MC Chapter 22: Underwriting and Rating

Question 1

Introduction

Answer 1

• Adequate rates generate sufficient revenue to cover claims, plan expenses, and yield an acceptable return on equity
• Competitive rates low enough to sell policies to meet health plan volume targets
• Equitable rates achieved through applying rating factors appropriately and result in higher persistency
• Major markets include individual, commercial group, and government business

Question 2

Underwriting

Answer 2

1. Type of u/w depends on:
   a. The time at which u/w is done (e.g. at issue, during the plan year, or renewal)
   b. Group size
   c. Risk arrangement (fully insured or self-insured)
2. Carrier actions based on u/w include:
   a. Issuing coverage at base rate
   b. Issuing coverage at a higher rate
   c. Excluding services
   d. Declining coverage
   e. Most of these options become unavailable under ACA
3. At issue
   a. Health status
   ▪ Until ACA takes effect, the following information might be requested
   * Physical exams and attending physician statements (indiv)
   * Prescription drug histories (indiv and small group)
   * Individual medical questionnaires (indiv and small group)
   * ER disclosure listing major health conditions (large group)
   * Medical cost experience (large group)
   * No health status information (Medicare and Medicaid risk contracts)

▪ Under ACA, small group and individual use only age and smoking status

▪ Preexisting condition limitation historically used to limit antiselection
* Not allowed under ACA beginning 2014

▪ Other u/w policies include ensuring a valid ER-EE relationship exists and minimum participation requirements

b. Ability to pay
▪ Income can be verified through tax returns or financial statements

▪ Credit history verified through credit agencies

▪ Some insurers require groups with a poor credit rating to produce collateral or a letter of credit

c. Other coverage
▪ Knowledge of presence of other coverage helps claim adjudicator determine which insurer is responsible for claims

▪ Avoid payment of claims for which workers’ compensation coverage is responsible

d. Persistency
▪ Be cautious when writing groups that frequently change carriers, because of fixed costs associated with writing a new group

4. Underwriting during the plan year and at renewal
   a. Stringent review to prevent adverse selection

b. ACA will limit what insurers can do about adverse selection, but does not prohibit u/w for calculating experience rates for large ER groups

Question 3

Rating

Answer 3

1. Uses u/w information to calculate premium for a specific individual or group
   a. Manual rate (i.e. a base rate) is adjusted for demographics, area, group size, industry, and other characteristics

b. Health plans’ costs include medical services, prescription drugs, sales and marketing, admin expenses, and profit

2. Community rating vs. experience rating
   a. Community rating means experience of a group or individual is not taken into account when calculating rates, only the collective experience of all who are in the same risk pool

b. Experience rating: manual rate is blended with group-specific experience depending on the group size and credibility of data
▪ Allowed under ACA for groups with > 100 EEs

c. ACA requires that all individuals be placed in the same risk pool, although individuals and small groups do not need to be in same pool

3. Rate formula
   a. Formula adjusts base rate for demographics, area, group size, industry, and other. Then add retention costs

b. Base rate development
▪ Historical experience info reflected in the base rate
- Population (e.g. Commercial, Medicare, Medicaid, other)
- Covered services
- Cost sharing
- Provider Payment arrangements
- Demographics
- Average member per contract
- Geographical area
- Occupation
- Health status
- Degree of health care management
- Coverage effective dat
- Level of out of network usage, if applicable
- Presence of workers’ compensation insurance
- Underwriting Practices
- Claim admin Practices
- Distribution methods

▪ Projection period base rate: analyzing historical medical costs and trending forward to projection period

▪ Claims data converted to an incurred basis including IBNR reserves

▪ Incurred claims matched with plan exposure to develop PMPM medical cost

▪ Adjust for changes in health plan operations between base period and projection period expected to affect incurred claims
* Underlying demand for medical services
* Mix of medical services
* Intensity
* Level of out of network usage
* Medical management
* Provider payment methods
* Wellness and preventive care programs
* Covered services
* Contractual benefit levels
* Member cost sharing
* Average amounts contained in consumer directed health spending accounts
* Average members per contract
* Industry
* Coverage effective date
* Presence of workers’ compensation
* Demographics
* Geographical area
* Claims admin
* Underwriting requirements
* Distribution methods

▪ Projection period base rate summarized in actuarial cost model
* The model contains PMPM medical costs by service category
* Each service category defined by a unique set of procedure codes

▪ PMPM medical cost = (the annual utilization per 1,000 members) * (average charge per service) / (12,000) – PMPM cost sharing

c. Rate Determination
▪ Step 1: Incurred medical costs PMPM (i.e. base rate)
▪ Step 2: Add or subtract:
* Covered services [not] reflected in the base rate
* Reinsurance costs
▪ Step 3: Multiply by:
* Benefit plan factor
* Geographical area factor
* Age/gender factor
* Degree of health care management factor
* Provider payment factor
* Health status factor
* Trend factor
* Other factors
▪ Step 4: Retention load (multiply or add)
* Administrative expenses
* Contingency reserves
* Coordination of benefits savings * Profit
▪ Step 5: Convert the member rate to a contract rate
▪ Steps 2-5 adjust the projection period base rate to reflect specific group and plan characteristics

d. Retention
▪ Retention can include admin expenses, buildup of contingency reserves, coordination of benefit savings, profit

▪ Arrive at PMPM premium by dividing the medical costs by a target loss ratio or adding specific PMPM retention costs

e. Conversion of rates from member to EE level
▪ PMPM manual rate must be converted from a member rate to a contract rate
▪ Individual and some small group contracts covering multiple members are rated by adding together rates for each member (called list bill rating)
▪ Large groups and some small groups charged rates according to contract tiers (e.g. EE only, EE plus spouse, family) referred to as composite rates

4. Data Sources
   a. Best data source for any health plan is its own experience
   b. Many health plans look to published data sources or actuarial consulting firms
5. Managing the Business
   a. Health plans review and update rate formulas at least once per year

Question 4

Examples of Typical Ongoing Actuarial Reports

Answer 4

Question 5

Impact of the ACA on underwriting and rating

Answer 5