History of SSA During the Johnson Administration 1963-1968
APPENDIX F- STATEMENT OF ACTUARIAL ASSUMPTIONS AND BASES EMPLOYED IN ARRIVING AT THE AMOUNT OF THE STANDARD PREMIUM RATE FOR THE SUPPLEMENTARY MEDICAL INSURANCE PROGRAM BEGINNING APRIL 1965
There follows a statement of actuarial assumptions and bases employed
in arriving at the amount of the standard
premium rate for the Supplementary Medical Insurance program beginning April 1968. The standard premium rate is that rate which is payable by those who enroll in their initial enrollment period and by those who enroll in a general enrollment period that terminates less than 12 months after the close of their initial enrollment period.
The actuarial determination has been made on the basis of both the actual operating experience under the program and the results of a current continuing sample survey of beneficiaries (which gives certain information more promptly than do the aggregate operations of the program). Because of the time lag in the submission of bills in this program, complete figures for the 6 months of 1966 are not yet available, and the processed data for the first 10 months of 1967 are rather incomplete.
There are current figures for cash expenditures under the program, but these figures taken alone are misleading because they do not take into account the liabilities arising from the natural delay in benefit payments until well after the date that services were received. Such delay is due to the tendency of enrollees to accumulate a number of bills before submitting a claim, the inherent delays by physicians and enrollees in making requests for payment, and the time required by the carriers to adjudicate and pay claims. There was a balance of $394 million in the Supplementary Medical Insurance Trust Fund at the end of October 1967 (a decline from a peak of $570 million at the end of March 1967), but there were at that time substantial outstanding liabilities incurred for services rendered during the first 16 months of the program.
On the basis of claims and administrative expenses paid (cash basis), the average monthly per capita expenditures of the program for the 6 months of 1966 were $1.93; for the first 10 months of 1967, the average was $6.06. However, these figures need to be adjusted for the estimated increase in liability that took place during the period for benefits that will be paid for services rendered during the period but had not been paid at the end of the period; i.e., the premium rate must be set on an accrual basis, rather than a cash basis.
Figures on an accrual basis for the 6 months of 1966 are, of course, much more complete than for 1967. On the basis of the 1966 accrual figures, it is now estimated that, for this 6-month period, benefits and administrative expenses per capita exceeded the income from premiums and matching Government contributions by 30 cents per month (i.e., 15 cents each). It is further estimated that the liability of the system for the entire l.5 year period, July x1966-December, 1967, will be about 7 percent higher than the income from the premiums and the matching Government contribution. In other words„ it is expected that the $3 premium for the entire period will be lower than half the cost for benefits and administrative expenses by about 20 cents. About 12 cents of this 20 cents is accounted for by the fact that apparently physicians' fees were higher during this period than had been assumed in setting the premium; the remaining 8 cents arises from the fact that there has apparently been a somewhat greater utilization of services under the program than had been anticipated. Projecting costs of the program for the 15-month period following March 1968 at the level of operation in 1966-67 thus would require an additional 20 cents in the premium rate. These estimates are based upon incomplete data for past periods and upon projections thereof and may be somewhat more or less when the final accounts are in.
In estimating the cost of the program for April 1968 through June 1969, it is necessary to provide for the long-term trend toward greater utilization of medical services (including the effects of the discovery and more frequent use of new, highly expensive medical techniques) and the long-range upward trend of the general earnings levels, which will be reflected in higher physicians' fees and administrative expenses.
It is assumed that in 1968-69, physicians' fees will increase at an annual rate of 5 percent and utilization of medical services by enrollees will increase at an annual rate of 2 percent. Administrative expenses are assumed to represent 9.5 percent of the benefit payments; this figure is based on the actual operating results in 1967, when the average per capita administrative expenses of $.56 per month represented 9.5 percent of the average per capita benefit costs on an incurred basis. (The administrative expenses, on a paid basis, represented an average monthly per capita amount of $.74 for the 6 months of 1966. The 1966 average was relatively high because of the necessary one-time start-up costs.) The average interest rate on the invested assets of the trust is assumed to be 4.75 percent (the rate applicable to virtually the entire portfolio as of October 31, 1967).
It is estimated that the monthly per capita cost on a calendar year basis would be $7.61 for 1968 and $8.28 for 1969 if the provisions of the 1967 amendments were in effect for this entire period. The cost for the 15-month period beginning April 1968 would average out at $7.89 a month (half of which is $3.95) Thus, a standard premium rate of $4 per month for the period April 1968 through June 1969 would allow a margin for contingencies, as required by law.
In addition, the interest earnings of the trust fund are available as a margin for contingencies and, if not needed to pay benefits and administrative expenses in the current period, will reduce the unfunded liability for the past deficiency in the premium rate. Interest earnings are the equivalent of another 10 cents per capita in available income.
The explanation of the $1 increase in the monthly premium rate for the new premium period can be summarized in
the following manner:
(a) The cost of the protection under the program as in effect in 1966-67 is estimated to have exceeded the income from premiums and Government matching contribution by about 7 percent--an increase of about 20 cents.
(b) The cost of the program in 1966-67 was abnormally low as a result of the fact that in the 6 months of operation in 1966 the full $50 deductible was applicable, and it had a much stronger effect in reducing benefit costs than will be the case in later years; in other words, with all other things being the same, the program cost is higher for future years, in which the $50 deductible isusually applicable for 12-month periods, than for the initial period--an increase of about 3 cents.
(e) The $50 deductible represents a smaller proportion of the total covered medical charges when these increase as a result of either higherphysician fees or higher utilization--an increase of about 11 cents.
(d) The utilization of medical services is assumed to be higher in the new premium period than in 1966-67, and so the program cost is higher--an increase of about 11 cents.
(e) The level of physicians' fees is assumed to be higher in the new premium period than in 1966-67, and so the program cost is higher--an increase of about 27 cents.
(f) The increased benefit protection arising from the provisions of the 1967 amendments must be taken into account--an increase of about 23 cents.
(g) The promulgated rate includes an amount to provide a margin for contingencies--an increase of 5 cents.
As indicated previously, the program has more than ample funds on a cash basis, to meet its expected obligations for benefit payments and administrative expenses now and in the period to which the promulgated premium rate applies.