When you need an actuary

If signing on to an accountable care organization or capitated contract after years under fee-for-service arrangements seems like a gamble, actuaries can help physicians make a safe bet.

“There’s no doubt that the trend toward shifting more risk to provider groups will necessitate more thoughtful consideration on understanding and managing that risk,” said Michael Thompson, a New York-based principal in the health care practice for consulting firm PwC. “Actuaries essentially are professionals who are trained in understanding, evaluating and pricing for risk.”

When a physician group accepts a contract under which its pay depends on reaching quality measurement scores or certain clinical outcomes, it signals more than a commitment to patient health. It also means that the physicians’ livelihoods are at risk if the practice agreed to accept too little money for caring for a payer’s members or the practice overestimated its ability to keep patients healthy.

Experts say working with an actuary doesn’t require that a physician group have millions of dollars at its disposal or that it have perfect records of its patient visits. The practice can benefit enormously from the help of an actuary, particularly if taking on risk is a new strategy.

The risk business

In the health insurance business, taking on risk means estimating how much health care a given group of people will use in a given month or year and then basing premiums on that projection. For most of the last 50 years, insurance companies usually have carried that risk, along with some large employers who pay their workers’ medical bills directly.

“Historically, actuaries have been largely concentrated on the insurer or health plan side of the equation, because that’s where the majority of the risk really resided,” Thompson said.

Under ACOs, bundled payment arrangements and global fee payments, physicians and hospitals are carrying some of the risk. Many health care leaders believe that handing some risk to physicians and hospitals will help reform health care. But it also represents a new way for physician practices to think about their business.

Actuaries can help doctors acclimate to that new mindset. They know how risk works, because their expertise assessing risk has been crucial to insurers’ ability to set premiums at a level that allows them to pay for care and make a profit.

The idea of taking on risk isn’t new to managed care veteran Ruth Benton. She trained as an actuary early in her career and worked for an HMO in 1979, when the first wave of managed care struck the health care industry.

Benton took a two-week class at the Wharton School of Business at the University of Pennsylvania, where she learned how to make risk-bearing contracts work for a medical organization.

Today she is CEO of New West Physicians, a Denver-based group of primary care physicians. The group recently formed an ACO with Cigna under a shared savings model.

Benton hasn’t used an actuary to prepare for those models, because she already is an expert.

“I’m perfectly positioned working in a medical group to do the work that’s necessary, because I did it in the 1980s,” she said.

Because risk-bearing contracts that hold potential losses also carry potential gains, she said, they are worth doing.

But she cautioned that pay arrangements that carry the potential to lose money call for an actuary’s help. And an actuary can be useful even for shared savings-style arrangements, under which physicians stand to benefit only from their efficiency, she said.

How to find an actuary

Experts say the best way to find a great actuary is similar to finding a great doctor — through word-of-mouth.

Some large groups issue requests for proposals, or RFPs, specifying the scope of the work they need done, said Ross Winkelman, an actuary with Englewood, Colo.-based Wakely Consulting Group. He cautioned that such proposals should not be too complex, because firms will be less likely to bother if bidding is an onerous task.

Winkelman recommends looking for an actuary designated as a fellow of the Society of Actuaries. That’s a designation by the Society of Actuaries that indicates advanced expertise and experience. An ASA, the society’s other credential, indicates an associate of the Society of Actuaries and is a sign of a well-qualified professional, he said.

Thompson said physician practices should seek out an actuary with experience doing similar work for medical groups, but short of that, at least some experience with health care organizations such as hospitals or health insurers.

Finding an actuary with direct medical group experience could be easier in California and other western states, where capitated contracts remained common after the 1990s. But actuaries with experience analyzing health insurance claims can be helpful, even if they haven’t worked with medical groups.

The American Medical Association’s guide to working with an actuary advises physicians to consider whether they need to work with someone locally. Doctors also should consider whether an actuary might have worked for a competitor or if there are other potential conflicts of interest.

What it will cost

Like all professional services, the cost of working with an actuary will depend on geography, the scope of the work and the qualifications of the person or firm doing the work. But, in general, actuaries are paid either by the hour, by retainer or on a project basis.

Actuaries aren’t cheap. But their help can mean the difference between a practice thriving and going bankrupt, as many groups learned during the wave of managed care capitation in the 1990s.

With the caveat that the ultimate price will depend on multiple factors, Winkelman said, “You’re looking at $5,000 to do much of anything.”

He said costs for even a basic project can reach $20,000. An hourly rate can run $200 to $500 for a qualified actuary, he added.

A retainer arrangement can make sense if the practice needs the actuary’s help on an ongoing basis for a year, Thompson said.

“Actuaries can be fairly expensive,” he said. “There has to be some consideration of risk and volume to make it worthwhile.”

Experts say that because the cost is significant, working with an actuary makes sense for groups that are taking on substantial risk — a typical pay-for-performance program doesn’t necessarily need a review by an actuary. But that doesn’t mean smaller practices can’t benefit from an actuary’s expertise.

Independent practice associations or regional physician organizations have worked with actuaries to offer help with new payment models to members in small practices.

Physicians who are considering taking on a relatively small amount of risk, and who have an idea of how widely patient outcomes could vary, may not need to hire an actuary, experts say.

What an actuary can deliver

An actuary’s work for physicians can include any kind of contract evaluation, but it goes beyond giving a contract a thumbs-up or thumbs-down.

Working with an actuary does not mean that a physician also must be an expert in statistics or that the practice must have precise and detailed historic patient data for an actuary to help.

“The good thing about actuaries is that they’re used to imperfect data,” Thompson said.

It’s not unusual for a medical group or hospital not to be sure which patients are enrolled in certain health plans or not to have data about the patients whose care will be paid for under the new capitated contract.

An actuary can identify which patients should be enrolled in a managed care program and stratify the practice’s patients into groups that carry different levels of risk, said Art Wilmes, an Indianapolis-based principal and consulting actuary for consulting firm Milliman. The actuary can gauge the potential variation in clinical outcomes and the likelihood that a pool of patients will need more care than anticipated by the contract terms.

The actuary’s analysis can help identify which patients’ care and what type of management — for example, congestive heart failure patients versus those with chronic obstructive pulmonary disease — carry the most potential savings and clinical improvement. That way, the practice can decide where best to focus time and effort.

“The key is when you want to optimize your management of a patient, you need to understand whether they will respond to [health] management activities,” Wilmes said. “Those are, in my mind, the tools that health systems and physicians will need.”