Objective 6 - Regulation and Taxation

Question 1

“Triple Aim” of health policy (three goals)

Answer 1

1. Better care for individuals - the Institute of medicine lists six characteristics of quality health care (separate list)
2. Better health for populations - public health initiatives should address the upstream causes of poor health (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.

Skwire, Chapter 4, Page 40

Question 2

Characteristics of quality health care

Answer 2

From the Institute of Medicine

1. Safe - must avoid injuries to patients
2. Effective - must provide services based on scientific knowledge to all who could benefit, and refrain from providing services to those not likely to benefit (avoid underuse and overuse)
3. Patient-centered - Should be respectful of and responsive to individual patient preferences, needs, and values, and should ensure that patient values guide all clinical decisions
4. Timely - should strive to reduce wait times and delays that can be harmful for both those who receive care and those who give care
5. Efficient - should avoid waste, including waste of equipment, supplies, ideas, and energy
6. Equitable - should not vary in quality because of personal characteristics such as gender, ethnicity, geographic location, and socioeconomic status

Skwire, Chapter 4, Page 41

Question 3

Causes of poor health and public initiatives to address them

Answer 3

1. Environmental factors that contribute to poor population health
   a) Lack of sanitized water
   b) Pollution (air and water)
   c) Violence (domestic, street, and gun violence)
   d) Unhealthy living environment
   e) Food-borne illness
   f) Lack of access to fresh, health foods
2. Community disease prevention - initiatives include childhood immunization requirements and free flu shots and preventive screenings
3. Lifestyle (e.g., 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

Skwire, Chapter 4, page 45

Question 4

Potential Problems in an unregulated insurance market

Answer 4

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 time or expertise to determine which firms are dishonest
3. Companies could become insolvent with no warning, leaving policyholders without coverage

Mnemonic - D/C, T/E, I

Skwire, Chapter 15, Page 229

Question 5

Goals of Insurance Regulation

Answer 5

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 fair competition
6. Raise tax money
7. Promote social goals

Skwire, Chapter 15, Page 230

Question 6

The Steps of Regulation

Answer 6

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 - some jurisdictions require prior approval for certain types of insurance. This may include 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

Mnemonic - LIAER (think Liar or Lier)… because companies Lie and need to be regulated!

Skwire, Chapter 15, Page 231

Question 7

Actions commonly taken by state regulators to help prevent insolvency

Answer 7

1. Capital Requirements (such as risk-based capital) - to 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

Skwire, Chapter 15, Page 233

Question 8

Type of consumer protection regulation

Answer 8

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. Premiums must be reasonable in relation to benefits (loss ratio requirements)
3. Fairness - Includes prohibitions on discrimination even though data may support it. For example, the ACA prohibits different premium rates by gender.

Mnemonic - Disclose Reasonable Facts (DRF; Facts = Fairness)

Skwire, Chapter 15, Page 235

Question 9

Responsibilities of the Insurance Commissioner

Answer 9

1. [O]versee the operation of the insurance department
2. [I]nterpret Insurance Laws
3. Make [r]egulations implementing insurance laws
4. [L]icense insurance companies, agents, brokers, and consultants
5. Conduct [e]xaminations of licensed insurers, and assess penalties for violations of laws
6. [R]eview form and rate filings - some states require that the commissioner approve the forms and rates prior to use
7. Regulate [a]dvertising - to protect consumers form unfair, inaccurate, deceptive, and misleading advertisements
8. Regulate [b]usiness practices - such as underwriting and claims practices
9. Enforce [p]rompt pay laws
10. Regulate insurer [s]olvency - this is the most important duty of the commissioner

Mnemonic - E B PR A I SOL (Evil Business PRactices Affect Insurer SOLvency)

Skwire, Chapter 16, Page 238

Question 10

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

Answer 10

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

Skwire, Chapter 16, Page 241

Question 11

Standard group contract provisions required by most state insurance laws

Answer 11

1. [G]race Period - There must be a 31-day grace period for payment of premium
2. [I]ncontestability - The validity of the policy cannot be contested after the policy has been in force for two years
3. [A]pplication and statements - the application has to be made part of the policy, and statements made by the insured are considered representations (not warranties)
4. [E]vidence of insurability - the policy must state when evidence of insurability is required
5. [M]isstatement of age provision - a policy must sate how premiums or benefits will be adjusted due to misstatement of age
6. [C]ertificates - the insurer must issue certificates to the policyholder for delivery to each insured
7. [B]enefits and eligibility - the policy must state the benefits and to whom they are payable, and include specific terms of eligibility for coverage

Mnemonic: I C B GAME - Insurance Can Be a GAME

Skwire, Chapter 16, Page 242

Question 12

Additional Contract Provisions for Group Health Plans

Answer 12

(In addition to the standard group contract provisions)

1. Preexisting Conditions - this provision describes the exclusions and 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 (e.g., during the first 60 days or more than 2 years after claim submission)

Skwire, Chapter 16, Page 243

Question 13

Additional Contract Provisions for Group Life Plans

Answer 13

(In addition to the standard group contract provisions)

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 up to 6 months by paying the premiums

Skwire, Chapter 16, Page 243

Question 14

Provider Protections Related to Preferred Provider Arrangements

Answer 14

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

Skwire, Chapter 16, Page 248

Question 15

Requirements for an HMO to obtain and maintain a certificate of authority

Answer 15

An HMO must have this certificate in order to operate as an HMO

1. Description of the HMO’s organization, governance, and management
2. Contracts with providers - including copies of standard forms and contracts between providers, TPAs, and other third-party vendors
3. Coverage agreements
4. Financial information - including financial statements and a financial feasibility plan
5. Provider information - including a map or description of the geographic service area, and a list (with addresses) of all providers
6. Grievance procedure
7. Quality assurance program
8. Insolvency protection measures - HMOs must satisfy minimum net work requirements, and a deposit of cash or securities is usually required

Skwire, Chapter 16, Page 252

Question 16

Consumer Protections related to preferred provider arrangements

Answer 16

1. Insurers must assure reasonable access to covered services and an adequate number of providers
2. The ACA requires emergency care to be covered at the same benefit level for all providers
3. Some states have tried to regulate quality assurance (measuring quality is difficult)

Skwire, Chapter 16, Page 249

Question 17

Advantages of federal qualification for HMOs

Answer 17

1. The equal contribution requirement - employers that offer a federally-qualified HMO cannot financially discriminate against a person enrolling in that HMO
2. HMO is allowed to contract as a Medicare or Medicaid carrier
3. 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

Skwire, Chapter 16, Page 259

Question 18

Disadvantages of federal qualification for HMOs

Answer 18

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

Skwire, Chapter 16, Page 260

Question 19

Taxation of Major Group Insurance Benefits

Answer 19

1. Health (Medical, dental, vision, and Rx)
   a) ER receives a current tax deduction for its expenses. For retiree Medical plans, this deduction is only allowed if benefits are funded over employees’ working lives.
   b) Benefit value for the EE and dependents is free from income and employment taxes (includes employer’s contribution to provide coverage and the insurance proceeds)
   c) No limits on the amount of tax-favored benefits
2. Group Term Life Insurance
   a) ER receives a current tax deduction for its expenses
   b) Benefit value for the EE (but not dependents) is free from income and employment taxes
   c) Tax-free coverage limited to $50,000 death benefit
3. Disability Insurance
   a) ER expenses are deductible as they are paid
   b) if the value of the coverage is taxed, the proceeds paid to the disabled individual are not taxed
   c) if the value of the coverage is not taxed, 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

Skwire, Chapter 16, Page 269

Question 20

ACA Individual and group market reforms

Answer 20

1. Improving coverage - requirements effective in 2010:
   a) Expanding dependent coverage - all plans must cover dependent children up to age 26
   b) Limits on rescissions of insurance coverage - these are prohibited except in cases of fraud
   c) Restrictions on lifetime and annual coverage limits - plans may not impose lifetime limits. And plans may impose annual limits only for non- essential health benefits.
   d) Preventive care coverage - services rated A or B by the US Preventive Services Task Force must be covered at 100%
2. Medical Loss Ratio (MLR) - 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
3. Premium Rate Reviews - established process for reviewing health plan premium increases and requiring plans to justify “unreasonable” increases
4. Early retiree reinsurance program - set aside $5 billion to partially reimburse employers for high-cost retirees over age 55 who were not yet eligible for Medicare
5. National high-risk pool - provided subsidized coverage until 2014 for previously uninsured individuals with pre-existing conditions

Skwire Chapter 18, Page 292

Question 21

ACA rating requirements effective in 2014

Answer 21

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

Skwire, Chapter 18, Page 293

Question 22

Categories of Essential Health Benefits (EHBs) Under the ACA

Answer 22

1. Ambulatory patient services
2. Emergency services
3. Hospitalization
4. Maternity and newborn care
5. Mental health and substance use disorder services
6. Prescription drugs
7. Rehabilitative and habilitative services and devices
8. Laboratory services
9. Preventive and wellness services and chronic disease management
10. Pediatric services, including dental and vision care

Skwire, Chapter 18, Page 294

Question 23

Provisions of the ACA health insurance exchanges

Answer 23

1. Each state will have an American Health Benefit Exchange for individuals and a Small Business Options Program (SHOP) Exchange for businesses with up to 100 employees
2. Plans in the exchanges must cover EHBs, have an out-of-pocket limit at or below the HSA limit, and fall into one of the ACA metal levels (or the catastrophic plan) (separate list)
3. States have various options for establishing exchanges (separate list)
4. Single Risk Pool - An insurer must combine all of its health plans (other than grandfathered plans) in a given market when setting premiums. All of its individual plans must be pooled together, and all of its small group plans must be pooled. Some states require the use of a combined risk pool for both markets.
5. Participating insurers must meet qualifications requirements with respect to networks, marketing, reporting, and consumer assistance
6. Quality is to be rewarded through market-based incentives
7. Exchanges may also offer Consumer Operated and Oriented Plans (CO-OPs) and multi-state plans

Skwire, Chapter 18, Page 294

Question 24

ACA metal levels and catastrophic plan

Answer 24

1. These are defined based on actuarial values (the % of total allowed costs covered by the plan)
2. The target actuarial values are:
   a) 90% for platinum plans
   b) 80% for gold plans
   c) 70% for silver plans
   d) 60% for bronze plans
3. Insurers may also offer a catastrophic plan through the exchanges to enrollees under age 30
4. Plans must be within two percentage points of the target actuarial values

Skwire, Chapter 18, Page 295

Question 25

ACA provisions related to Medicare

Answer 25

1. Linking payments to quality outcomes - e.g., providing incentives to hospitals that meet certain performance standards
2. Establishing national strategy to improve health care quality
3. Encouraging development of new patient care models - e.g., the Medicare Shared Savings Plan
4. Medicare plan improvements, such as:
   a) Medicare Advantages plans can receive bonuses or re-allocations of rebates based on certain quality measures. These plans are also now subject to MLR requirements.
   b) For Medicare Part D, beneficiary coinsurance in the coverage gap will be phased down from 100% to 25% by 2020
5. Ensuring Medicare sustainability - e.g., temporary adjustment to the calculation of Part B premiums
6. Health care quality improvements - e.g., establishing community health teams to support patient-centered medical homes
7. Prevention and wellness provisions - cost sharing for preventive services was eliminated
8. Created new demonstration programs
9. Improving coordination of Medicare/Medicaid dual eligibles

Skwire, Chapter 18, Page 299

Question 26

‘Other’ ACA Health Insurance Market Reforms

Answer 26

1. Essential Health Benefits (EHBs) - all qualified individual and small group health benefits plans must offer an EHB package (separate list)
2. Grandfathering of existing plans - plans in existence when the ACA was enacted are exempt from many ACA requirements. But most of the benefit and coverage requirements do still apply.
3. Premium credits and cost-sharing subsidies for those with low incomes (see separate lists in “Implications of Individual ACA Subsidies”)
4. Small business tax credits (this is covered in a list from HBoEE Chapter 32 )
5. 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 greater of:
   a) A $ amount per person (up to 3 per family): $695 in 2016 (Indexed)
   b) A % of income: 2.5% in 2016 and later
6. Employer Mandate - beginning in 2015, 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.
7. 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.
8. Revenue provisions (see also a related list of new ACA taxes and fees in GHC-806-15)
   a) New health insurer tax collected $8 billion in 2014, grading up to $14.3 billion in 2018, and indexed af ter
   b) Excise tax on high-cost health plans (beginning in 2018)
   c) Limitations to tax-favored allowances for FSAs
   d) New taxes on certain medical devices

Skwire, Chapter 18, Pages 294, 297, and 302

Question 27

Administrative Functions that Health Benefit Exchanges Must Provide

Answer 27

1. Certifying and assigning [q]uality ratings to plans
2. Presenting benefits information in a [s]tandardized format
3. Providing consumers with [e]ligibility determinations
4. Providing Certifications for people who are [e]xempt from the individual mandate
5. Ensuring that all participating [h]ealth plans satisfying the exchange’s requirements

Mnemonic - SEE Q H (SEE Quality Healthplalns

Skwire, Chapter 19, Pate 313

Question 28

Key Elements of Exchanges that may vary by state

Answer 28

1. State or [F]ederal exchange - One-third of states established their own exchange. The rest use the federal government’s exchange
2. [G]overnance structures - the exchange could be established within an existing state agency, independently, or through a quasi-government entity
3. Maximizing exchange [p]articipation - approached include making the exchange attractive and available to more customers, such as by providing value-added services
4. Some states [m]erge the individual and small group rating pools
5. [S]tandardized benefit packages - some states require that participating insurers offer a set of standardized benefit plans
6. Establishing a [b]asic health plan (BHP) - the ACA allows states to create a BHP for residents under 200% of federal poverty level who are not eligible for Medicaid and lack affordable access to comprehensive employer coverage
7. [C]ontrolling which insurers participate in the exchange (separate list)
8. [A]dministration expense funding - could be through some combination of premium taxes, insurer assessments, and provider assessments

Mnemonic - Benefit Plans SCAM the Federal Government (BP SCAM FG)

Skwire, Chapter 19, Page 313

Question 29

Approaches for the State to control which insurers participate in the exchange

Answer 29

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

Note - Read the text again if you forget this card frequently

Skwire, Chapter 19, Page 316

Question 30

Provisions for controlling antiselection on the exchanges

Answer 30

1. Federal Requirements that help control anti-selection 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 and out of the exchange
2. Federal requirements that help control antiselection among insurers within the exchange
   a) Risk management tools - Reinsurance, Risk Corridors, and Risk Adjustment programs (see separate list in GHC-806-15)
3. State opportunities to control antiselection
   a) Could require insurers who leave the exchange to wait five years before re-entering
   b) Could require that all insurers participating in the exchange offer plans at all benefit tiers
   c) Should ensure consistency of pricing rules in and out of the exchange

Skwire, Chapter 19, Page 317

Question 31

Requirements to obtain and maintain ACA grandfathered status

Answer 31

1. The plan must have existed on March 23, 2010
2. The plan must have notified policyholders that it is considered grandfathered
3. The insurer must have taken appropriate legal action to assert grandfathered status for the plan
4. The insurer cannot make material changes to the plan

Skwire, Chapter 28, page 486

Question 32

Major Small Group Rating requirements from the NAIC model law

Answer 32

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 lowest and highest premium rate that could be charged within a given class of business
   b) Calculated only after all rates have been adjusted for all allowable case characteristics and benefit design variations
3. Rating restrictions between classes - the differential between the different classes’ index rates is limited to 20%
4. Rating restrictions within a class - all groups must be charged a rate within 25% of the class’ index rate
5. Rate increase limit for a given group - the increase is limited to the sum of the following:
   a) % of change in the new business rate
   b) 15% annually for group’s experience
   c) Adjustment due to change in coverage or case characteristics

Group Chapter 28, Page 487

Question 33

Allowable case characteristics from the NAIC model law

Answer 33

These rating factors apply to grandfathered plans. ACA-compliant plans can only use rating factors allowed under the ACA (separate list in Skwire Ch. 18)

1. Age
2. Gender
3. Geographic Area
4. Family Composition
5. Group size (max allowable spread is 20%)
6. Some states allow industry (max allowable spread of 15%) and tobacco use

Group Chapter 28, Page 487

Question 34

Core components of a small group rate filing for non-Grandfathered plans

Answer 34

1. Part 1 - Unified Rate Review Template
   a) An excel spreadsheet showing summary values pertaining to the rate increase request
   b) Worksheet 1 provides aggregate data for all benefit plans, including historical experience, credibility information, trend, and other pricing inputs
   c) Worksheet 2 provides this same information by benefit plan, as well as each plan’s metal value, membership projections, and requested rate change
2. Part II - written explanation of the rate increase - for products with an average increase of 10% or more, the carrier must provide a plain language narrative explaining the major reasons for the increase
3. Part III - Actuarial Memorandum - provides descriptions of the rate review template components and support for assumption made (see separate list of required elements for the actuarial memorandum)
4. Unique plan design supporting documentation and justification - if the plan design contains unique features that cannot be handled by the AV calculator, then this component is needed to explain any special actuarial adjustments that were made.

Skwire, Chapter 28, page 491

Question 35

Required elements for the actuarial memorandum for a small group rate filing

Answer 35

1. Health status and non-allowed case characteristics changes - description of the financial effect of health status changes and explanations for changes in morbidity
2. Plan design and coverages - justification for any adjustments made to account for differences in benefit designs
3. Trend - justification for annual trend, typically broken down between unit cost trend and utilization trend
4. Documentation of assumptions for administrative taxes and fees
5. Profit and Risk Margins - carriers are typically allowed to include the profit and risk margin they deem warranted, though regulators may object if the value is high

Skwire, Chapter 28, Page 497

Question 36

Types of coverages and nondiscrimination tests for cafeteria plans

Answer 36

1. Eligibility Test - this 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, an d 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

Rosenbloom, Chapter 25, Page 709

Question 37

Goal of ACA Risk-Adjustment

Answer 37

1. The goal is to compensate health insurers for differences in enrollee health so that premium reflect differences in coverage and other plan factors, but not differences in health status
2. This allows plan with more high-risk enrollees to charge the same premium as similar plans with more low-risk enrollees
3. Therefore, the competitive focus shifts from risk selection to quality, efficiency, and value

GHC-808-15, Page 3

Question 38

Components of the ACA risk adjustment methodology

Answer 38

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 diagnosis to determine a risk scores, which is a relative measure of how costly that individual is anticipated to be to the plan. (Separate list for model’s features)
2. Risk transfer formula (see separate list for this formula in GHC-810-15) - uses risk scores from the risk adjustment model, combined with other factors, to calculate the funds transferred between plans

GHC-808-15, Page 6

Question 39

Features of the HHS-HCC risk adjustment model

Answer 39

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 (the base year diagnoses and demographic information to predict the near 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 expeditures - 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 this model
5. Induced demand due to cost-sharing reductions - 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 model 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

(Includes information from GHC-809-15)

GHC-808-15, Page 6

Question 40

Adaptations made to CMS-HCCs to develop HHS-HCCs

Answer 40

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
   b) The CMS-HCCs predict Medicare provider payments while the HHS-HCCs predict commercial insurance payments

GHC-809-15, Page 3

Question 41

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

Answer 41

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 or 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

GHC 809-15, Page 4

Question 42

Risk Transfer Formula for ACA risk adjustment

Answer 42

1. This formula is used to determine risk adjustment dollar flows from plan to plan
2. It measures 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 differences represented by the cost factors in the formula
4. T(i) represents 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) = [ PSRS(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) ) ]

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)

GHC-810-15, page 4

Question 43

Components of the ACA risk transfer formula

Answer 43

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, and 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 1.15 for platinum)
4. Allowable rating factor (ARF) - accounts only for age rating based on 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) operates in states that do not designate their own curve.
5. Geographic cost factor (GCF) - is used because there are may costs that vary geographically

GHC-810-15, Page 4

Question 44

Formula for calculating the medical loss ratio (MLR) under the ACA

Answer 44

Formula for calculating the medical loss ratio (MLR) under the ACA

MLR = (Claims + quality improvement expenses) / (premium - taxes, licensing, and reg fees)

1. To be included as a quality improvement expense, the activities must lead to measurable improvements in patient outcomes or safety, prevent hospital readmissions, promote wellness, or enhance health information technology in a way that improves quality. Provider credentialing is included.
2. Taxes, licensing, and regulatory fees include federal, state, and local taxes and fees. Taxes on investment income and capital gains are not included.

GHC-815-16, Page 3

Question 45

Premium Subsidies under the ACA

Answer 45

1. To be eligible for a premium subsidy, an individual must:
   a) Have incomes from 100%-400% of the 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 / 12
   a) The FPL amount as of 2013 for an individual was $11,490
   b) The FPL 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: 100-133%; Max Contribution: 2.00%
FPL Level: 133%; Max Contribution: 3.00%
FPL Level: 150%; Max Contribution: 4.00%
FPL Level: 200%; Max Contribution: 6.30%
FPL Level: 250%; Max Contribution: 8.05%
FPL Level: 300-400%; Max Contribution: 9.50%

HW: Implications of Ind Subsidies - Pages 7, 10

Question 46

Cost-sharing subsidies under the ACA

Answer 46

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 200-250% 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% for FPL and $5,200 for incomes from 200-250% of FPL

HW: Implications of Ind Subsidies - Pages 8

Question 47

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

Answer 47

1. Low-income people (below 200% 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 the ACA plans, many high-income young people will elect to stay on their current plan for as long as possible
3. Middle-income young people will 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.

HW: Implications of Ind Subsidies - Pages 12

Question 48

Stakeholders who need to understand the impacts of the subsidies

Answer 48

1. Issuers - Health insurers should perform an analysis to determine the subsidy impacts on various ages and income levels in the 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 department need to understand the impact of their rate reviews 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

HW: Implications of Ind Subsidies - Pages 16

Question 49

(ASOP #8)

Recommended practices for actuaries preparing health filings

Answer 49

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 (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 filings assumptions
6. For projecting future results, use past experience that is properly adjusted (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 for other information, supplied by others, refer to ASOP #23
13. Prepare and maintain documentation in compliance with ASOP #41

ASOP #8, Page 4

Question 50

(ASOP #8)

Assumptions that may be needed for a rate filing

Answer 50

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 cost 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

ASOP #8, Page 4

Question 51

(ASOP #8)

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

Answer 51

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

ASOP #8, Page 6

Question 52

(ASOP #26) Documentation needed to support the actuarial certification of compliance with small group rating methods

Answer 52

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 documentation that the rates are in compliance with applicable regulatory requirements. Should explain how classes of business, average rates, rating bands, and rate increases comply with rating constraints.
3. A written demonstration supporting the determination of compliance with actuarial soundness

ASOP #26, Page 3

Question 53

(ASOP #26)

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

Answer 53

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

ASOP #26, Page 5

Question 54

(ASOP #41)

Disclosures required in an actuarial report

Answer 54

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

1. The intended users of the report
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 or 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

ASOP #41, Page 7

Question 55

(ASOP #41)

Disclosures required for assumptions and methods used in an actuarial report

Answer 55

1. The communication should identify the party responsible for 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 three 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 ether b or c, also disclose the affected assumption of method, the party who set it, and the reason it was set by this party, rather than by the actuary

ASOP #41, Page 5 and 8

Question 56

Options for states when establishing exchanges

Answer 56

1. State-based marketplace - the state performs all marketplace functions. Consumers apply for and enroll in coverage through websites maintained by the states

For the following options, consumers enroll in coverage through healthcare.gov

2. Federally-supported state-based marketplace - still considered state-based marketplaces, but the states rely on the federally-facilitated marketplace IT platform
3. State-partnership marketplace - the state administers in-person consumer assistance, and HHS performs the remaining functions
4. Federally-facilitated marketplace - HHS performs all marketplace functions

Skwire, Chapter 18, Page 295