Multi-State Actuarial Models of Functional Disability

Dr Adam W. Shao
Senior Quantitative Analyst, Mine Wealth + Wellbeing Super
Associate Investigator, CEPAR, UNSW Australia

Joint work with Professor Michael Sherris and Dr Joelle Fong

Guest Lecture for Actuarial Statistics
School of Risk and Actuarial Studies, UNSW Australia
May 2017
 Topic coverage

1 Introduction

2 Methodology

3 Results

4 Limitations and Extensions

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 Age and disability

Elderly prone to becoming chronically ill and functionally disabled as

they age
Require care and support in various daily tasks:
Lifetime risk of needing aged care at age 65 is 68% for females and
48% for males (Productivity Commission of Australia, 2011),
Australian data;
High costs of formal care:
US: LTC expenditure for Americans age 65+ projected to exceed
US$800 billion by 2020
Australia: Government spending on aged care rises to 1.8% of GDP
(2010 Intergenerational Report)

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 Background - LTC costs and funding

LTC costs are increasingly higher and the increasing trend is projected
to continue (Congressional Budget Oce, 2004; Shi and Zhang, 2013;
Productivity Commission of Australia, 2013)
LTC costs funding scheme
Australia: means-tested aged care, lifetime stop-loss mechanism
proposed by Productivity Commission of Australia (2011)
U.S.: Medicaid and Medicare + private insurance + personal payment
The private LTC insurance market is an important supplement for the
public funding source (Productivity Commission of Australia, 2011;
Glendinning et al., 2004; Colombo et al., 2011)

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 Background - LTC Insurance

Pays benets when the insured becomes functionally disabled

Based on number of Activities of Daily Livings (ADLs) that individuals
cannot perform independently and cognitive impairment
Six ADLs in the U.S. Health and Retirement Studies data: dressing,
walking, bathing, eating, transferring in/out of bed, and toileting
Typically two or three out of six ADLs
Australian Bureau of Statistics data: Core Activity Restrictions
Five ADLs in Australian Institute of Health and Welfare (AIHW) data:
self-care, movement activities, moving around places, communication,
and health-care tasks

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 Types of LTC Insurance

Four dierent types based on benets

Fixed benet policies sold to healthy individuals
Fixed benet policies sold to the elderly entering or already staying in
long-term care facilities
Indemnity-based benet policies
Policies that allow the insured to choose between xed benet and
long-term care service

Product features
Elimination period (3 months to 2 years)
Maximum benet period (3 to 5 years)
Base policies

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 Fixed Benet LTC Insurance

Most typical and widely used is the xed benet policy

Stand-alone policies
Included as a rider benet in whole life insurance
xed death benet
draw-down death benet
Life care annuities
long-term care insurance combined with life annuity
reduces adverse selection by pooling longevity risk and disability risk
potential for reduced LTC insurance premiums

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 Motivation

Long-term care insurance provides nancial protection to the insured

and insured's family;
Prior studies on ADL disability mainly focus on the prevalence and
trends in morbidity (Cutler, 2001; Crimmins, 2004);
Fewer studies construct nationally representative transition rates;
Robinson (1996) directly estimates transition probabilities v.s.
Transition Intensity Approach (Haberman and Pitacco, 1999).

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 Our research

At what rates do older persons get functionally disabled?

Estimate transition rates into and out of LTC disability for U.S. adults
age 50-100
Along with mortality for nondisabled & disabled lives
Based on a national representative data of the US older population
LTC disability state aligned with insurers' denition: 2 ADLs
Explore sensitivity of rates to alternative disability denitions.
How do these rates compare with published sources? Useful?
Mortality rates compared with U.S. population life tables, etc.
LTC morbidity tables from Society of Actuaries (SOA), but 1990s.
Next best alternative: we directly apply SOA's method to our sample
to derive another set of rates for comparison.

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 Topic coverage

1 Introduction

2 Methodology

3 Results

4 Limitations and Extensions

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 Model: three-state Markov

3-state time continuous Markov

N F

N: Non-disabled, F: Functionally disabled, D: Dead;

A single-level disability model allowing for recovery: four transition
intensities;
Due to chronic character of LTC disability, recovery is not allowed in
many studies (Ferri and Olivieri, 2000)

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 Notation

= {N, F, D}: State space

x : Age
(x) : Health state at age x
Transition probability: For i, j
pij (x, x + t) = Pr {(x + t) = j | (x) = i}

Transition intensity: For i, j and i 6= j

pij (x, x + x)
ij (x) = lim +
x0 x
ij (x): Graduated using Generalized Linear Model (GLM) based on
Health and Retirement Study (HRS) data

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 Data

Health and Retirement Study (HRS) data: nationally representative

survey of Americans over the age of 50

12-year observation with 7 biannual waves, 1998 - 2010;

Longitudinal data on self-responded health status: ADLs and CI;
Cognition is evaluated by episodic memory and mental status: 7- out
of 35 points is CI (Langa et al., 2008);
Sample: 19,547 individuals, born 1900 - 1950 (56.5% females)
Recovery cannot be ignored

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 Transition counts - male

ix = # of transitions
Age Band : N F : F N : N D : F D
50-54 13 10 5 2
55-59 80 61 60 20
60-64 160 143 192 37
65-69 222 148 325 85
70-74 282 141 405 120
75-79 310 113 447 143
80-84 274 108 446 192
85-89 236 56 325 203
90-94 126 28 186 140
95-100 40 4 50 52
Total 1,743 812 2,441 994

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 Transition counts - female

ix = # of transitions
Age Band : N F : F N : N D : F D
50-54 34 19 9 1
55-59 153 132 58 14
60-64 293 260 137 48
65-69 417 285 236 113
70-74 422 274 272 127
75-79 443 227 319 185
80-84 542 222 413 269
85-89 498 168 413 341
90-94 308 100 247 313
95-100 107 21 75 177
Total 3,217 1,708 2,179 1,588

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 Estimation approach: GLM

Integer age: age last birthday

The number of transitions of each type is assumed to follow a Poisson
distribution
ix Poisson(mx ),
Central exposed to risk: ex
mx is the mean: function wrt age, log link function
( k )
mx = ex exp
X
s x s ,
s=0

Select the optimal k based on AICc, BIC and model deviance

Crude transition rate eixx

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 Estimation approach: GLM

Derive transition rates through the Transition Intensity Approach

(Haberman and Pitacco, 1999)
To graduate/smooth transition rates, we apply General Linear
Modeling (GLM) approach:
exible
widely applied in the actuarial science eld
easy to implement
parameters tted using MLE

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 Topic coverage

1 Introduction

2 Methodology

3 Results

4 Limitations and Extensions

15/30
Log of crude transition rates
Nondisabled to Disabled Disabled to Nondisabled
0 0
Male
ln(crude rates)

2 Female 2

4 4

6 6

60 80 100 60 80 100
Age Age
Nondisabled to Dead Disabled to Dead
0 0
ln(crude rates)

2 2

4 4

6 6

60 80 100 60 80 100
Age Age
 Model selection

Compare linear, quadratic and cubic functions with respect to age

AICc: Akaike Information Criterion corrected for sample size
BIC: the Bayesian information criterion
Dc : dierence in residual deviance statistic in a likelihood ratio test

Dc = 2[log(ls ) log(lc )],

log(ls ) = {ix + ix log(ix )} + C

X

log(lc ) = {mx + ix log(mx )} + C

X

In a likelihood-ratio test, Dc is asymptotically distributed as a

chi-square with degrees of freedom equal to the dierence in number
of parameters between the two nested models
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Model selection
Males Females
Model AICc BIC 4Dc AICc BIC 4Dc
:NF
Lin 272.6 276.2 0.00 372.6 376.2 0.00
Qua 260.1 265.4 -14.76 *** 299.4 304.7 -75.46 ***
Cub 262.4 269.3 -0.04 300.5 307.4 -1.23
:F N
Lin 209.1 212.7 0.00 272.1 275.7 0.00
Qua 211.3 216.6 -0.03 265.2 270.4 -9.24 ***
Cub 213.6 220.4 -0.07 267.5 274.3 -0.02
:ND
Lin 260.7 264.3 0.00 290.5 294.1 0.00
Qua 255.9 261.2 -7.00 *** 281.8 287.1 -10.93 ***
Cub 257.7 264.5 -0.62 282.4 289.3 -1.74
:F D
Lin 241.8 245.4 0.00 250 253.6 0.00
Qua 243.8 249.1 -0.28 250.4 255.7 -1.91
Cub 245.9 252.8 -0.22 246.6 253.5 -6.10 **
* p < 0.10, ** p < 0.05, *** p < 0.01
 Graduated disability (t) and recovery (b) rates

0.6 Mean graduated rates 0.6 Mean graduated rates

Crude rates Crude rates
0.4 0.4
Rates

0.2 0.2

0 0
60 80 100 60 80 100
Age Age
0 .4 0.4

0 .3 0.3
Rates

0 .2 0.2

0 .1 0.1

0 0
60 80 100 60 80 100
Age Age

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 Graduated mortality rates: non-disabled (t) and disabled (b)
1 1
Mean graduated rates Mean graduated rates
0.8 0.8
Crude rates Crude rates
0.6 0.6
Rates

0.4 0.4
0.2 0.2
0 0
60 80 100 60 80 100
Age Age
1 1
0 .8 0.8
0 .6 0.6
Rates

0 .4 0.4
0 .2 0.2
0 0
60 80 100 60 80 100
Age Age
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 More on condence intervals

The condence interval comprises two portions

the darkly-shaded portions capture parameter uncertainty
the lightly-shaded portions capture variations from the distributional
residuals
Total variance of the responses considers both components
Simulations are used to generate the unconditional distribution of the
responses

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 Competing risks: males (t) and females (b)
0 .6
Disability rate
Recovery rate
Rates 0 .4 Mortality(nondisabled)
Mortality(disabled)
0 .2

0
50 60 70 80 90 100
0 .6

0 .4
Rates

0 .2

0
50 60 70 80 90 100
Age

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 Life expectancy in non-disability and disability
35
Male LE in nondisability
30 Male LE in disability
Female LE in nondisability
25 Female LE in disability

20
Years

15

10

0
50 60 70 80 90
Age

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 Comparing with published sources: female

0.6
GLM (non-disabled)
GLM (disabled)
SSA cohort
RP2000 (disabled)
0.4 Wolfram (non-disabled)
Probabilities

Wolfram (disabled)

0.2

0
50 55 60 65 70 75 80 85 90 95 100
Age

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 SOA's method

Summary of SOA (1995) / Robinson (1996) method:

also a time-cts Markov model
transitions counts grouped by gender & 3 age categories (65-74, 75-84, 85+)
uses a 'suitable' parametric graduation formula:
ij (x 80)
 
rij (s, x) = exp ij + ij (s 0.5) + , i 4, i 6= j
100
where x is the average age of the age categories.

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 GLM v.s. Robinson's method
Nondisabled to Disabled Disabled to Nondisabled
0.3 0.3

0.2 0.2
Rates

0.1 0.1

0 0
60 80 100 60 80 100
Nondisabled to Dead Disabled to Dead

0.6 Male, GLM 0.6

Male, SOA/Robinson
0.4 Female, GLM 0.4
Rates

Female, SOA/Robinson
0.2 0.2

0 0
60 80 100 60 80 100
Age Age
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 Dierent benet triggers
Nondisabled to Disabled Disabled to Nondisabled
0.3 0.3
2+ ADLs
2+ ADLs or CI
Probability

0.2 3+ ADLs
0.2

0.1 0.1

0 0
60 80 100 60 80 100
Nondisabled to Dead Disabled to Dead
0.4 0.4

0.3 0.3
Probability

0.2 0.2

0.1 0.1

0 0
60 80 100 60 80 100
Age Age

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 Topic coverage

1 Introduction

2 Methodology

3 Results

4 Limitations and Extensions

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 Summary

This paper uses GLM to assess disability and mortality transitions for
elderly individuals;
GLM is comprehensive and exible;
Women tend to suer longer due to higher disability and lower
mortality rates;
Men and women have distinct age patterns of recovery;
Mortality rates of the disabled from Robinson's method are higher
than our estimate and published sources.

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 Limitations and Extensions

Transition rate at very old ages: we are unable to extrapolate rates

beyond age 100
Results are sensitive to disability denition: implications to LTC
insurance pricing
Dependence on duration: semi-Markov model
Time trend: how do transition rates change overtime?

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 Time Trend: Transition Rates with Systematic Risk

Disability Mortality
1 1
95% CI 95% CI
0 Frailty 0 Frailty
No Frailty No Frailty
1 No Frailty with Time Trend 1 No Frailty with Time Trend
2 2
log(Rates)

log(Rates)
3 3

4 4

5 5

6 6

7 7
50 55 60 65 70 75 80 85 90 95 100 50 55 60 65 70 75 80 85 90 95 100
Age Age

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 Time Trend: Survival Curves with Systematic Risk

1
95% CI
Frailty
0.8 No Frailty
No Frailty with Time Trend
Survival Probability

0.6

0.4

0.2

0
50 60 70 80 90 100 110 120
Age

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