Actuarial companies are companies that specialize in analyzing past utilization data for specified groups and then, using assumptions when necessary, estimating likely future costs for treating each group. Good actuarial work needs to be thoroughly attuned to the real world, so that any assumptions are grounded in logic and represent the field as it is currently practiced. Actuarial analysis is only as good as its sources, and therefore depends on the quality of the historic cost data, the accuracy of the demographic data, and on the validity of its assumptions. An actuarial analysis is the basic tool used by insurance firms to determine how much to charge for a policy that would pay for a defined benefit package. State agencies need to estimate how much the State should expect to pay for the services it proposes to contract through a managed care firm.
States employ actuaries to prepare such analyses.
Whenever possible, actuarial analysts will base estimates on concrete data and, when necessary, will make assumptions to compensate for missing, incomplete, or inaccurate data. In order to stretch limited funds, it is usually in the interest of the State purchaser and the State AOD authority to lower the PMPM to the lowest level that can still support a quality care system. In working with actuaries, it is thus very important to provide them with appropriate assumptions. To the extent possible, one should try early in the discussion to define what assumptions the actuaries are actually using. Model building for PMPM should accompany or precede actuarial analysis.