Canadian Chpt14 Pricing

Question 1

Flex pricing approaches:

Flat credit structures

Answer 1

1. Flat credit structures allocate an equal credits to all EEs
   
   1. 1 objective 2 (equity) is always achieved
2. Variation 1: family credits
   
   2. 1 EE allocation = current co. Cost for a family
3. Variation 2: average credits
   
   3. 1 EE allocation = avg cost of current plan per covered EE
4. Variation 3: single coverage credits
   
   4. 1 EE allocation = company cost of the EE-only coverage
   5. 2 in order to have no losers, price tags must be decreased
5. Net pricing and flat credit approaches
   
   5. 1 flat credit approaches unlikely to be on a net pricing basis

Question 2

Flex pricing approaches

1. Buy back structures
2. Election based structures

Answer 2

1. Buy-back structures
   1.1 credits = avg cost of each EE to the ER prior to flexible program
   1.2 takes into account cost based on whether they cover dependent’s
   1.3 the buy-back approach can be used in a net pricing scenario
   (credits are allocated based on the average cost to the employer of singles and families prior to flexible benefit program. Fails objective 2-equity, because families get more credits)
2. Election-based structures
   2.1 price tags and credits = buy-back for option A
   2.2 Option B or C have the same net cost, regardless of family status
   2.3 comes closest to meeting all four objectives
   (Same as buy-back pricing except families who opt down are given fewer credits, such that singles and families in those options have the same net cost. Come to closer to show int obj 2 but still fails)

Question 3

Four Flex Pricing Objectives

Answer 3

1. Objective 1: realistic pricing
   
   1. 1 price tags should closely represent the value of each option
2. Objective 2: Equity
   
   2. 1 EEs should receive an equal dollar amount or percentage of play
3. Objective 3: No losers
   
   3. 1 be able to repurchase prior coverage with no increase in costs
4. Objective 4: No Additional Company Cost
5. Generally impossible to achieve all four simultaneously

Question 4

Flex pricing steps

Answer 4

1. Data collection and analysis
2. Preliminary option pricing
   - requires that a relative value for each option be determined
3. Preliminary subgroup pricing
   
   • most common category is dependent coverage
4. Anticipation of changes in claims experience (trend)
5. Taxes and administration fees
6. Adjustments to realistic price tags
   
   6. 1 subsidized pricing
      
      6. 1.1 encourage the selection of a particular option
      7. 1.2 limit the potential for adverse selection in an option
      8. 1.3 difficult to re-price consistently in future years
   7. 2 carve-out pricing
      
      6. 2.1 EE will not have as full an appreciation of the cost
      7. 2.2 difficult to explain to employees what the prices represent
      8. 2.3 future price increases more difficult to explain
7. No-coverage option pricing (whether to allow EEs to waive coverage)
8. Pricing by business unit or location

Question 5

Forming a flexible credit structure

3 key elements

Answer 5

1. Source of credits
   
   1. 1 current benefits, benefit reductions, wellness credits, EE payroll deductions, additional ER money
2. Amount of Credits:
   
   2. 1 current and also a strategy for how the credit pool may increase in future
3. Allocation of credits
   
   3. 1 equity in benefit value: price tags set realistically and credits on a per capita basis
   4. 2 repurchase of current program = no loser
   5. 3 organizational objectives: cost mgmt, service recognition, EE performance, health awareness
   6. 4 component credit allocation: credits are allocated for each benefit. The sum of components = EEs total credit allocation

Question 6

Testing the flex pricing structure

Answer 6

1. Winners and losers: out of pocket cost of the prior plan and flex plan compared
2. Employer cost analysis
   
   2. 1 cost = expected claims + expenses and taxes + credits - price tags
3. Reasonableness