Objectives 1&2: Plan Provisions and Manual Rates Flashcards
Key dimensions of medical benefit plans (3)
(any medical plan can be defined by its position on these dimensions or continuums)
1) Definition of covered services and conditions under which those services will be covered
2) Degree to which the insured participates in the cost of the service
3) The breadth of the network and the degree to which the provider participates in the risk related to the cost of the service
Services covered by medical policies (11)
1) Facility services - includes acute care hospitals, emergency rooms, outpatient facilities, psychiatric facilities, alcohol and drug treatment programs, skilled nursing facilities, and home health care
2) Professional services - includes surgeries, office visits, home visits, hospital visits, emergency room visits, and preventive care
3) Diagnostic services
4) X-ray and lab services
5) Prescription drugs
6) Durable medical equipment
7) Ambulance
8) Private duty nursing
9) Wellness benefits
10) Nurse help lines
11) Disease management benefits
Purposes of having the insured share in the cost of the medical plan (3)
1) Control utilization - studies have shown drastic reductions in utilization when a plan is subject to deductibles, copays, or coinsurance
2) Control costs - requiring cost sharing lowers the premium and therefore leads to more affordable coverage
3) Control risk to insurer - requiring cost sharing results in a benefit program that more truly represents an insurable risk
Types of provider reimbursement (9)
1) Discounts from billed charges
2) Fee schedules and maximums
3) Per diem reimbursements - a negotiated amount per day of hospital stay. Varies by level of care
4) Hospital diagnosis related groups (DRGs) - a set payment based on the patient’s diagnosis, regardless of the length of stay or level of services
5) Ambulatory payment classifications - similar to DRGs, used for outpatient charges
6) Case rate or global payments - a single reimbursement is negotiated to cover all services associated with a given condition. Commonly used for maternity and transplant cases.
7) Bonus pools - pays the provider a bonus if utilization is below target or quality-of-care criteria are met. Funded through withholds.
8) Capitation - the provider performs a defined range of services in return for a monthly payment per enrollee. Variations include global capitation and specialty capitation.
9) Integrated delivery system - the insurer employs the providers of care (common in staff model HMOs)
Provisions included in medical plans (5)
1) Overall exclusions
2) Mandated benefits (due to regulations)
3) Coordination of benefits - to determine the payment when a service is covered under multiple benefit plans
4) Subrogation - assigns the carrier the right to recovery from any injuring party (commonly used for workers’ comp claims)
5) COBRA continuation - employers with at least 20 employees must offer continued coverage for 18 to 36 months beyond a person’s normal termination date
Common exclusions for medical plans (9)
1) Services not deemed to be medically necessary
2) Services deemed to be experimental
3) Services related to cosmetic surgery
4) Other specified services, such as hearing and vision services
5) Transplants
6) Services for which payment is not otherwise required
7) Services required due to an act of war
8) Services provided as a result of a work-related injury
9) Services provided by a provider related to the patient
Criteria for provincial Medicare plans to qualify for federal contributions (from the Canada Health Act) (5)
1) Comprehensiveness - all medically-required hospital and physician services must be covered under the plan
2) Universality - all legal residents of a province must be entitled to the plan’s services on uniform terms and conditions
3) Accessibility - reasonable access by residents to hospital and physician services must not be impeded by charges made to those residents
4) Portability - the plan may not impose a waiting period in excess of 3 months for new residents, and coverage must be maintained when a resident moves or travels within Canada or is temporarily out of the country
5) Public administration - the plan must be administered on a non-profit basis by a public authority
(Extra-billing and user charges are not prohibited, but they will result in reductions in the federal grants to the province)
Benefits covered by most Canadian provincial Medicare plans (9)
1) Hospital services - room and board in a public ward, as well as physician’s services, diagnostics, anesthesia, nursing care, drugs, and supplies
2) Physician services - includes services of a general practitioner, specialist, psychiatrist, and others
3) Services of other professionals, such as optometrists, chiropractors, osteopaths, and podiatrists
4) Services of a physiotherapist if in a hospital facility
5) Prescription drugs for social assistance recipients and residents over age 65 in most provinces
6) Prostheses and therapeutic equipment
7) Other diagnostic services, such as laboratory tests and x-rays performed outside a hospital
8) Dental care - medically-required oral and dental surgery performed in a hospital
9) Out-of-province coverage - includes expenses incurred in other provinces and outside Canada
Concerns about the Canadian Medicare system, from recent reports (8)
1) Waiting for months to see a specialist is common
2) Shortages of equipment, specialists, and technicians cause waiting for diagnostic procedures
3) Waiting for elective and non-emergency surgery is common, due to a lack of operating room time and a shortage of hospital beds
4) Emergency rooms are overcrowded, due in part to the unavailability of after-hours clinics
5) People who need LTC tend to wait in hospitals because of a shortage of beds in LTC facilities
6) Technology-intensive services are not available everywhere
7) The demand for services exceeds the supply, resulting in rationing
8) Some essential services (such as prescription drugs for chronic illnesses) are not covered by Medicare
Categories of expenses commonly covered by private (supplemental) medical plans in Canada (6)
1) Hospital charges - plans usually pay charges for room and board, up to the amount needed to upgrade to a semi-private or private room
2) Prescription drugs - these represent approximately 70-75% of the cost of private medical plans. Various plan designs exist, but they generally cover all drugs prescribed by a physician
3) Health professional practitioners - eligible expenses are usually subject to inside limits (such as one treatment per day and a maximum number of treatments per year)
4) Miscellaneous expenses - these are usually eligible only if prescribed by a physician and include almost any insurable expense not otherwise covered, such as ambulance, x-rays, and prostheses
5) Vision care - eye examinations by an optometrist are usually included in the medical plan, while glasses or contact lenses may be included in either the medical plan or on a stand-alone basis
6) Out-of-Canada coverage - the most common coverage is for emergency care for short trips outside Canada
Sources of internal data for estimating medical claim costs (4)
1) Medical claims systems data - includes billed claims, eligible claims, allowed amounts, and paid amounts
2) Pharmacy benefit manager (PBM) data - organizations that use third-party PBMs to administer prescription drug claims will needs to collect this data from them
3) Premium billing and eligibility data - includes exposure information that is needed to convert claims data into a per member or employee basis
4) Provider contract system data - includes files of contractual reimbursement rates
Steps in developing medical claim costs for use in a rate manual (3)
should be collected for an incurral period of at least 12 months (to avoid seasonality issues). The best source of data is a company’s own experience
2) Normalize the data for important rating variables
3) Project experience period costs to the rating period - the trend rate should reflect changes in utilization of services, changes in the average cost per service, and other factors, such as regulatory impacts and cost shifting among payers
Important rating variables when normalizing medical data for use in the rate manual (7)
(Many of these variables can now only be used in rating large groups, due to the ACA)
1) Age and gender - it may be appropriate to have separate age and gender factors for different major service categories or different plan types
2) Geographic area - the data should be adjusted to reflect one specific geographic area
3) Benefit plan - adjust the data to reflect a common benefit plan (commonly the richest plan)
4) Group characteristics - the manual rate should represent the average group with respect to group characteristics, such as industry and group size
5) Utilization management programs - adjust for any changes in these programs
6) Provider reimbursement arrangements - adjust the experience to reflect a common reimbursement level
7) Other risk adjusters (based primarily on claim, diagnosis, encounter, and pharmacy data) - these may eventually become the primary method of risk adjustment
Methods of adjusting manual rates for specific benefit plans (2)
1) Claim probability distributions (CPDs) - these are typically used to estimate the impact on claim costs of deductibles, coinsurance, and out-of-pocket maximums
2) Actuarial cost models - these models build estimated total claim costs by developing a net claim cost (after member cost sharing) for each detailed type of service and summing to get the total
Development of CPD (8)
1) Range of claims (e.g. $0.01 - $50) - brackets of claim costs (given)
2) Frequency - percentage of members who’s annual claims are in the given range (given)
3) Average annual claims - average annual claims of those members (given)
4) Annual cost - calculated as product of (2) and (3)
5) Accumulated frequency - calculated as backsum of (2)
6) Accumulated annual cost - calculated as backsum of (3)
7) Value of Claim Cost in excess of the high end of range - using subsequent line, (6) - Ded (low end on next line) * (5)
8) Value of deductible equal to high end of range - total annual cost - (7); always will sum to same number
Organizations that sell dental insurance (6)
1) Insurance companies
2) Dental service corporations, such as Delta Dental
3) Blue Cross and Blue Shield plans
4) Dental HMOs
5) Dental referral plans (discount dental plans)
6) Third party administrators
Typical plan design for dental insurance (5)
exams, cleanings, fluoride, sealants, x-rays
- Class II - Basic - fillings, extractions, endodontics (root canals), periodontics (treatment of gum disease) and oral surgery
- Class III - Major - inlays, onlays, crowns, bridges, and dentures
- Class IV - Orthodontics - sometimes added to dental plans with a lifetime maximum
2) Reimbursement varies by class, such as 100% for Class I, 80% for Class II, and 50% for Class III. Less cost sharing is required on preventive services to encourage their use
3) Calendar year deductible - such as $50 or $100, often waived for Class I services
4) Annual plan benefit maximum - ranges from $1,000 to $2,500 per person
5) No annual out-of-pocket maximum. An exception is that ACA-compliant pediatric dental coverage must have an out-of-pocket maximum
Dental plan cost containment provisions (6)
These are used to limit the antiselection risk resulting from the elective nature of benefits
1) Frequency limitations - such as two cleaning per year and one set of x-rays per year
2) Pre-existing conditions limitations - prevent the plan from paying for charges incurred prior to the insurance effective date, such as replacement of a missing tooth
3) Least expensive alternative treatment - the insurer reimburses based on the least expensive clinically acceptable treatment plan
4) Waiting periods - must be satisfied before coverage begins. Are generally applied to Class III and Class IV services, and typically range from 3-12 months
5) Exclusions - such as cosmetic services, experimental treatments, and services that are covered by a medical plan
6) Benefits after insurance ends - coverage for work started before termination only continues for 31 days
Underwriting and rating parameters for dental (11)
1) Group size - minimum group size of 5 is usually enforced to avoid antiselection
2) Eligible individuals and groups - plans usually cover active employees and dependents. Some insurers don’t cover groups from certain industries
3) Participation - many plans allow for participation as low as 25% of eligible employees
4) Employer contributions - most non-voluntary plans require a minimum employer contribution of 50% of the single employee premium
5) Other coverages - if dental is with other insurance options it helps to prevent antiselection
6) New business - plans may charge higher rates to groups who are offering dental coverage for the first time, due to pent up demand for dental services by employees in those groups
7) Geographic location - area factors vary by state, service area, or zip code
8) Demographics - claim costs are higher for females and older ages. Common family structures are 2-tier, 3-tier, and 4-tier
9) Waiting and deferral periods - may have a waiting period before a new employee can join the plan
10) Incentive coinsurance - may be used on plans with no prior coverage. Start with low coinsurance for classes II and III and raise the level each year as the individual utilizes preventive services.
11) Transferred business - if the plan is a replacement, then it may pay for claims incurred in the prior year
Dental reimbursement models and delivery systems (5)
1) Indemnity - traditional FFS reimbursement. Plan members may use any dentist, but the dentist will bill the patient for the balance remaining after the plan makes its maximum payment. Types include scheduled indemnity plans and UCR plans
2) PPO - a contracted network of dentists agree to discounted FFS reimbursement agreements. Discounts are only available in network, and in-network providers may not balance bill the patient. Types include managed indemnity plans (passive PPOs) and EPOs
3) Dental HMO - uses prepaid or capitated arrangements. Members must use the network. Types include Independent Provider Association (IPA) plans and staff model dental HMO plans.
4) Point of service (POS) - a hybrid of the indemnity, PPO, and dental HMO concepts
5) Discount dental plans - members receive discounts from preferred providers (this is not insurance)
Comparison of dental reimbursement models (8)
1) Premium - HMOs < PPOs < Indemnity
2) Patient access - any dentist can be used for indemnity and PPO plans, but members must use the network in an HMO
3) Benefit richness - HMOs typically cover the same benefits as PPOs and indemnity plans but with less out-of-pocket expense
4) Cost management - indemnity plans use some cost controls. PPOs use those controls and a credentialing process to find cost-effective providers. HMOs add a gatekeeping approach.
5) Utilization - indemnity plans and PPOs may overutilize due to FFS. HMOs may underutilize due to capitation
6) Quality assurance - unlike indemnity plans, PPOs and HMOs have credentialing processes to help assure quality care
7) Fraud potential - detecting fraud will be based on the insurer’s efforts, rather than the particular plan type
8) Provider contracting - PPOs and HMOs have contracts with dentists, who agree to accept discounted charges
Claim administration procedures used by dental plans (5)
1) Predetermination of benefits - the plan wants members to submit expensive treatment plans for review before service
2) Least expensive alternative treatment
3) Coordination of benefits - done to avoid paying benefits in excess of charges
4) Dental review - difficult claims should be reviewed by a dental consultant
5) Maximum allowable charge (aka UCR) - expenses are limited to the less of the dentist’s usual fee, the fee level set by the plan administrator based on charges submitted in the same geographical area, and the reasonable fee charged for a service when unusual circumstances or complications exist
Data sources for developing dental claim costs (6)
1) Own company data (best source)
2) Outside databases - Prevailing Health Care Charges System, MDR Payment System, National Dental Advisory Service, ADA “Survey of Dental Fees”
3) Consulting firms (have manuals containing utilization data)
4) Rate filings of other carriers
5) Third party administrators
6) Reinsurers
Plan characteristics that impact dental claim costs (4)
1) Covered benefits - plans often have a missing tooth provision and limit the replacement of dentures to once every 5-7 years
2) Cost sharing provisions - these provisions are important because receiving proper dental care is very elective from the insured’s point of view. Provisions include deductibles, coinsurance and copays, and maximum limits
3) Waiting period - used to discourage individuals from enrolling for one year to treat significant dental problems and then dropping coverage
4) Period of coverage - will need to project past experience into future. Dental trend should not be assumed to be the same as medical trend.
Network and care management practices that impact dental claim costs (2)
1) Provider reimbursement levels
a) FFS reimbursement may be based on UCR levels
b) PPO networks contract for reduced fees from a limited number of dentists. The dentist may not bill above those levels
c) Capitation is common with dental HMO plans
2) Care management practices - these will depend on the reimbursement method used. Practices include pre-authorization and self-management (for capitated providers)
Insured characteristics that impact dental claim costs (7)
1) Age and gender - adults have higher costs than children, females have higher costs than males
2) Geographic area - can be a significant factor
3) Group size - smaller groups have higher costs (due to adverse selection)
4) Prior coverage and pre-announcement - groups without prior coverage will have high costs in the first year due to utilization by those who had put off having dental work done. If the plan is announced many months prior to becoming effective, this problem becomes even worse.
5) Employee turnover - high turnover increases costs since some new employees didn’t have prior coverage
6) Occupation or income - entertainers, professionals, and groups who are more aware of their benefits have higher costs
7) Contribution and participation - groups with less than 100% participation will have higher costs due to anti-selection. The level of participation is inversely related to the required contribution level.
Factors that influence prescription drug costs (10)
1) Prescription drug pipeline - manufacturers want to recover their investments in research and development of new drugs
2) Brand patent protection - patents protect a drug’s original manufacturer from competition for a period of new drugs
3) Specialty drugs - have relatively higher cost than other brand name drugs
4) Biologics - these are very expensive ($2,000 - $500,000 per patient per month) and are not easily replicated, so generics will not be produced for most of them
5) Direct to consumer advertising - marketing of high-cost drugs has been effective, resulting in many patients requesting the new drugs
6) Member cost sharing offsets - many manufacturers offer to cover member out-of-pocket costs for expensive drugs. This removes the member’s incentive to use preferred products and generics.
7) Faster approval process by the FDA - this has increased the number of high-cost drugs coming to the market
8) Aging population - leads to more demand for drug therapies
9) Increase in awareness of and testing for disease - often results in drug therapies to avoid acute illnesses
10) Personalized medicine - genetic testing sometimes leads to unnecessary medication use
Entities in the pharmacy benefits system in the US (7)
1) Pharmaceutical manufacturers - they research, obtain approval for, produce, and distribute prescription drugs. They sell drugs to wholesalers and also directly to pharmacies. They also negotiate with PBMs, offering rebates in exchange for favorable formulary placement.
2) Pharmaceutical wholesalers - they purchase prescription drugs from manufacturers and distribute drugs to pharmacies
3) Pharmacies - they dispense prescription drugs directly to beneficiaries, and purchase drugs either from wholesalers or directly from manufacturers,
4) Pharmacy benefit managers (PBMs)
5) Third-party payers (insurance companies, employers, or government programs) - they fund the prescription drug benefit and in some instances assume the claims risk
6) Beneficiaries - they are the consumers of prescription drugs
7) Prescribing health care providers - they diagnose beneficiaries and prescribe drugs for them
Functions performed by PBMs (9)
1) Administer prescription drug benefit programs
2) Negotiate rebates with manufacturers
3) Negotiate discounts with pharmacies
4) Manage relationships with third-party payers
5) Performing utilization management
6) Run drug adherence programs
7) Integrate drug benefits with medical
8) Establish a formulary of drugs
9) Build a network of pharmacies
Types of drugs (8)
1) Generic - typically the lowest cost and most commonly dispensed. A generic equivalent drugs is a generic version of a brand drug, created once the brand drug’s patent expires.
2) Brand name - multi-source brand drugs have a generic equivalent while single-source brand drugs do not
3) Specialty - high-cost drugs, many of which require special treatment and delivery (e.g. temperature controlled and administered by a health care provider)
4) Biologic - derived from living organisms and are usually very expensive. Generally considered to be specialty drugs.
5) Biosimilars, or follow-on biologics - subsequent versions of biologic drugs developed by different manufacturers. May not be therapeutically equivalent to biologics.
6) Compound - drugs mixed by a pharmacist. Can deliver a customized strength and dosage to meet a beneficiary’s specific needs.
7) Over-the-counter - do not require a prescription to purchase
8) Supplies - such as diabetic test strips and alcohol pads
Stages of the prescription drug lifespan (4)
1) Research and development by manufacturers - includes initial drug discovery, preliminary testing, clinical trials, and review by the FDA. Typically lasts 15 years.
2) Brand patent protection period - the manufacturer is awarded the exclusive right to produce the drug. Typically lasts 12 years.
3) Generic exclusivity period - immediately follows the patent protection period. Only the brand name manufacturer and one additional manufacturer are allowed to sell the generic equivalent. Typically lasts six months.
4) Generic drug lifespan - after the generic exclusivity period, all manufacturers may produce and sell the drug
Methods of prescription drug distribution (7)
1) Retail pharmacies - physical locations where beneficiaries can visit to pick up prescription drugs. Typically dispense a one-month supply.
2) Mail order pharmacies - they send prescriptions through the mail, typically for a three-month supply of maintenance medications for treating chronic conditions
3) Specialty pharmacies - they focus on delivering specialty drugs, which often require special storage and administration.
4) Health care providers
5) LTC facilities
6) Hospice facilities
7) Home health professionals
Types of cost sharing plans for pharmacy benefits (3)
1) Copay plans - often seen with managed care plans. Copays typically vary by tier.
2) Coinsurance plans - coinsurance will increase by tier. Will typically include a deductible, either integrated with a medical plan or a separate deductible if the plan is not integrated.
3) Combination of copay and coinsurance - options include:
a) Cost sharing equal to the larger of a copay of percentage coinsurance
b) A coinsurance percentage with a dollar maximum
Types of formulary designs (3)
Formularies are lists of preferred drugs
1) Closed - only formulary drugs are covered. But plans must have a process to cover non-formulary drugs for individual patients based on medical necessity.
2) Open - all eligible drugs are covered, but cost sharing may vary by tier
3) Tiered (incentive) - separate formulary tiers are established, with copays or coinsurance varying by tier
Most common pharmacy benefit tier designs (5)
1) Two tier - generics and brand name drugs
2) Three tier - generics, preferred brand, and non-preferred drugs
3) Four tier - most common is to add specialty drugs to a three-tier design
4) Five tier - start with a four-tier design with specialty as tier 4 and then split one of those tiers:
a) Split the generic tier into preferred and non-preferred (a common design for Part D)
b) Or split the specialty tier into preferred and non-preferred
5) Six tier - options include:
a) Generic, preferred brand, non-preferred brand, biosimilars, preferred specialty, and non-preferred specialty
b) Preferred and non-preferred tiers for each of generic, brand, and specialty
Factors that determine leverage when negotiation rebates from drug manufacturers (3)
Rebates are payments from manufacturers in exchange for preferred status of their drugs on a formulary
1) Number of lives represented - successful contracting requires at least 500,000 lives over which the plan can exert formulary control.
2) Control of market share - ability to move market share to preferred products
3) Consistency of behavior - the predictability of the plan’s response to a manufacturer’s actions
Data fields included in pharmacy data files (16)
These files include one record per prescription, and the following information on each record
1) Age, gender, and date of birth of the patient
2) Fill date - this is the incurred date for the claim
3) Claim ID
4) Prescribing provider ID
5) Pharmacy provider ID
6) Drug name - use a consistent source so the data does not have two different names for the same drug
7) Tier - the category for the drug, as defined in the plan design
8) National Drug Code (NDC) - an eleven-digit code used to identify a specific form of a drug. A mapping of NDCs to drug names can be obtained from data vendors.
9) Days supply - scripts are generally grouped into 30-day, 60-day, or 90-day categories
10) Units - the number of pills or a measurement of volume for liquid medications
11) Allowed amount - sum of discounted ingredient cost, dispensing fee, vaccine fee, and sales tax
12) Refill indicators - for prescriptions that allow refills, this shows which fill the current claim is for
13) Member and plan cost - these fields show how much of the allowed cost is paid by each party
14) Therapeutic class - categorization based on the conditions the the drugs are intended to treat
15) Other types of drug codes - RxNorm Concept Unique Identifier (RxCUI) and Generic Product Identifier (GPI)
16) Average wholesale price and wholesale acquisition cost
Steps for calculating premiums for pharmacy benefits (4)
1) Develop an allowed cost trend, which includes
a) Unit cost change
b) Utilization change
c) Mix change - such as a shift between generics and brand name drugs
2) Calculate adjustment factors for important rating variables - factors that are already accounted for in allowed cost trend should not be included as a separate rating factor adjustment, in order to avoid double counting
3) Estimate member cost sharing based on the projected allowed cost - if the plan design uses copays, use the average effective copay, rather than the nominal copay stated in the plan design
4) Calculate the plan liability and premium
a) Projected allowed amount = base period allowed amount * trend factor * other adjustment factors
b) Net plan liability = projected allowed amount - member cost sharing - rebates
c) Premium = net plan liability + expenses + profit margin
Important rating factors for pharmacy benefits (6)
1) Demographics - such as age and gender
2) Area
3) Benefit design - changes in benefits may cause changes in drug use. This is referred to as induced utilization.
4) Formulary - costs are impacted by:
a) The list of covered drugs and tier placement of drugs
b) Formulary management programs, such as prior authorization, step therapy, and quantity limits
c) Brand patent expirations
5) Contracting - PBMs negotiate with pharmacies regarding dispensing fees and discounts off the average wholesale price
6) Other factors - these include changes in mail order utilization, changes in the generic dispensing rate, and changes in utilization management or cost management programs
Payment mechanisms for prescription drugs (6)
1) Average manufacturer price (AMP) - the price manufacturers use to sell to wholesalers. In Canada, is called the manufacturer’s list price (MLP) and is regulated to ensure prices charged are reasonable and in line with prices of alternative treatments.
2) Wholesale acquisition cost (WAC) - the manufacturer’s suggested list price, which may also be used as a sale price to the wholesaler.
3) Average wholesale price (AWP) - is based on data obtained from manufacturers and distributors, but it’s not an average nor is it based on any actual prices paid by anyone. WAC and AWP are the most widely accepted mechanisms. For brand drugs, WAC must equal 83.33% of AWP in the US, due to legislation.
4) Actual acquisition cost (AAC) - the price retailers pay to wholesalers, negotiated between the two parties.
5) Usual & customary (U&C) retail price - the price customers pay to retailers. It includes the retailer’s AAC plus a markup.
6) Maximum allowable cost (MAC) - is typically used for generic drugs and can be viewed as a fee schedule.
Layers (participants) within the prescription drug distribution channel (5)
1) Manufacturers produce drugs and typically sell them to wholesalers based on AMP or WAC
2) Wholesalers act as middlemen because retailers generally prefer to purchase drugs from one source rather than negotiating with hundreds of individual manufacturers. They sell to retailers based on WAC plus a markup or discount off AWP.
3) Retailers (pharmacies) dispense prescription drugs to consumers, charging a U&C retail price. But if insurance is involved, the retailer will negotiate pricing with the insurer or its contracted pharmacy benefit manager (PBM).
4) Consumers purchase drugs at the U&C price if there is no insurance. If insurance is involved, consumers typically pay a copayment or coinsurance and the insurer pays the rest of the negotiated price.
5) PBMs and insurers are not involved in distributing drugs except for PBMs who own mail service or specialty pharmacy facilities.
Types of group life insurance (9)
1) Basic group term life (most common) - provides employees a common level of basic insurance protection
2) Group supplemental (or optional) life - provides additional insurance beyond basic group term life. Typically employee-pay-all with unisex rates in 5-year age brackets.
3) Group accidental death and dismemberment (AD&D) - typically offered as a companion to group term life and with the same face amount. 100% of the face amount is paid upon death or loss of more than one member (hand, foot, sight of an eye). 50% is paid upon loss of one member.
4) Dependent group life - multiple coverage options are usually provided, offering coverage of up to $100,000 on the spouse and $10,000 on each child.
5) Survivor income benefits - provides a monthly payment in lieu of a lump sum death benefit. Benefit is typically a percentage of monthly earnings, such as 25% for a spouse and 15% for a child.
6) Group permanent life - plan types are single-premium group paid-up life, group ordinary life, and group term and paid-up
7) Group universal life (GUL) - consists of a term life component and a side fund that accumulates with interest to provide tax-favored savings and long-term insurance protection
8) Group variable universal life - same as GUL except several investment options (including equities) are available
Typical basic group life plan designs (4)
To minimize adverse selection, none of these designs allow individual selection of insured amounts
1) Flat dollar plans - such as $10,000 for all employees
2) Multiple of earnings plans (most common design) - such as 1 or 2 times earnings
3) Salary bracket plans - salary ranges are established and benefits vary by range
4) Position plans - benefits vary based on the employee’s position in the company (e.g., hourly vs non-officer management vs. officers)
Group term life disability provisions (3)
Most plans contain one of the following:
1) Waiver of premium - coverage continues without premium payment when an employee becomes totally disabled, as long as he or she is less than a certain age, typically 60 or 65
2) Total and permanent disability - a monthly benefit is paid when an insured becomes totally and permanently disabled. On death, the original death benefit is reduced by any disability payments made.
3) Extended death benefit - pays the death benefit if the insured’s coverage terminates upon total disability prior to age 60 and the insured remains disabled and dies within one year
Formula for group term life imputed income
Employees are taxed on the value of employer-provided group term life insurance in excess of $50,000. This value is determined from Table I (rates vary by age).
Monthly imputed income = [Table I rate * (Coverage amount - $50,000) / $1,000] - employee contributions
Considerations in developing a manual table for life insurance (7)
1) Two approaches can be used:
a) Manual premium tables - calculate the manual premium rate, then adjust for group size. This adjustment will reflect the margin, profit, and expenses appropriate for the group size, relative to the averages built into the table.
b) Manual claims tables - calculate the manual claim rate, then add the appropriate margin, profit, and expenses
2) Data sources - could use SOA studies, industry mortality tables, population statistics, or own company experience (which is the best source, if credible)
3) Changes in mortality - expected future mortality improvement should be reflected
4) Reinsurance - the net cost of reinsurance should be factored into the claim table or expenses
5) Conversions to individual life policies - these create severe anti-selection, which should be reflected in the manual rates
6) Manual adjustments are made for group-specific traits
7) Rates for the group are based on age and gender mix, but groups typically end up charging a composite rate to all employees
Uses of general population data for pricing life insurance (4)
1) Estimating annual improvements in mortality
2) Determining ratios or mortality by age bracket
3) Comparing male and female mortality
4) Developing rates for the very young and the very old (the non-working population)
Manual claim table adjustments for group life, of group rating characteristics for life insurance (9)
1) Disability factors - an adjustment is needed if a group has a different waiver of premium approach than is assumed in the manual rates
2) Effective date adjustment - and adjustment is needed if the central date of coverage is not July 1
3) Industry factors - based on industry codes such as SIC codes
4) Regional factors
5) Lifestyle factors - e.g., adjustments based on the percentage of employees that smoke
6) Marketing considerations - e.g., added charges for rate guarantees
7) Contribution schedules - e.g., a 5% discount if the employees pays the entire premium, reducing anti-selection
8) Case size factors and volume adjustments - larger groups may have lower mortality or expenses
9) Plan options - optional benefits and allowing lots of employee choices will create anti-selection
Types of living benefits for life insurance (3)
This benefit (also called accelerated death benefits) pays a portion of the face amount prior to death, with the remaining benefit paid at death
1) LTC benefits - provides a monthly benefit of 2% of the face amount, beginning when the insured is permanently confined to a nursing home
2) Critical illness benefits - typically pays 25% of the face amount upon the occurrence of a listed disease, such as stroke or cancer
3) Terminal illness benefit - pays 25% to 50% of the face amount when the insured has been diagnosed with a terminal illness with less than 6 or 12 months to live
Benefit provisions for group disability income (7)
1) Definition of disability
2) Elimination period - the period of time the employee must be disabled before collecting disability benefits. Commonly 3 months of 6 months for LTD. For STD, commonly 8 days and may be shorter for accidents than for sicknesses.
3) Benefit period - commonly, 2 years, 5 years, or to age 65 for LTD. For STD, typically 13 or 26 weeks to coordinate with the LTD elimination period.
4) Benefit amounts - benefits paid monthly for LTD and weekly for STD. Replaces a percentage of pre-disability earnings (such as 60% for LTD and less for STD). A maximum benefit amount may further limit payments.
5) Benefit offsets - benefits are reduced by income from other sources, such as Social Security, retirement benefits, workers’ compensation, and part-time work
6) Limitations and exclusions - benefits for mental illness or substance abuse are usually limited to the first 2 years of disability. Disabilities resulting from an act of war or intentionally self-inflicted injury are usually excluded.
7) Optional benefits
Typical definition of disability for LTD group disability income
As a result of sickness or accidental injury, the employee is unable to perform some or all of the material and substantial duties of an occupation, and has a loss of a percentage of pre-disability earnings
a) During the first 24 months after the elimination period, the occupational duties are based on the employee’s own occupation, and the loss of income percentage is 20%
b) After the first 24 months, the occupational duties are based on any gainful occupation for which the employee is reasonably suited by education, training, and experience, and the loss of income percentage is 40%
Typical definition of disability for STD group disability income
The employee is unable to perform all the duties of his or hew own occupation. Coverage is typically for only non-occupational (occurring outside of the workplace) accidents or sicknesses to avoid overlap with workers’ compensation.
Optional benefits that may be added to group disability contracts (10)
Benefits apply to LTD, unless otherwise stated
1) COLA - cost of living adjustment to provide inflation protection for benefits
2) Survivor benefit (LTD & STD) - a lump sum benefit payable to the insured’s survivors upon the death of the insured
3) Expense reimbursement for day care expenses
4) Pension benefit - an additional benefit payment to replace lost contributions to retirement plans
5) Portability - allows an insured who leaves the group to continue group coverage
6) Conversion option - insureds who lose coverage can convert to either group or individual disability coverage
7) Spousal benefits - disability protection for spouses of employees
8) Catastrophic benefits - additional amounts for more serious disabilities, such as those resulting in total paralysis
9) 24-hour coverage (STD) - to cover both on-job and off-job disabilities
10) First day hospital coverage (STD) - elimination period is waived if the insured is confined in the hospital due to a disability
Data sources for estimating disability claim costs (6)
1) A company’s own data is the best source if it is reliable and credible
2) Rate filings of competitors
3) Research of governmental and business publications
4) Data from consulting firms and reinsurers
5) Insurer studies - such as loss ratio studies and actual to expected incidence or termination rates
6) Industry data and tables (typically based on intercompany experience studies)
Intercompany experience studies for estimating disability claim costs (6)
1) 1987 Commissioners Group Disability Table - adopted by the NAIC as the statutory minimum reserve basis for LTD. Is still the most recent intercompany incidence rate study.
2) SOA 2008 GLTD Experience Table - provides considerable detail on claim termination rates
3) 2012 GLTD Valuation Table - will be replacing the 1987 CGDT for use in developing minimum statutory reserves
4) TSA reports - contain exposure and actual to tabular ratios by industry classification
5) 1985 Commissioners Individual Disability Table A (CIDA) - the basis of active life and claim reserves for individual policies
6) SOA Individual Disability Experience Committee 1990-2006 Study
Types of disability income experience studies (3)
1) Calendar year loss ratio study
a) Compute the ratio of incurred claims to earned premium for a given calendar year
b) Incurred claims are calculated as paid claims plus the increase in claims reserves
c) May not provide a clear picture of historical trends because results are affected by reserve changes
2) Incurral year loss ratio study
a) Compute the ratio of incurred claims to earned premium for a given calendar year
b) Incurred claims are calculated as the present value of claim payments made to date plus the present value of the current claim reserve
c) Shows historical trends because the full cost of a claim is attributed to the year the claim was incurred
3) Study of actual-to-expected incidence or termination rates - ratios of a company’s actual claim incidence or termination rates compared to expected rates from published industry tables or company data
Formula for disability income net monthly premium
Net monthly premium = Incidence Rate * SUM(Benefit * Continuance * Interest Discount) at time t; where the summation runs for the entire length of the benefit period. Note that income offsets will also need to be reflected
Group characteristics that impact disability income claim costs (6)
1) Age and gender
2) Occupation - may need to adjust claim costs for:
a) Hourly vs salaried
b) Blue collar vs. grey collar vs. white collar
c) Union vs. non-union
d) Commissioned sales personnel
3) Industry - for group insurance, it is more appropriate to rate based on industry than on occupations
4) Average earnings per employee - claim rates decrease as average earnings increases
5) Area - claim costs vary due to the legal environment and the general attitude and culture of the area
6) Size of group - claim costs follow a “U” shaped curve, with higher costs for the largest and smallest employers
Types of reserves in disability income insurance (2)
1) Active life reserve - exists for policies priced on a level-premium basis. Consists of the excess premiums charged in early years to cover the premium shortfall in later years.
2) Disabled life reserve - established to cover each disability claim and its projected length
