Objective 6 - Regulation and Taxation

Question 1

The “triple aim” (three goals) of health policy

Answer 1

1. Better care for individuals - the Institute of Medicine lists six characteristics of quality health care: safe, effective, patient-centered, timely, efficient, and equitable
2. Better health for populations - public health initiatives should address the upstream causes of poor health (see separate list)
3. Lower per-capita costs - the significance of health care within an economy can be measured by health expenditures as a percentage of GDP. This percentage is much higher in the US than in other developed countries.

Question 2

Causes of poor health and public initiatives to address them

Answer 2

1. Environmental factors that contribute to poor population health:
   a) Unsanitized water
   b) Pollution (air and water)
   c) Violence (domestic and street)
   d) Unhealthy living environment
   e) Food-borne illnesses
   f) Lack of access to fresh, healthy foods
2. Community disease prevention - initiatives include childhood immunization requirements and free flu shots and preventative screenings
3. Lifestyle (eg. obesity epidemic) - initiatives include healthy school lunch programs, safe pedestrian walkways, and taxes on unhealthy foods
4. Smoking and substance abuse - anti-smoking laws have been effective
5. Socioeconomic factors - income is related to poor health. Social programs such as Medicaid try to address this.
6. Wellness and disease management solutions - include programs around disease preventions, smoking, diet, fitness, or weight loss

Question 3

ACA individual and group market reforms

Answer 3

1. Individual mandate - beginning in 2014, US citizens and legal residents must have qualifying health coverage or pay a tax penalty, unless an exemption applies. The penalty is the greater of:
   a) A dollar amount per person (up to 3 per family): $95 in 2014, $325 in 2015, and $695 in 2016 (indexed thereafter)
   b) A percentage of income: 1% in 2014, 2% in 2015, and 2.5% in 2016 and later
2. Employer mandate - beginning in 2014 employers with 50 or more full-time employees must offer coverage or pay a fee. The fee = $2,000 * (full-time employees - 30), but is adjusted based on the number of employees who receive a premium tax credit
3. Essential benefit package - required to be offered by all qualified health benefits plans beginning in 2014. Will provide a comprehensive set of services, cover preventive services without cost sharing, cover at least 60% of the actuarial value of the covered benefits, and limit annual cost sharing to the current law HSA limits
4. Medical loss ratio (MLR) - starting in 2011, plans must provide rebates to consumers if the MLR is below 85% for large groups (101 or more employees) or 80% for small group and individual plans
5. Benefit and coverage requirements (see separate list)
6. Rerating requirements (see separate list)
7. Benefit tiers - all new plans must be either platinum (covering 90% of benefit costs), gold (80%), silver (70%), or bronze (60%). INsurers may offer a catastrophic plan to enrollees under age 30 and those who are exempt from the individual mandate.
8. Grandfathering of existing plans - plans in existence on March 23, 2010, are exempt from many ACA requirements. But most of the benefit and coverage requirements do still apply.

Question 4

ACA benefit and coverage requirements effective in 2010

Answer 4

1. All individual and group plans must cover dependent children up to age 26
2. Rescissions of insurance coverage are prohibited except in cases of fraud
3. Pre-existing condition exclusions for children are prohibited
4. No individual or group plans may impose lifetime limits. And plans may impose annual limits only for non-essential health benefits (this requirement was graded in through 2014).
5. Services rated A or B by the US Preventive Services Task Force must be covered at 100%

Question 5

ACA rating requirements effective in 2014

Answer 5

1. Individual and small group plans must be offered on a guaranteed issue and renewal basis
2. Plans may not impose pre-existing condition exclusions
3. Rating variation is only allowed based on:
   a) Age (limited to a 3 to 1 ratio from highest to lowest age band)
   b) Geographic rating area
   c) Tobacco use (limited to a 1.5 to 1 ratio)
   d) Family composition
4. Waiting periods for coverage must not exceed 90 days

Question 6

Provisions of ACA health insurance exchanges

Answer 6

1. Each state will have an American Health Benefit Exchange for individuals and a Small Business Health Options Program (SHOP) Exchange for businesses with up to 100 employees
2. Pans in the exchanges must cover essential health benefits, have an out-of-pocket limit at or below the HSA limit, and fall into one of the ACA benefit tiers (described in a separate list)
3. Risk pooling - insurers must pool all individual market plans (other than grandfathered plans) into a single risk pool. Similarly, all small group plans must be pooled together.
4. Participating insurers must meet many qualification requirements such as networks, marketing, reporting, and consumer assistance
5. Exchanges must also offer Consumer Operated and Oriented Plans (CO-OPs), which are nonprofit, member-run health insurance companies

Question 7

Other ACA provisions

Answer 7

Other major topics not covered by prior lists (these flashcards suck)
1 Premium credits and cost-sharing subsidies for those with low incomes (see separate list)
2. Small business tax credits (see separate list)
3. Medicare provisions
a) Medicare Advantage plans can receive bonuses or re-allocations of rebates based on quality. Beginning in 2014, plans are subject to MLR requirements.
b) Medicare Part D - beneficiary coinsurance in the coverage gap will be phased down from 100% to 25% by 2020. Retiree drug subsidy payments lost their tax exempt status beginning in 2013.
4. Revenue provisions (see also a related list of new ACA taxes and fees)
a) New health insurer tax will collect $8 billion in 2014, grading up to $14.3 billion in 2018, and indexed thereafter
b) Excise tax for high-cost health plans (beginning in 2018)
c) Limitations to tax-favored allowances for FSAs and HSAs
d) New taxes on certain medical devices
5. Medicaid - expanded to all non-Medicare eligible individuals with incomes up to 133% of FPL. Due to Supreme Court ruling, federal government can’t withhold original Medicaid funding from states who do not expand.

Question 8

Potential problems in an unregulated insurance market

Answer 8

1. A dishonest company could gain a competitive edge via:
   a) Misleading marketing materials
   b) Unfair price (only appears to be a good value)
   c) Inadequate reserves
2. Customers do not have the time or expertise to determine which firms are dishonest
3. Companies could become insolvent with no warning, leaving policyholders without coverage

Question 9

Goals of insurance regulation

Answer 9

1. Eliminate policies not providing the benefits expected
2. Prevent insolvency
3. Eliminate policies that provide poor value
4. Solve minor consumer problems
5. Maintain fiar competition
6. Raise tax money
7. Promote social goals

Question 10

The steps of regulation

Answer 10

1. Licensing - the firm agrees to be regulated. Agents may also be required to get a license.
2. Information gathering - the purpose is to monitor financial soundness, confirm compliance, provide consumer information, and design new regulatory requirements
3. Prior approval of policy language, premium rates, reinsurance arrangements, dividends, mergers, and investments
4. Enforcement - includes penalties such as fines, legal action and/or license removal
5. Receivership - may initially track financial condition, or may take over an insolvent company

Question 11

Actions commonly taken by state regulators to help prevent insolvency

Answer 11

1. Capital requirements (such as RBC) - protect against adverse deviations in experience
2. Guaranty funds - all companies are assessed to create a fund to protect the insureds of insolvent companies
3. Reserve requirements - for claim reserves and liabilities, contract reserves, provider liabilities, and premium deficiency reserves

Question 12

Types of consumer protection regulation in the United States

Answer 12

1. Disclosure - must disclose to a potential customer the key features of the insurance policy. This may include a shopper’s guide, outline of coverage, summary of benefits, or illustration.
2. Reasonableness - includes mandated benefits and prohibited exclusions. Premium must be reasonable in relation to benefits (loss ratio requirements)
3. Fairness - includes prohibitions on discrimination even though data may support it (eg. unisex rates)

Question 13

Responsibilities of the insurance commissioner

Answer 13

1. Oversee the operation of the insurance department
2. Interpret insurance laws
3. Make regulations implementing insurance laws
4. License insurance companies, agents, brokers, and consultants
5. Conduct examinations of licensed insurers, and assess penalties for violations of laws
6. Review form and rate filings - some states require that the commissioner approve the forms and rates prior to use
7. Regulate advertising - to protect consumer from unfair, inaccurate, deceptive, and misleading advertisements
8. Regulate business practices - sucha s underwriting and claims practices
9. Enforce prompt pay laws
10. Regulate insurer solvency - this is the most important duty of the commissioner

Question 14

Reasons for an insurance commissioner to assume an insurer’s assets

Answer 14

1. Non-cooperation with examiners
2. Refusing to remove questionable officers
3. Charter violations
4. State law violations
5. Endangered capital or surplus
6. Technical insolvency

Question 15

Standard group contract provisions required by most state insurance laws

Answer 15

1. Grace period - there must be a 31-day grace period for the payment of premium
2. Incontestability - the validity of the policy cannot be contested after the policy has been in force for two years
3. Application and statements - the application has to be made part of the policy, and statements made by the insured are considered representations (not warranties)
4. Evidence of insurability - the policy must state when evidence of insurability is required
5. Misstatement of age provision - a policy must state how premiums or benefits will be adjusted due to misstatement of age
6. Certificates - the insurer must issue certificates to the policyholder for deliver of each insured
7. Benefits and eligibility - the policy must state the benefits and to whom they are payable, and include specific terms of eligibility for coverage

Question 16

Additional contract provisions for group health plans

Answer 16

These are in addition to the standard group contract provisions from a separate list

1. Preexisting conditions - this provision describes the exclusions or limitations that apply to preexisting conditions
2. Notice of proof of claims – establishes a time limit for notifying the insurer of a loss
3. Legal actions - this provision specifies the time period when a legal action may not be brought on a claim (eg. during the claim’s first 60 days)

Question 17

Additional contract provisions for group life plans

Answer 17

These are in addition to the standard group contract provisions from a separate list

1. There must be a provision identifying the designated beneficiary
2. Conversion rights - this provision allows the policy to be converted to an individual policy (in certain situations)
3. Death during the conversion period - if a person dies within the conversion period, the amount available to be converted will be paid as a claim
4. Disability continuance - active employees that become totally disabled can continue coverage for up to six months by paying the premium

Question 18

Provider protections related to preferred provider arrangements

Answer 18

1. Any-willing-provider laws - require insurers to accept any provider that meets the insurer’s terms for participation
2. Limitations on benefit differentials between preferred and non-preferred providers - to limit how much extra coinsurance the member must pay for using a non-preferred provider
3. Coverage of non-preferred providers (required in some states) - effectively precludes exclusive provider arrangements
4. Requirements that allied medical practitioners (such as chiropractors, dentists, and optometrists) be included in PPOs - these requirements are not common

Question 19

Consumer protections related to preferred provider arrangements

Answer 19

1. Insurers must assure reasonable access to covered services and an adequate number of providers
2. Some states have tried to regulate quality assurance (measuring quality is difficult)
3. Requirements that patients receiving emergency care will have costs reimbursed as though treated by a preferred provider

Question 20

Requirements for an HMO to obtain a certificate of authority

Answer 20

1. A description of the HMO’s organization, governance, and management
2. Contracts with providers - including copies of contracts between providers, third-party administrators, and other third-party vendors
3. Coverage agreements - including copies of individual and group contracts and evidence of coverage forms
4. Financial information - including financial statements and a financial feasibility plan
5. Provider information - including a description of the geographic service area, and a list of all providers
6. Grievance procedure - a description of the HMO’s procedure for handling grievances
7. Quality assurance program - details of the program for credentialing providers, evaluating care, initiating correction, and reevaluating deficiencies
8. Insolvency protection measures - must satisfy minimum net worth requirements, and a deposit of cash or securities is usually required

Question 21

Advantages of federal qualification for HMOs

Answer 21

1. The equal contribution requirement - employers that offer a federally-qualified HMO cannot financially discriminate against a person enrolling in that HMO
2. The HMO is allowed to contract as a Medicare or Medicaid provider
3. The federal HMO Act preempts all state laws that would prevent the HMO from acting in accordance with the federal HMO Act
4. Federally-qualified HMOs may be automatically deemed to comply with ERISA’s claim appeal requirements

Question 22

Disadvantages of federal qualification for HMOs

Answer 22

1. The HMO must establish a separate line of business for any non-qualified HMO business
2. Minimum coverage requirements of federally-qualified HMOs
3. Restriction on the use of anything more than “nominal” copayments
4. Federal restriction on rating may be more restrictive than state requirements

Question 23

HIPPA reforms related to potability and availability

Answer 23

1. Pre-existing conditions exclusions - may not be imposed except in certain situations
2. Underwriting and rating - eligibility and premiums cannot be based on health (see separate list)
3. Special enrollment periods - to permit eligible individual who lost other coverage to enroll
4. Multi-employer health plans may not deny a participating employer continued coverage except fro nonpayment of contributions, fraud, or noncompliance with plan provisions
5. Guaranteed issue - small group carriers must accept all small employer groups and all eligible individuals in those groups
6. With certain limited exceptions, insurers must renew or continue inforce coverage for all groups

Question 24

Administrative functions that health benefit exchanges must provide

Answer 24

1. Certifying and assigning quality ratings to plans
2. Presenting benefits information in a standardized format
3. Providing consumers with eligibility determinations
4. Providing certifications for people who are exempt from the individual mandate
5. Ensuring that all participating health plans satisfy the exchange’s requirements

Question 25

Key decisions states must make related to health benefit exchanges

Answer 25

1. Should the state establish an exchange? If a sate does not, the federal government will set one up for it.
2. Governance structures - the exchange could be established within an existing state agency, independently, or through a quasi-government entity
3. Influencing the level of participation - eg. by making the HBE attractive and available to more customers
4. Should carriers be required to participate in the HBE?
5. Should the sate merge the individual and small group rating pools?
6. Should groups with 51-100 employees be allowed to join the exchange in 2014?
7. Controlling antiselection - eg. by implementing a risk adjustment system
8. Standardized benefit packages - should the state require specific benefit packages at each plan level?
9. Intra-state exchanges - should regional exchanges be set up?
10. Should a basic health plan (BHP) be established (which would be outside the exchange)? - BHPs are for residents under 200% of FPL who are not eligible for Medicaid and lack affordable access to comprehensive employer coverage
11. How should the state control which carriers participate in the exchange? (see separate list)
12. What value-added services should the exchange provide? - eg., it could enhance the required online comparison tool
13. How will the exchange fund administration costs - eg., through premium taxes, carrier assessments, and provider assessments

Question 26

Approaches for the state to control which carriers participate in the exchange

Answer 26

1. Open market - allowing all plans that meet minimum ACA requirements
2. Setting additional standards for qualified plans
3. Selective contracting agent - selecting plans based on comparative value
4. Active purchaser - negotiating premiums with insurers

Question 27

Provisions for controlling antiselection on the exchanges

Answer 27

1. Federal requirements that help control antiselection against the exchange
   a) Provisions that encourage broad enrollment, such as the individual mandate, low-income subsidies, and tax credits for small employers
   b) Requiring all plans to cover essential health benefits
   c) Requiring insurers to offer the same premiums in an out of the exchange
2. Federal requirements that help control antiselection among carriers within the exchange
   a) Risk management tools reinsurance, risk corridor, and risk adjustment programs (see separate list)
3. State opportunities to control antiselection
   a) Could require carriers who leave the exchange to wait give years before re-entering
   b) Could require that all carriers participating in the exchange offer plans at all benefit tiers
   c) Should ensure consistency of pricing rules in an out of the exchange

Question 28

Major federal laws governing group health plans

Answer 28

1. ERISA - applies to benefit plans sponsored by private-sector employers. Includes provisions related to reporting and disclosure, fiduciary standards, civil enforcement and preemption, and claim procedures.
2. COBRA - provides enrollees of an employer-sponsored group health plan the opportunity to keep that coverage for a period of time after employment ends, or after certain other qualifying events
3. HIPPA - limits the ability of group health plans to impose preexisting condition exclusions and prevents plan from basing eligibility or premiums on:
   a) Health status
   b) Medical condition
   c) Claims experience
   d) Receipt of health care
   e) Medical history
   f) Genetic information
   g) Evidence of insurability
   h) Disability
4. ACA - amended HIPPA rules to prohibit pre-existing condition exclusions. Requires large employers to provide adequate and affordable coverage or pay a financial penalty.

Question 29

Taxation of major group insurance benefits

Answer 29

1. Health (medical, dental, vision, and prescription drugs)
   a) Employer receives a current tax deduction for its expenses (for post-retirement plans, this deduction is only allowed if certain pre-funding rules are followed.)
   b) The benefit value for the employee and dependents is free from income and employment taxes (include employer’s contribution to provide coverage and insurance proceeds)
   c) No limits on the amount of tax-favored benefits
2. Group term life insurance
   a) Employer receives a current tax deduction for its expenses
   b) The benefit value for the employee (but not dependents) is free from income and employment taxes
   c) Tax-free coverage is limited to a $50,000 death benefit
3. Disability insurance
   a) Employer’s expenses are deductible as they are paid
   b) If the value of the coverage is taxed, the proceeds paid to disabled individuals are not taxable
   c) But if the value of the coverage is not taxed, then the proceeds are taxable
4. LTC insurance - proceeds under a qualified plan are deemed to be health insurance and receive the same tax-favored treatment

Question 30

Major small group rating requirements from the NAIC model law

Answer 30

1. Certain case characteristics are recognized as allowable rating factors (see separate list of allowable case characteristics). This means they are not subject to the following premium range limitation tests.
2. Index rate
   a) The average of the base premium rate (the lowest rate that could be charged) and the corresponding highest premium rate
   b) Calculated only after all rates have been adjusted for allowable case characteristics and the benefit design variations
3. Rating restrictions between classes - the rating differential between classes is limited to 20% between the lowest and highest class index rates
4. Rating restrictions within a class of business - the premium rates charged to difrerent groups within a given class of business cannot vary from that class’ index rate by more than 25%
5. Rate increase limit for a given group - the increase is limited to the sum of the following:
   a) The percentage change in the new business rate from the prior to the new rating period
   b) 15% annually for experience
   c) Adjustment due to change in coverage or case characteristics

Question 31

Allowable case characteristics

Answer 31

1. Age
2. Gender
3. Geographic area
4. Family composition
5. Group size (maximum of 20% from highest to lowest)
6. Industry (maximum of 15% from the highest to lowest)
7. Other characteristics, with commissioner’s prior approval

Question 32

Information needed for reviewing and certifying small group rates

Answer 32

1. The small group rate manuals used during the rating period being reviewed
2. The small group rate manuals used during the prior period
3. The policy and certificate forms used in the business
4. Listing of groups in force during the testing period, and the following for each group:
   a) Rates charged in the current and prior period
   b) Group size
   c) The value of allowable case characteristics
   d) The value of any change in benefit from the previous year
5. Depending on the type of certification required, may also need:
   a) Loss ratio and claim experience reports
   b) Sales brochures and other solicitation materials
   c) Description of the underwriting procedures
   d) Underwriting results for each new group
   e) Marketing materials
   f) Underwriting manual

Question 33

Types of coverage and nondiscrimination tests for cafeteria plans

Answer 33

1. Eligiblity test - this test is designed to measure whether the plan discriminates in favor of highly-compensated individuals. Includes a length-of-services test and a facts and circumstances determination.
   a) Highly-compensated individuals are officers, 5% owners, highly-compensated employees, and the spouses and dependents of these individuals
2. Contributions and benefits test - this test involves mathematical testing as well as general nondiscrimination with respect to benefits
3. Key employee concentration test - nontaxable benefits provided to key employees cannot exceed 25% of the aggregate benefits provided to all employees
   a) Key employees are officers with annual pay of more than $160,000, 5% owners, and 1% owners with annual pay of more than $150,000

Question 34

Advantages and disadvantages of pre-tax qualified benefits

Answer 34

Advantages

1. The benefits are not taxable
2. The benefits are a substitute for taxable wages

Disadvantages

1. Funds for medical care reimbursements cannot be carried over from one plan year to the next
2. The plan must comply with many qualification rules
3. Elections must be made before the play year begins (with some exceptions, such as a family status change)
4. The plan may not discriminate in favor of highly compensated individuals

Question 35

Special state funds to solve health insurance problems

Answer 35

1. Solvency funds - solvent companies are assessed for losses arising from insurer insolvencies
2. High-risk pools - cover individuals who have difficulty qualifying for underwritten coverage. Pools charge premiums, but they are inadequate, so carriers are assessed for the shortfall.
3. Small group pools - many states require insurers to offer 2 plans (basic and standard) on a guaranteed basis to individuals who were rejected for other coverage

Question 36

ACA risk adjustment goal and development issues

Answer 36

Goal: to compensate health insurers for differences in enrollee health mix so that premiums reflect differences in coverage and other plan factors but not differences in health status

Key development issues:

1. New population - the ACA risk adjustment population includes those who previously had coverage and individuals who were previously uninsured. As a newly-constituted population, claims data was not available for calibrating a risk adjustment model, so a proxy data source was used
2. Cost and rating factors - the ACA allows plans to offer coverage at different coverage levels and to rate based on age, tobacco use, family size, and geographic rating area. This creates the following considerations:
   a) How to preserve premium differences that reflect differences in coverage levels (risk transfers should address risk selection, but should not adjust away actuarial value differences among plans)
   b) How to develop risk scores that appropriately reflect a given enrollee’s risk when plans pay a different portion of an enrollee’s costs are different coverage levels
   c) How allowed premium rating should be netted out of risk transfers
3. Balancing risk transfers among plans - a critical part of the risk adjustment methodology was determining how to calculate risk transfers that summed to zero across all plans while preserving permissible premium differences

Question 37

Components of the ACA risk adjustment methodology

Answer 37

1. HHS-HCC risk adjustment model (HHS = Department of Health and Human Services; HCC = hierarchical condition categories) - this model uses an individual’s demographics and diagnoses to determine a risk score, which is a relative measure of how costly that individual is anticipated to be the plan (see separate list for this model’s features)
2. Risk transfer formula (see separate list for formula) - uses risk scores from the risk adjustment model, combined with other factors, to calculate the funds transferred between plans

Question 38

Features of the HHS-HCC risk adjustment model

Answer 38

1. Claims data from a large national proprietary database sourced from large employers and health plans was used to calibrate the model
   a) Data was used only for enrollees who had coverage comparable to the essential health benefits under the ACA
   b) Only diagnosis codes from sources allowable for HHS risk adjustment are included
2. Prospective vs. concurrent model
   a) Most risk adjustment models that are used for payment are prospective (use base year diagnoses and demographic information to predict the next year’s spending). They are favored for their emphasis on the cost impact of ongoing chronic conditions
   b) But a concurrent model (uses current year diagnoses and demographics to predict the current year’s spending) was chosen because no prior year information on health status existed for this population when the model was developed
3. Revised clinical classification - this model is a revision of the CMS-HCC clinical classification model
4. Plan liability vs. total expenditures - separate risk scores were considered based on total medical expenditures for an individual vs. the amount the plan is liable for. The plan liability risk scores were ultimately chosen for use in the model.
5. Induced demand due to cost-sharing reductions - a multiplicative adjustment was developed to account for higher utilization among individuals who are enrolled in cost-sharing reduction plans
6. Weighted least squares regression was used for determining model coefficients
7. For the adult model, disease interaction terms were included to improve model performance
8. Due to clinical and cost differences in the adult (age 21+), child (age 2-20), and infant (age 0-1) populations, separate risk adjustment models were developed for each group. Separate models were also developed for each cost sharing level (catastrophic, bronze, silver, gold, and platinum)
9. For each enrollee, the total predicted plan liability is the sum of the incremental predicted plan liabilities from the relevant model (based on the enrollee’s age and cost sharing level)
   a) For adults and children, this is the sum of the age/sex, HCC, and disease interaction coefficients
   b) For infants, this is the sum of the maturity/disease-severity category and additive sex coefficients

Question 39

Adaptations made to CMS-HCCs to develop HHS-HCCs

Answer 39

1. Prediction year - the CMS-HCC risk adjustment model is prospective, but the HHS-HCC risk adjustment model is concurrent
2. Population - the CMS-HCCs were developed using data from the elderly (age 65+) and disabled Medicare populations. The HHS-HCCs were modified to reflect medical conditions and cost patterns for commercial populations (under age 65).
3. Type of spending
   a) The CMS-HCCs are set up to predict non-drug medical spending, while the HHS-HCCs predict the sum of medical and drug spending
   c) The CMS-HCCs predict Medicare provider payments while the HHS-HCCs predict commercial insurance payments

Question 40

Criteria used to determine which HCCs to use in the HHS risk adjustment model

Answer 40

1. Represent clinically-significant, well-defined, and costly medical conditions that are likely to be diagnosed, coded, and treated if they are present
2. Are not especially subject to discretionary diagnostic coding
3. Do not primarily represent poor quality or avoidable complications of medical care
4. Identify chronic, predictable, or other conditions that are subject to insurer risk selection, risk segmentation, or provider network selection, rather than random acute events that represent insurance risk

Question 41

Risk transfer formula for ACA risk adjustment

Answer 41

1. This formula is used to determine risk adjustment dollar flaws from plan to plan
2. It measure the difference between a plan’s premium with risk selection and its premium without risk selection
3. Its purpose is to offset variations in risk resulting from risk selection while preserving the permissible premium difference represented by the cost factors in the formula
4. T(i) represent the payment (or if negative, the charge) to plan i for each member month of enrollment. The total risk transfer is calculated by multiplying T(i) by the plan’s total member months.
   T(i) = { [PLRS(i) * IDF(i) * GCF(i) / SUM( s(i) * PLRS(i) * IDF(i) * GCF(i) ) - (AV(i) * ARF(i) * IDF(i) * GCF(i)) / SUM( s(i) * AV(i) * ARF(i) * IDF(i) * GCF(i) ) ] * P(s)
   a) s(i) is the market share for plan i
   b) P(s) is the statewide enrollment-weighted market average plan premium
   c) The summations are across all plans in the risk pool
   See separate list for definitions of the cost factors in this formula

Question 42

Components of the ACA risk transfer formula

Answer 42

1. Plan liability risk score (PLRS)
   a) This score comes from the HHS-HCC risk adjustment model
   b) It includes an adjustment to account for the ACA family rating rules. When the plan average PLRS is calculated, all plan enrollees are counted in the numerator, but only billable plan enrollees (parents and up to the three oldest children) are counted in the denominator.
2. Actuarial value (AV) - accounts for relative differences in plan liability due to coverage level (0.57 for catastrophic, 0.6 for bronze, 0.7 for silver, 0.8 for gold, 0.9 for platinum)
3. Induced demand factor (IDF) - reflects differences in spending patterns attributable to differences in the generosity of plan benefits (1.00 for catastrophic and bronze, 1.03 for silver, 1.08 for gold, and 1.1.5 for platinum)
4. Allowable rating factor (ARF) - accounts only for age rating based in an age rating curve. Each state has a standard age curve that all plans are required to use. A federal age rating curve (with a 3:1 maximum adult ratio) operate in state that do not designate their own curve
5. Geographic cost factor (GCF) - is used because there are many costs that vary geographically

Question 43

Premium subsidies under the ACA

Answer 43

1. To be eligible for a premium subsidy, an individual must:
   a) Have income from 100-400% of federal poverty level (FPL)
   b) Purchase a plan in an individual exchange
   c) In general, not be eligible for other coverage
2. Subsidy = max(0, premium for benchmark plan - maximum contribution)
3. Benchmark plan is the 2nd-lowest-cost silver plan in the exchange. But the individual can use the subsidy on any exchange plan.
4. Maximum contribution = FPL amount * FPL level * maximum contribution percentage / 12
   a) The FPL amount as of 2013 for an individual was $11,490
   b) The PFL level is the individual’s income as a percentage of FPL
   c) Maximum contribution percentage is based on the following ranges of FPL levels. Linearly interpolate between these levels.
   FPL level / Maximum contribution %
   100-133% / 2%
   133% / 3%
   150% / 4%
   200% / 6.3%
   250% / 8.05%
   300-400% / 9.5%

Question 44

Cost-sharing subsidies under the ACA

Answer 44

1. These subsidies are available only for individuals with incomes below 250% of FPL who select a silver plan in the exchange
2. Benefits are adjusted to gross up the actuarial value to:
   a) 73% for incomes from 20-250% of FPL
   b) 87% for incomes from 150-200% of FPL
   c) 94% for incomes from 100-150% of FPL
3. The federal government reimburses insurers for the difference between the 70% actuarial value for a silver plan and these grossed up values
4. For 2014, the maximum out-of-pocket limit for individuals is $2,250 for incomes from 100-200% of FPL and $5,200 for incomes from 200-250% FPL

Question 45

Expected enrollment impact of premium and cost-sharing subsidies on the exchanges

Answer 45

1. Low-income people (below 200% of FPL) will overwhelmingly select silver plans to take advantage of the large cost-sharing subsidies available to them
2. To avoid the age subsidies required of them in ACA plans, may high-income young people will elect to stay on their current plan for as long as possible
3. Middle-income young people are the most likely to go without coverage
4. High-income young people will likely purchase at least the minimum required coverage. The tax penalty as a percentage of the lowest bronze premium will be substantial for them
5. Lower-income older people will be the most likely to enroll in subsidized exchange coverage. The net premium for the lowest-cost bronze plan for them will often be less than the tax penalty would be.

Question 46

Stakeholders who need to understand the impacts of the subsidies

Answer 46

1. Issuers - health insurers should perform an analysis to determine the subsidy impacts on various ages and income levels in their markets
2. Employers - the availability of exchange subsidies has led some employers to drop employee coverage and still more to drop dependent coverage. Understanding the subsidies will help them set health care cost budgets and estimate the potential penalties resulting from their employees joining the exchanges.
3. Labor unions - they are concerned about being left out of the health benefits procurement process if more attractive options are available directly on the exchanges
4. States - insurance departments need to understand the impact of their rate review on the federal subsidies their consumers will receive (lower rates will lead to lower subsidies)
5. Federal government - should model expected future subsidies using simulation models that build off of the data that is now available from current exchange enrollment and gross premiums

Question 47

Recommended practices for actuaries preparing health filings

Answer 47

1. State the purpose of the filing - including the regulatory requirements that the filing intends to comply with
2. Understand any applicable laws
3. Decide what assumptions are needed and select appropriate assumptions (see separate list)
4. Review the formulas used to calculate premium rates and determine whether they are appropriate
5. Understand the business plan, and consider its assumptions when setting rate filing assumptions
6. For projecting future results, use past experience that is properly adjusted (see separate list)
7. Be familiar with rating factors and regulatory requirements for those factors
8. Consider available data relevant to new plans or benefits
9. Projections of future capital and surplus should account for any future actions that are likely to have a material effect on capital or surplus
10. Projections done to compare future results with a regulatory benchmark should be based on appropriate available information
11. Assumptions must be reasonable in the aggregate, and for each assumption individually
12. When relying on data or other information supplied by others, refer to ASOP #23
13. Prepare and maintain documentation in compliance with ASOP #41

Question 48

Assumptions that may be needed for a rate filing

Answer 48

1. Premium levels and expectations for future rate changes
2. Projections of covered lives
3. Levels and trends in morbidity, mortality, and lapsation
4. Non-benefit expenses, including administrative expenses, commissions, broker fees, and taxes
5. Investment earnings and time value of money
6. Health care trends - when projecting medical expense trends, consider detail by service category or service setting, separated by cost and utilization. Also consider leveraging and changes in benefit provisions and provider contracting.
7. Expected financial results - consider appropriate methods and assumptions for calculating profit margin
8. Expected impact of known contractual arrangements with health care providers and administrators
9. Expected impact of reinsurance and other financial arrangements
10. Provisions for adverse deviation - consider whether the provisions are sufficient to cover anticipated costs under moderately adverse experience

Question 49

When using past experience to project future results, adjust for material changes in:

Answer 49

1. Selection of risks
2. Demographic and risk characteristics of the insured population
3. Policy provisions
4. Business operations
5. Provider contracts
6. Premium rates, claim payments, expenses, and taxes
7. Seasonality in incurred claims
8. Trends in mortality, morbidity, and lapse
9. Catastrophic claim variability
10. Administrative procedures
11. Federal or state regulations
12. Medical practice
13. Cost containment procedures or quality improvement initiatives
14. Economic conditions

Question 50

Documentation needed to support the actuarial certification of compliance with small group rating methods

Answer 50

1. Materials that have been reviewed to certify compliance with requirements for rating methods and underwriting practices, including:
   a) A description of the carrier’s rating methods and underwriting practices
   b) The rating manual and formulas for calculating rates from the manual
   c) Some test calculations to verify that the rates charged are in accordance with the rating manual
2. A written demonstration that the rates are in compliance with applicable regulatory requirements. Should explain how classes of business, average rates, rating bands, and rate increase comply with rating constraints.
3. A written demonstration supporting the determinations of compliance with actuarial soundness

Question 51

Items to include in an actuarial certification of compliance with small group rating methods

Answer 51

1. Certification that all practices required to be in the certification are in compliance with applicable regulatory requirements
2. A listing of practices that are covered in the certification
3. Identification of the time period covered
4. Changes in rating methods and other practices that have occurred during the time period covered that affect compliance
5. A description of any subsequent events that could materially affect current or future certifications
6. Where a qualified certification is given, any actions that are being taken to bring the carrier into compliance
7. Where a limited certification is given, any sections of the regulatory requirements that are not addressed

Question 52

Disclosures required in an actuarial report

Answer 52

This report states the actuarial findings and identifies the methods, procedures, assumptions, and data used

1. The intended users of the reports
2. The scope and intended purpose of the assignment
3. The acknowledgement of qualification as specified in the Qualification Standards
4. Any cautions about risk and uncertainty
5. Any limitations or constraints on the use of applicability of the findings
6. Any conflict of interest
7. Any information on which the actuary relied that has a material impact on the findings and for which the actuary does not assume responsibility
8. The information date (date through which data and other information has been considered)
9. Subsequent events (may have a material effect on the actuarial findings)
10. If appropriate, the documents comprising the actuarial report

Question 53

Disclosure requirements for assumptions and methods used in an actuarial report

Answer 53

1. The communication should identify the party responsible fro each material assumption and method
2. If the assumption or method is prescribed by law, disclose the applicable law, the assumptions or methods affected, and that the report was prepared in accordance with the law
3. If a material assumption or method is selected by another party, the actuary has 3 choices:
   a) If it does not conflict with the actuary’s professional judgment, no disclosure is needed
   b) If it significantly conflicts with the actuary’s professional judgment, then disclose this fact
   c) If the actuary is unable or not qualified to judge its reasonableness,then disclose this fact
   In the case of either b or c, also displace the affected assumption or method, the party who set it, and the reason it was set by this party, rather than by the actuary