Actuarial Notes

Educational Note: Health Care Trend Rate

By Canadian Institute of Actuaries Committee on Post-Employment Benefit Plans · Canadian Institute of Actuaries · 2012 · 212031

Study guide: Exam CP-321

A May 2012 Canadian Institute of Actuaries educational note (document 212031), prepared by the Committee on Post-Employment Benefit Plans, intended to assist actuaries in determining health care trend rate assumptions when providing advice on the financial condition of a post-retirement benefit plan. It starts with a definition of a health care trend rate, discusses its development, considerations and limitations for use in a valuation, and gives more specific information on the types of claims trend rates that apply in health care benefits.

On the syllabus

  • Exam CP-321 — Outcomes 6b, 6e, 6g; pages 4-17 only (Sections 1 to 6, up to the Appendix).

Memorandum

  • The note was approved for distribution by the Practice Council on May 2, 2012, and is not a Standard of Practice; the memorandum points to subsection 1220 of the Standards of Practice on familiarity with educational notes.

1 Introduction

  • Post-employment benefit plans continue employee group benefits such as life insurance and health care benefits after active employment ceases; plan sponsors must recognize their cost on an accrual basis in their financial statements.
  • Unlike the survival assumptions, there is no established practice, data or industry standard for the trend in health care costs used to derive future health care benefit payments.
  • For valuation purposes the difficulty lies in determining health care trend rates for long projection periods, which can extend out for 70 years or more.

2 What is a Health Care Trend Rate?

3 Components of Health Care Trend Rates

  • General Health Care Trend Factors
  • Plan-Specific Health Care Trend Factors

4 Aggregate and Benefit-Specific Trend Rates

  • Aging Assumption and Trend Rates
  • Aggregate Trend Rates
  • Benefit-Specific Trend Rates

5 Development of Health Care Trend Rates

  • National/Global Factors
    • Inflation (General vs. Medical vs. Substitution Effect)
    • Attitudes and Behaviours
    • Government Policy
    • GDP
    • Population Demographics and Pharmaceutical Research
    • Technology
    • Access to Health Care/Health Care Providers
    • National Education and Advertising of Health Care Issues
  • Private Sector Health Care Trends
  • Plan-Specific Factors
    • Plan Provisions
    • Total Compensation or Company Business Model Affordability
    • Union vs. Non-union
    • Geographical Location of Health Care Services
  • Initial Short-Term Health Care Trend Rates
    • Recent Past Experience
    • Size of Group
    • Plan Provisions
    • Anticipated Plan Changes
  • Long-Term Health Care Trend Rates
  • Transition from the Initial Short-Term Trend Rate to the Long-Term Trend Rate

6 Limitations

  • Past vs. Future Long-Term Trends
  • Sustainability of Trend Rates
  • Unforeseen Future Events

Appendix

Sources