ASOP 5: Incurred Health and Disability Claims

Question 1

Scope and Purpose

Answer 1

1. Estimating and reviewing incurred claims under health benefit plans
2. Does not apply to policy reserves, premium reserves, or claim settlement expense reserves
3. Actions taken by the actuary’s principal regarding the use of such estimates are beyond the scope of this ASOP
4. If the actuary departs from this ASOP for any reason, the actuary should refer to the Communications and Disclosures section

Question 2

Definitions

Answer 2

1. Development (or Lag) Method
2. Health Benefit Plan (includes the following)
   a. Medical
   b. Prescription drug
   c. Dental
   d. Vision
   e. Disability Income
   f. Long-term care
   g. Other health-related benefits
3. Incurred Claims
   a. Amounts incurred during valuation period
   i. Paid + estimate of unpaid claims liabilities + projection of future payments on reported claims (for LTD and LTC)
   b. Income Statement uses different calculation
   i. Paid during valuation period (regardless of incurred date) + ending claim liabilities - beginning claim liabilities
4. Tabular Method
5. Unpaid Claims Liabilities
   a. Unreported claims plus,
   b. Reported but unpaid claims

Question 3

Issues and Recommended Practices - Considerations for Estimating Incurred Claims

Answer 3

1. Plan Provisions and Business Practices
a. Group contract holder requirements
b. Provider payment arrangements
c. Elimination Periods
d. Pre-existing conditions limitations
e. Maximum allowances
f. Managed care restrictions
g. Understand any changes in plan provisions or business practices made since the last incurred claim estimate

2. Economic Influences
a. Price levels
b. Unemployment
c. Medical practice
d. Managed Care contracts
e. Cost shifting
f. Provider fee schedule changes
g. Medical procedures
h. Epidemics
i. Catastophic events
j. Elective claims may increase in recessionary periods or prior to contract termination

3. Organizational Claims Administration
a. Staffing levels
b. Time required for complicated claims
c. Computer system changes or downtown
d. Seasonal backlog of claims submitted
e. Increased electronic submission of claims by providers
f. Government influences
g. Cash flow considerations
h. Be aware that admin practices of external contracted practies can affect unpaid claim liabilities

4. Claim seasonality

5. Credibility - consider how the credibility of the data affects the development of incurred claim estimates

6. Risk Characteristics & Organizational Practices by Block of Business
a. Types of risk accepted influenced by
1. Marketing
2. Underwriting
b. Incurred claims influenced by
1. Pattern of growth
2. Maturity of block

7. Legislative Requirements
a. Can influence
1. New benefits
2. Risk characteristics
3. Rating
4. Reserving practices
5. Underwriting practices
6. Claims processing
7. Methods used to estimate incurred claims

8. Carve-outs
a. Consider
1. Pertinent benefits
2. Payment arrangements
3. Separate reporting of carve-outs

9. Long-term Products
a. Variety of Benefits - Lump-sum, fixed, variable payments
b. Cost of living adjustments and inflation protection
c. Institutional or home-based care
d. Social insurance integration
e. Criteria for benefit eligibility

Question 4

Issues and Recommendations - Incurred Claims Analysis

Answer 4

a. Unpaid Claims Liability
i. Identify the purpose or use of the unpaid claim estimate
1. Examples: external financial reporting, internal management reporting, appraisal work

ii. Review plan provisions to determine if they create liabilities
1. Examples: medical benefits extending beyond the contract period or long-term disabilities
2. Is the obligation part of the current or future period’s liability
3. Is separate reserve needed

iii. Data and Reporting
1. Claims system
2. Exposure units
3. Premium rates
4. Dating methods
a. Loss recognition
b. Service rendered
c. Payment status
5. Professional judgment for adjustments

iv. Provision for Adverse Deviation
1. Professional judgment
2. Moderately adverse conditions

v. Time value of money
1. May have material impact, especially long-term claims
2. Depends on purpose of incurred claims calculation
3. Reflect accounting standards

vi. Consistency of assumptions and methods
1. Consistent with those used for estimating related liabilities unless it would be inappropriate to do so
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b. Categories of Incurred Claims
i. Separate categories and development based on different:
1. Lag patterns
2. Cost per exposure unit
3. Trends
4. Exposure unit growth rates

ii. Appropriate for available data and the task being performed

iii. More refined for projecting costs and utilization data

iv. Examples
1. Fee for service claims
2. Capitation payments
3. Disability income paid to insureds
4. Electronic vs. manual payments
5. Type of contract
6. Type of service
7. Geographic area
8. Premium rating method
9. Demographic factors
10. Distribution factors
11. Provider risk sharing arrangements

c. Reinsurance Arrangement
i. Reflect effect in estimating incurred claims
ii. Lag patterns affected by extended reporting or recovery periods

d. Large claim patterns
i. Distort claim payment patterns
ii. Distort historical per-unit claim levels
iii. Adjustments may be appropriate
iv. Incurred claim estimates may be overstated by completion factors if valuation period had high number of large claims

e. Coordination of benefits (COB) or Subrogation
i. How reflected in data
1. Negative claims
2. Income
ii. Adjust for COB, subrogation, or recoveries

f. Provider Contractual Arrangements
i. Affect
1. Trends
2. Claim cost levels
3. Claims processing
ii. Variation in arrangements by region or product
iii. Reimbursement might not be through claim payment process for capitation, withholds, bonuses, and stop loss contracts
iv. Portion of risk shifted to provider
v. Disclose if provider insolvency may have a material effect on risk bearing entity’s ultimate liability
vi. Statutory limitations on credits for the transfer of risk
vii. Amounts due from providers (e.g. pharmacy rebates)
viii. Unpaid Medical costs from failed providers

Question 5

Issues and Recommendations - Methods for Estimating Incurred Claims

Answer 5

a. Consider
i. Using more than 1 method
ii. Purpose, constraints and scope of the assignment
iii. Reasonableness of assumptions and sensitivity of results to alternative assumptions
iv. Trends in prior and current periods
v. Professional judgment of most reasonable provision for incurred claims

b. Development Method
i. Short-term benefits having processsed claims (not capitation)
ii. May also be used for long-term claims
iii. Use metrics to assess reasonableness of results for periods where development patterns are less credible
iv. Compare to earned premiums & exposure units for reasonableness

c. Projection Methods
i. When data is limited or not sufficiently credible for other estimation methods, to supplement development method for the most recent incurral months, or as a reasonableness check
ii. Starts with a historical claim metric (e.g. cost per claim, PMPM, loss ratio) then multiplies times the appropriate base for the period being estimated (e.g. claim volume, member months, earned premium)
iii. May adjsut metric for trend
iv. May adjust for catastophic claims
v. Consider using risk adjustment to help project shifts in morbidity of the block

d. Tabular Method
i. Common for known long-term claims
ii. Factor multiplied by volume measure (such as individual claims or waived rates)
iii. Factors may be based on
1. Age and gender insured
2. Elimination Period
3. Cuase of Claim
4. Length of disablement on valuation date
5. Remaining benefit period
iv. Consider
1. Specifid benefit changes throughout lifetime of claim
2. Assumptions used to develop the table
3. Tabular not appropriate for estimating unknown claims

e. Alternative Approaches
i. Regression
ii. Time series
iii. Econometric Models

Question 6

Issues & Recommendations - Follow-up Studies

Answer 6

a. Test reasonableness of prior period estimates
b. do the following
i. Acquire data to perform such studies
ii. Perform studies in aggregate or for pertinent blocks of business
iii. Utilize results in estimating incurred claims

Question 7

Reliance and Documentation

Answer 7

1. Reliance on data or other info supplied by others
   - Refer to ASOP 23 “data quality” for guidance
2. Reliance on assumptions and methods selected by others
   - Refer to ASOP 41 for guidance
3. Documentation
   - Methods, assumptions, procedures, sources of data
   - Such that another actuary qualified in the same field could assess the reasonableness

Question 8

Communications and Disclosures

Answer 8

1. Refer to ASOP 41 for further guidance
2. Include the following
   a. Important dates used in the analysis
   b. Significant limitation that constrained the actuary’s analysis
   c. Significant risks and uncertainties
   d. Any explicit provision for adverse deviation
   e. The risk that provider insolvency may have a material effect
   f. Any follow-up studdies that actuary utilized
   g. When updating a previous estiamte, changes in assumptions, procedures, methods, or models that have a material impact
   h. Any material assumptions or method prescribed by applicable law
   i. If the actuary states reliance on other sources
   j. If the actuary has deviated materially from guidance of this ASOP