides a subsidy for all participants. This could have been handled more efficiently or more directly (why not just a voucher to the neediest?) but congress decided to maintain the principle of equal coverage for all that is supposed to be a strength of Medicare. The second part is a high deductible, catastrophic plan that kicks in when drug expenditures reach a certain level. In between the two parts, there is no coverage (the so-called "donut hole"). Covering the donut hole would be cost prohibitive (not that the cost of the basic plan is exactly cheap, although we should note that it is a lot less than the CMS actuaries predicted....a subject for another posting later). Instead of focusing on the fact that the plan design is a compromise, and that it rather efficiently achieves several goals, the focus has been on the donut hole. So there will likely be a single plan design (just like Part A and Part B), instead of the large number of choices currently available, with cheap medications assured by CMS setting prices for drug companies.

More thoughts on the future shape of medical insurance to come....

Presidential proposals for market-driven reform

In the past we have supported efforts to introduce more market-driven reforms to the healthcare financing sector. We support the notion of Consumer-driven health insurance (and have it in our own company). However, as currently constituted, CDH is fatally-flawed. Unlike the Medicare Advantage program (which risk-adjusts contributions to health plans) and traditional old-fashioned pooled health insurance (in which equal contributions are made but distributed unequally to beneficiaries) the CDH regulations required that employers subsidize all employees equally, regardless of need. As a result, chronically-ill employees were likely to be (chronically) underfunded, relative to their need.

The president's proposals of Tuesday night (January 31) change the design. Employers would be allowed to pay more to chronically ill employees. (This will probably result in a shift of resources away from healthier employees toward the chronically ill, redressing the balance that the prior regulations distorted.) This actuarial design creates opportunities for employers and employees. Fortunately, the tools exist to support the design.

Social Security reform: implications of Medicare

One of the positive aspects of the debate on Social Security reform is the focus that it places on return on the investment that employees and employers make in their future income. As an employer, I write a check each month to the Federal Government for Medicare and Social Security, and no-one ever reports back to me what is done with the money, what return is earned on it, what benefit the beneficiaries have accrued from it, etc. So a by-product of reform might be more transparency in reporting, and the ability to compare yields on the funds taken by Social Security to the yields earned in the market.

All this is well and good. However, there is an implication for the potential privatization of the Social Security system that may be drawn from the (current) mixed (private/public) health care system. Healthcare, readers will remember, is often paid for by employers. One potentially valuable unintended consequence of the employer-funded system is that employers take a keen interest in the cost and benefits that their payments yield, resulting in benefit innovation and cost control. However, because of the fragmented nature of the system, there are often competing benefit offerings (such as access to government programs, Medicaid, etc.). Competition between private and public offerings to large numbers of the same people gives those beneficiaries the opportunity to select against the system, choosing the package or benefit that is most attractive.

As Social Security is reformed, we want to avoid the possibility of large numbers of beneficiaries being able to move between a private and a public system, to the potential detriment of both.