Objectives 1&2: Plan Provisions and Manual Rates

Question 1

Key dimensions of medical benefit plans (3)

Answer 1

(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

Question 2

Services covered by medical policies (11)

Answer 2

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

Question 3

Purposes of having the insured share in the cost of the medical plan (3)

Answer 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

Question 4

Types of provider reimbursement (9)

Answer 4

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)

Question 5

Provisions included in medical plans (5)

Answer 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

Question 6

Common exclusions for medical plans (9)

Answer 6

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

Question 7

Criteria for provincial Medicare plans to qualify for federal contributions (from the Canada Health Act) (5)

Answer 7

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)

Question 8

Benefits covered by most Canadian provincial Medicare plans (9)

Answer 8

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

Question 9

Concerns about the Canadian Medicare system, from recent reports (8)

Answer 9

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

Question 10

Categories of expenses commonly covered by private (supplemental) medical plans in Canada (6)

Answer 10

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

Question 11

Sources of internal data for estimating medical claim costs (4)

Answer 11

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

Question 12

Steps in developing medical claim costs for use in a rate manual (3)

Answer 12

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

Question 13

Important rating variables when normalizing medical data for use in the rate manual (7)

Answer 13

(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

Question 14

Methods of adjusting manual rates for specific benefit plans (2)

Answer 14

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

Question 15

Development of CPD (8)

Answer 15

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

Question 16

Organizations that sell dental insurance (6)

Answer 16

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

Question 17

Typical plan design for dental insurance (5)

Answer 17

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

Question 18

Dental plan cost containment provisions (6)

Answer 18

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

Question 19

Underwriting and rating parameters for dental (11)

Answer 19

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

Question 20

Dental reimbursement models and delivery systems (5)

Answer 20

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)

Question 21

Comparison of dental reimbursement models (8)

Answer 21

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

Question 22

Claim administration procedures used by dental plans (5)

Answer 22

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

Question 23

Data sources for developing dental claim costs (6)

Answer 23

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

Question 24

Plan characteristics that impact dental claim costs (4)

Answer 24

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.

Question 25

Network and care management practices that impact dental claim costs (2)

Answer 25

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)

Question 26

Insured characteristics that impact dental claim costs (7)

Answer 26

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.

Question 27

Factors that influence prescription drug costs (10)

Answer 27

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

Question 28

Entities in the pharmacy benefits system in the US (7)

Answer 28

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

Question 29

Functions performed by PBMs (9)

Answer 29

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

Question 30

Types of drugs (8)

Answer 30

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

Question 31

Stages of the prescription drug lifespan (4)

Answer 31

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

Question 32

Methods of prescription drug distribution (7)

Answer 32

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

Question 33

Types of cost sharing plans for pharmacy benefits (3)

Answer 33

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

Question 34

Types of formulary designs (3)

Answer 34

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

Question 35

Most common pharmacy benefit tier designs (5)

Answer 35

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

Question 36

Factors that determine leverage when negotiation rebates from drug manufacturers (3)

Answer 36

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

Question 37

Data fields included in pharmacy data files (16)

Answer 37

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

Question 38

Steps for calculating premiums for pharmacy benefits (4)

Answer 38

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

Question 39

Important rating factors for pharmacy benefits (6)

Answer 39

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

Question 40

Payment mechanisms for prescription drugs (6)

Answer 40

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.

Question 41

Layers (participants) within the prescription drug distribution channel (5)

Answer 41

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.

Question 42

Types of group life insurance (9)

Answer 42

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

Question 43

Typical basic group life plan designs (4)

Answer 43

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)

Question 44

Group term life disability provisions (3)

Answer 44

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

Question 45

Formula for group term life imputed income

Answer 45

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

Question 46

Considerations in developing a manual table for life insurance (7)

Answer 46

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

Question 47

Uses of general population data for pricing life insurance (4)

Answer 47

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)

Question 48

Manual claim table adjustments for group life, of group rating characteristics for life insurance (9)

Answer 48

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

Question 49

Types of living benefits for life insurance (3)

Answer 49

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

Question 50

Benefit provisions for group disability income (7)

Answer 50

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

Question 51

Typical definition of disability for LTD group disability income

Answer 51

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%

Question 52

Typical definition of disability for STD group disability income

Answer 52

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.

Question 53

Optional benefits that may be added to group disability contracts (10)

Answer 53

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

Question 54

Data sources for estimating disability claim costs (6)

Answer 54

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)

Question 55

Intercompany experience studies for estimating disability claim costs (6)

Answer 55

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

Question 56

Types of disability income experience studies (3)

Answer 56

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

Question 57

Formula for disability income net monthly premium

Answer 57

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

Question 58

Group characteristics that impact disability income claim costs (6)

Answer 58

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

Question 59

Types of reserves in disability income insurance (2)

Answer 59

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

Question 60

Types of disability income claim experience studies (2)

Answer 60

1) Actual-to-expected morbidity - this is the most preferable method of examining disability income experience, but there is often not enough data for morbidity studies. Morbidity consists of: a) The rate of disability - the number of disabled lives per thousand lives exposed b) The rate of recovery - measures the length of disability. The number of disabled lives that will recover at different points in time per thousand disabled lives. 2) Loss ratios - due to the limited amount of data, most studies are based on claims ratios: a) Cash claims ratio - claims dollars paid out divided by earned premiums b) Incurred claims ratio (preferred) - claims plus active life reserve plus claims reserve, divided by earned premium

Question 61

Parameters to consider in a disability income claims or persistency study (16)

Answer 61

1) Occupation class - there are significant differences in morbidity and underwriting approaches from one occupation class to another 2) Occupation - each class is made up of many occupations, and each occupation may perform somewhat differently based on socioeconomic trends 3) Policy form - a study by policy form is needed to determine whether pricing assumptions were correct for new forms 4) Extra benefits - some optional benefits (such as cost of living) require significant reserves 5) Age - changes in medical treatment and technology will affect age experience 6) Duration - due to the wear off of underwriting selection, loss ratios will be higher on older blocks of business and extremely low on new blocks 7) Elimination period - changes in experience may occur at one elimination period and not at another 8) Benefit period - to-age-65 and lifetime benefits may affect the election of early retirement 9) Indemnity (benefit amount) - some studies have shown that the larger the indemnity, the poorer the experience 10) Income - studies have shown that higher replacement ratios lead to higher morbidity 11) Geography - densely populated areas may have higher morbidity than less populated areas 12) Agent and agency - data by agent can provide information on the ability of the agent to select good risks 13) Sex - higher morbidity for women has been demonstrated at least up until the mid-50 age grouping 14) Mode of premium payment - the annual premium payment mode generates more favorable experience, while the quarterly mode is the least favorable 15) Smoking status - nonsmokers have lower disability costs than smokers 16) Combinations of the above parameters - to determine interactions

Question 62

Steps for manual rating of disability coverage (6)

Answer 62

1) Determine the base rates/premium (base premium = base rate * benefit amount). Base rate is the expected average claim cost for an insured age x, gender g, elimination period e, and maximum benefit duration (in weeks) w a) LTD: Base Rate(x,g,e,w) = I(x,g,e) * RSV(x,g,e,0)/12; where RSV is the reserve at time 0 and I is the probability of claim) b) STD: Base Rate(x,g,e,w) = I(x,g,e) * D(x,g,e)/12; where D is the expected length of claim in weeks 2) Deduct offset credits (offset * base rate) to get the net base premium 3) Demographic adjustments - multiplicative adjustments to reflect the person's salary, industry, occupation, and location 4) Plan provision adjustments - multiplicative adjustments for the definition of disability, max or min monthly benefits, pre-existing clause, and anti-selection 5) Non-claim adjustments (retention) - the prior steps give the final claim cost. Add loadings for commissions, expenses, and premium taxes 6) Add profit - can be a percent of premium or a needed ROI/ROE

Question 63

Steps for experience rating of disability coverage (4)

Answer 63

1) Determine the group's manual rate with profit and expenses removed (i.e. final claim cost) 2) Determine the experience-based rate using the last 3-5 years of data a) Discount claims and reserves to the midpoint of the experience period or to the actual date of disability b) Divide by exposure to get the experience-based claim rate c) If large claims are pooled, add a pooling charge 3) Blend the manual rate and the experience-based rate to get the case claim rate a) Blended rate = manual claim rate * (1-Z) + experience claim rate * Z b) Credibility (Z) = N / (N + K), where N = number of life years and K = constant (e.g. 5,000 for LTD and 250 for STD) 4) Final case premium = blended rate / target loss ratio

Question 64

Steps in the claim process for disability (4)

Answer 64

1) Determine eligibility for coverage - is the claimant insured and actively at work, is there a pre-existing condition? 2) Determine if the definition of disability is met - this is the most difficult step of the process 3) Determine the payment amount - pre-disability income * benefit percent - offsets 4) Get ongoing proof of disabilities a) STD - often approved for a specified period based on the type of disablement. Reviewed at the end of the period b) LTD - reviewed annually, when the condition or treatment changes, or when the definition of disability changes

Question 65

Tools of the claim process for determining and handling disabilities (6)

Answer 65

1) Medical evaluation - begins with an attending physician's statement and can include independent medical exams 2) Rehabilitation plans - providing vocational training or physical rehabilitation 3) Financial evaluation of the claimant - verification of pre- and post-disability earnings 4) Settlements - these are risky, so be sure the insurer is not perceived as taking advantage of the claimant (ensure legal representation) 5) Fraud review - check information for inconsistencies or alterations 6) Managed disability - techniques are used to "manage" disability and encourage a return to work

Question 66

Economic fundamentals that have led to recent financial difficulties faced by LTC insurers (3)

Answer 66

These have led many companies to take substantial premium increases and to exit the market 1) Reduced investment earnings caused by historically low interest rates 2) Higher costs of providing LTC, consistent with the rapidly-rising medical costs in the US 3) Strong persistency, resulting in more policies than expected sticking around long enough to be eligible for benefits

Question 67

Types of LTC insurance plans (3)

Answer 67

These are the different approaches for paying benefits 1) Service reimbursement model - pays the cost of the LTC services, subject to fixed limits that vary by type of service (e.g., $150 per day for nursing home care and $90 per day for assisted living facility care) 2) Service indemnity model - a fixed benefit is paid for any day or week that formal LTC services are received, regardless of the actual charges incurred 3) Disability or cash model - a fixed benefit is paid for each day an insured is eligible for benefits, whether or not services are actually received

Question 68

Plan provisions on LTC insurance policies (12)

Answer 68

1) Benefit triggers 2) Elimination or waiting period - a time period during which the insured must remain disabled and benefit eligible before benefits are paid (commonly 90 days) 3) Covered services 4) Alternate plan of care - allows the insurer to pay benefits (at its discretion) for services not explicitly covered by the contract 5) Benefit limits - enrollees select a daily benefit maximum for institutional care. Other benefits are tied to this daily benefit (such as 60% for home assistance services). Lifetime maximum is administered as a pot of dollars = daily amount * 365 days * years of benefit purchased. 6) Inflation protection - increases the benefit limits as LTC costs increase over time 7) Non-forfeiture benefits - sold as an optional benefit. Provides a reduced, paid-up benefit to insureds who lapse coverage 8) Spousal riders and discounts - some plans offer a premium discount for individuals who are married 9) Restoration of benefits - many plans restore the lifetime maximum benefit if an insured recovers before exhausting the plan's benefits 10) International coverage - some plans provide limited benefits for care received abroad 11) Shared lifetime maximum benefit pools - some plans allow an insured who uses all of his or her benefits to tap into any remaining benefits of a spouse's policy 12) Policy exclusions - examples include pre-existing conditions or diseases, alcohol and drug addiction, and treatment covered by other policies or Medicare

Question 69

Types of non-forfeiture benefits on LTC insurance policies (4)

Answer 69

1) Shortened benefit period - the minimum standard for tax-qualified plans. Pays the benefit amount and frequency in effect at the time of lapse. Lifetime maximum is reduced to the sum of premiums paid minus benefits paid 2) Reduced paid-up - daily and lifetime maximums are reduced and coverage is extended for the life of the insured 3) Extended term - benefit maximums do not change, but only disabilities that commence within a limited time period are covered 4) Contingent and non-forfeiture benefit - often provided to those who lapse due to a substantial premium increase and had not purchased a non-forfeiture benefit. Uses the shortened benefit period approach.

Question 70

Major effects of the year 2000 changes in the NAIC LTC Insurance Model Act (7)

Answer 70

1) Requires disclosure of rating practices at the time of application - e.g., including a statement that the policy may be subject to future rate increases 2) Requires an actuarial certification at the time of initial rating - must include a statement that the initial rates are sufficient to cover anticipated costs under moderately adverse experience 3) Eliminates minimum loss ratio requirements in the initial rate filing 4) Places limits on expense allowances in the event of a rate increase - if a rate increase is requested, the lifetime loss ratio must not be less than a weighted average of 58% of the initial premium and 85% of the premium increase 5) Requires reimbursement of unnecessary rate increases - this could result if the revised premium schedules are more than double the initial rates 6) For policies in a rate spiral, guarantees policyholders the right to switch to currently-sold insurance without underwriting 7) Authorizes the commissioner to ban companies for 5 years if they persist in filing inadequate initial premiums

Question 71

Major effects of HIPAA on LTC (4)

Answer 71

1) Defined qualified plans 2) Clarified taxation of premium and benefits - established that a qualified LTC insurance contract shall be treated as an accident and health insurance contract for tax purposes 3) Standardized benefit triggers 4) Allowed tax reserves to be calculated on a one-year preliminary term basis for tax-qualified plans

Question 72

Major stakeholders in the group LTC policy design process (4)

Answer 72

1) Employer group a) LTC is appealing because it complements other products (such as disability and life coverages) and relative to medical is a low-cost benefit with stable pricing b) May not be able to offer guaranteed issues to all active employees, since this could make the premiums more expensive than similar individual policies 2) Insurance company a) Concerned with up-front acquisition costs, the risk of low enrollment, and the need to sell to both the employer and employee b) Costs vary significantly by participation level, making this a key assumption 3) Employees a) May not yet be aware of the risk covered by LTC insurance b) Concerned with the significant cost, which may even exceed the cost of individual policies 4) Insurance brokers - have found that group LTC insurance provides the opportunity to open the door to competitive life and disability markets

Question 73

Assumptions needed for a LTC pricing model (9)

Answer 73

1) Voluntary lapses - lapse rates are much lower than for other types of health insurance. Premiums are very sensitive to changes in lapse assumptions, especially for products with inflation protection. 2) Mortality - most companies use the 1994 Group Annuitant Mortality table 3) Morbidity (see separate list for the major variables that impact claim cost) 4) Selection factors - to reflect underwriting wear-off. Depends on the level of underwriting performed. 5) Expenses - start-up expenses are high relative to other types of business 6) Interest - the investment rate on assets is a key assumption because of the large amount of reserves 7) Reserve basis - important considerations include the level of margins and how these margins are achieved 8) Other assumptions - including the average daily benefit and the premium mode 9) Profit - typically based on lifetime goals for pre-tax profits, post-tax profits, return on investments, or return on equity

Question 74

Major variables that impact LTC claim cost (5)

Answer 74

1) Marital status - costs are lower for married individuals because of the presence of a potential caregiver at home 2) Gender - females have significantly higher ultimate costs than males 3) Benefit trigger 4) Area - utilization patterns of LTC services vary by geographic area 5) Case management - companies using a case manager usually experience lower claims

Question 75

Misconceptions regarding LTC rate increases (3)

Answer 75

1) Products are annually renewable a) LTC is guaranteed renewable and priced on an issue age basis b) Premiums are expected to remain level and cover all future costs 2) Using historical loss ratios to determine performance is appropriate a) Claims and loss ratios are low in early policy years, but this does not mean the product is profitable b) A large portion of early premiums need to be set aside as contract reserves to pre-fund future claims c) This can be addressed by including the change in contract reserves in the claims calculation 3) Companies have time to wait and see how experience will unfold a) As more time passes without a rate increase, the future premium base to which the rate increase would be applied shrinks b) This results in much larger increase needs in order to produce the targeted lifetime loss ratio

Question 76

LTC pricing assumptions that often drive the need for a rate increase (3)

Answer 76

1) Morbidity - misses on this assumption may not become apparent for many years because of the gap between the average issue age and the average age of LTC claimants 2) Persistency - higher persistency leads to significantly higher claims because more policyholders remain in later years when claim costs are extremely high 3) Interest - investments are key to ensuring that the contract reserves grow enough to support the company's future liabilities. The recent economic recession has resulted in investment earnings that are much lower than what was assumed.

Question 77

Types of critical illness policies (2)

Answer 77

1) Standalone - offers coverage only for critical illness a) Basic - covers only cancer, heart attack, stroke, and sometimes coronary artery bypass graft b) Enhanced - includes 15-20 additional conditions and costs about 30% more 2) Acceleration - combines coverage for both critical illness and death. Pays the face amount on the earlier to occur of critical illness or death. a) An alternative is partial acceleration. Some percentage (25-50%) of the face amount is paid for critical illness, after which the remaining face amount remains in force as death protection only.

Question 78

Areas of specific concern for product design of critical illness insurance (4)

Answer 78

These all relate to managing risk 1) Definitions - limiting benefits for conditions that are non-life threatening when diagnosed 2) Avoidance of anti-selection at issue 3) The potential high cost of benefits for some conditions beyond age 75 4) The potential high cost of long-term guarantees due to advances in medical science leading to earlier detection

Question 79

Definition of critical illness insurance

Answer 79

Critical illness is an insurance product that pays the face amount when: 1) The insured is diagnosed with a condition covered in the policy. The diagnosis must be made by a doctor and must be supported by objective evidence. 2) The condition meets the definition in the policy and is not excluded by any other policy provision 3) The insured survives for a specified period (usually 30 days) following diagnosis

Question 80

Conditions typically covered in basic critical illness insurance (4)

Answer 80

1) Life-threatening cancer 2) Heart attack - may exclude mild heart attacks that occur within a couple of days following angioplasty 3) Stroke - the definition requires a measurable neurological deficit that persists for 30 consecutive days 4) Coronary artery bypass graft - similar procedures which do not involve grafts are always excluded

Question 81

Conditions covered in enhanced critical illness insurance plans (9)

Answer 81

1) Multiple sclerosis 2) Kidney failure requiring dialysis 3) Major organ transplants 4) Cardiovascular: heart valve replacement and aortic surgery 5) Degenerative: motor neuron disease, Parkinson disease, and Alzheimer disease 6) Brain: coma and benign brain tumor 7) Head: blindness, deafness, and loss of speech 8) Body: loss of limbs, paralysis, major burns, and occupational HIV 9) Loss of independence (covered by only some companies)

Question 82

Optional product features on critical illness policies (7)

Answer 82

1) Return of premiums on death 2) Return of premiums on expiry - returns premiums on the policy's expiration date if the policy is still in force 3) Return of premiums on surrender - returns a defined percentage of the premiums upon surrender prior to the expiry date. The percentage may increase to 100% over time. 4) Face amount increasing (to keep up with inflation) or decreasing (to match the declining principal remaining on a mortgage loan) 5) Partial benefits (10-25% of the face amount) payable for some non-life threatening conditions which have been excluded in the policy 6) Assistance benefit - provides medical consulting advice for the diagnosed critical illness 7) Guarantee that premiums will not change

Question 83

Main approaches used to develop premium rates for critical illness insurance (2)

Answer 83

1) "Costing" - calculating premium rates based on all of the related costs, usually with the help of commercial product modeling software. Uses assumptions for the expected costs for all elements, including profit objectives and limitations on capital available for new business. 2) "Pricing" - premium rates are positioned relative to the company's major competitors to achieve the desired level of sales. A commercial premium rate quotation service is typically used. Both pricing approaches are used concurrently, with assumptions and target rates being adjusted until a good balance between financial objectives and competitiveness is found

Question 84

Steps for developing critical illness incidence rates (8)

Answer 84

1) Start with general population age-specific incidence rates from government resources and research organizations for the various illness covered 2) Adjust these rates to fit the condition definitions in the policy 3) Apply any applicable trends (such as a decrease in heart attack rates) 4) Use ratios of insured lives to population mortality to adjust rates from the general population to an insured population 5) Use ratios of nonsmoker to smoker mortality to segment rates into nonsmoker and smoker rates 6) Use ratios of select to ultimate insured mortality to create select and ultimate rates 7) Compare the rates to any available insurance experience and adjust as deemed necessary 8) Sum the rates for each of the major conditions covered, then add small amounts (about 1%) for each additional covered condition

Question 85

Rating approaches for Medicare Supplement (3)

Answer 85

The methodology used may be mandated by regulation 1) Attained age - rates are based on the individuals current age 2) Issue age - rates are based on the individual's age when the policy was issued 3) Community rates - all participants pay the same rate. Some modified community rating approaches differentiate based on age, sex, duration, or other parameters

Question 86

Loss ratio standards for Medicare Supplement products (3)

Answer 86

Rate filings must show that the following loss ratios meet the standard, which is the greater of the original expected loss ratio that the company filed and the statutory minimum 1) The lifetime loss ratio (with premiums and claims calculated on a present value basis) 2) The future loss ratio (with premiums and claims calculated on a present value basis) 3) The expected third-year loss ratio

Question 87

Medicare Supplement pricing assumptions (10)

Answer 87

1) Morbidity - past claim costs need to be trended forward to the rating period 2) Mortality - this is not a significant assumption for Medicare Supplement, and is frequently combined with the persistency assumption 3) Persistency - this should be based on the company's experience for similar products 4) Investment earnings - these will be credited to the various types of reserves that are held 5) Selection factors / underwriting - for underwritten policies, selection factors may be used for the first one to three years 6) Age and sex distribution - most policies are sold to individuals turning age 65 7) Smoker vs. non-smoker - if rates vary by smoker status, then the distribution of smoker status must be estimated 8) Area factors - claim costs by area may come from rating manuals or government statistics 9) Expenses and taxes 10) Other considerations - modal factors and policy fees are sometimes used

Question 88

Types of health insurers and MCOs (10)

Answer 88

These plans make up the managed care continuum 1) Indemnity - indemnifies the beneficiary from the financial cost of health care. There are few controls for managing cost 2) Service plans - similar to indemnity, but adds contracting with providers as a way to manage costs 3) Managed indemnity - overlays some managed care features onto indemnity plans 4) PPOs - contract with a network of participating providers who agree to accept the PPO's payment structure and levels. Members who see PPO providers have higher levels of coverage (lower cost sharing) 5) Exclusive provider organizations - similar to PPOs, but care received by nonparticipating providers is not covered (except for urgent or emergency care) 6) POS plans - combine an HMO with indemnity-type coverage for care received outside the HMO. 7) HMOs - provide basic and supplemental health services in the manner prescribed by the HMO Act 8) CDHPs - combine a high-deductible health plan with some form of individual pretax savings account (HRA or HSA) 9) Third-party administrators - administer benefits for self-funded employer groups, but do not assume risk 10) Consumer operated and oriented plans (CO-OPs) - member-run health insurers created to offer coverage to small groups and individuals through the ACA exchanges

Question 89

Common types of managed care overlays (6)

Answer 89

1) General utilization management (UM) - offering a menu of UM activities that can be selected by employers or insurers 2) Large case management - includes identifying catastrophic cases, notifying reinsurers, monitoring the treatment, and negotiating payments for high-cost cases 3) Specialty UM - focuses on utilization review for specialty services, such as behavioral health care 4) Disease management (DM) - focuses on common chronic diseases, such as diabetes 5) Rental networks - networks of contracted providers within individual markets 6) Workers' compensation UM - addresses standard UM and some unique aspects involved with workers' compensation benefits

Question 90

Features that differentiate HMOs from health insurers (9)

Answer 90

1) Licensed under different laws than health insurers 2) Must provide adequate access to providers within their service areas 3) Must require "no balance billing" clauses in all provider contracts that are stronger than those found in non-HMOs 4) Must allow direct access to primary care physicians (PCPs) and ob/gyn physicians 5) Must have written policies and procedures for physician credentialing, utilization management, and quality management 6) Must maintain defined minimum levels of capital reserves 7) Usually share some financial risk with physicians 8) Most require members to see a PCP for routine services and to access specialty care 9) Most are accredited by an accrediting organization

Question 91

Types of HMOs (5)

Answer 91

1) Open-panel - the HMO contracts with private physicians who agree to its terms and conditions and who meet its credentialing criteria a) Independent practice association (IPA) model - the HMO contracts with an IPA. Physicians are not employees of the HMO or the IPA, and they continue to see their non-HMO patients. b) Direct contract model - the HMO contracts directly with independent physicians or medical groups 2) Closed-panel - most of the care is provided through either a single medical group associated with the HMO or through physicians employed by the HMO. Closed to private physicians. a) Group model - the HMO contracts with a multi-specialty medical group practice to provide all physician services to the HMO's members. The physicians are employed by the group practice. b) Staff model - physicians are employed by the HMO and are paid by salary plus bonus or incentives 3) True network model - the HMO contracts with more than one large medical group or physician organization 4) Mixed model HMOs - most commonly occurs when a closed-panel HMO adds open panel components 5) Open-access HMOs - the member selects a PCP and gets the most benefits by using the HMO system. Can bypass the PCP to get in-network specialty care directly, but with less coverage. Only services provided in network are covered.

Question 92

Advantages (4) and disadvantages (2) of open-panel HMOs

Answer 92

Advantages 1) More easily marketed and sold due to the large panel of private physicians 2) Easier for members to find a participating physician that is conveniently located 3) In IPA models, routine medical management functions may be delegated to the IPA 4) Easier and less costly to set up and maintain Disadvantages 1) Because the HMO is not providing medical care itself, it has little ability to manage care 2) Premiums are often higher than those of closed panels

Question 93

Advantages (3) and disadvantages (4) of closed-panel HMOs

Answer 93

Advantages 1) Ability to more closely manage care 2) Delegation of many routine medical management functions to the group, which reduces administrative costs 3) Convenience for members of having lots of services available in one location Disadvantages 1) Not as easily marketed to new members 2) Locations of medical offices may not be convenient for all members 3) Only feasible in medium to large cities 4) More complex and costly to set up and maintain

Question 94

Types of integrated health care delivery systems (IDSs) (8)

Answer 94

In IDSs, providers united to manage health care and contract with the health plan 1) IPAs 2) Physician practice management companies - these companies purchased physician practices. Most failed because once physicians sold their practices there was no longer sufficient incentive for them to be productive. 3) Group practice without walls - formed as a vehicle for physicians to organize without being dependent on a hospital for services or support 4) Physician-hospital organizations - an entity through which a hospital and its physicians negotiate with payers 5) Management services organizations - provides a vehicle for negotiating with payers and also provides services (such as billing and administrative support) to support physicians' practices 6) Foundation model - a hospital creates a not-for-profit foundation which purchases physician's practices. Usually done when there is a legal barrier to a hospital employing physicians directly. 7) Provider-supported-organization - groups of providers who contract directly with Medicare on an at-risk basis for all medical services. They failed because they did not properly spread risk, they attracted too many bad risks, and they did not typically conduct utilization management and disease management. 8) Hospitals with employed physicians - the hospital employs PCPs and specialists. This substantially increases the hospital's negotiating leverage.

Question 95

Structural requirements of accountable care organizations (ACOs) (6)

Answer 95

The ACA created ACOs for use in the Medicare program. They help achieve more integrated and efficient care by fostering local organizational accountability for quality and costs. 1) Those eligible to form an ACO include group practices, networks of individual practices, hospitals, rural health clinics, and federally-qualified health centers 2) Must be a legal entity that is authorized to conduct business in each state in which it operates 3) Must be formed for the purposes of: a) Receiving and distributing shared savings b) Repaying shared losses or other monies owed to CMS c) Establishing, reporting, and ensuring provider compliance with health care quality criteria 4) At least 75% of the ACO's board seats must be held by ACO participants 5) Management structure must be similar to what is found in a nonprofit health plan 6) Participants must have a sufficient investment such that ACO losses would be a significant motivator

Question 96

Key characteristics of patient-centered medical homes (7)

Answer 96

1) Patients have an ongoing relationship with a personal physician 2) Patients receive care from a team of individuals led by the personal physician 3) Personal physicians take responsibility for providing or arragning all of the care for the patient 4) The patient's care is coordinated or integrated across all elements of the health care continuum 5) Quality and safety are key parts, enhanced by evidence-based medicine 6) Patients have enhanced access to care through open scheduling and expanded hours 7) Payment should appropriately recognize the added value provided to patients

Question 97

Types of individual health insurance (9)

Answer 97

1) Major medical 2) Limited benefit medical - don't cover enough services to meet the definition of major medical 3) Group conversions - policies offered (on a guarantee issue basis) to individuals leaving group coverage. State laws typically require this coverage to be offered. 4) Medicare Supplement and Medicare Select - supplement Medicare coverage by filling in the gaps in that coverage 5) Medicare Advantage and Part D - private managed care plan plans that provide benefits to Medicare beneficiaries 6) Disability income - covers income lost due to an illness or injury 7) Business protection coverage - disability coverage that protects a business against the impact of an employee becoming disabled 8) LTC - covers services for individuals who need assistance performing basic ADLs or who are cognitively impaired 9) Dental - not usually sold in the individual market due to anti-selection concerns

Question 98

Categories of essential health benefits (EHBs) under the ACA (10)

Answer 98

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

Question 99

Types of limited benefit medical insurance (4)

Answer 99

1) Hospital indemnity - pays a flat amount per day of inpatient hospitalization. Often limited to a certain number of days, and may have an elimination period. 2) Other scheduled benefits - limited coverage for one or more indemnity-type benefits (e.g., $250 per ICU day or $20 per x-ray) 3) Dread disease - provides coverage only for a specified list of medical conditions (such as cancer) 4) Critical illness - provides a lump sum benefit in the case of a heart attack, stroke, heart surgery, cancer (except skin cancer), or diagnosis of specified conditions

Question 100

Enrollment requirements for Medicare Advantage and Part D plans

Answer 100

MA plans are guaranteed issued for any beneficiary who meet the following requirements: 1) Is enrolled in Medicare Parts A and B 2) Does not have end stage renal disease (ESRD) 3) Applies during a valid enrollment period, such as: a) Initial enrollment period - when beneficiaries first become eligible for Medicare b) Annual open enrollment period - between October 15 and December 7 of each year, beneficiaries can enroll or change their MA or Part D coverage c) Special enrollment periods - these exist for various reasons, such as a change in residence or loss of current coverage 4) Resides in the plan's service area 5) Abides by the terms of the insurance contract Part D plans have similar guaranteed issue requirements, except that: 1) Beneficiaries are eligible as long as they are enrolled in Part A, Part B, or Part C 2) Beneficiaries with ESRD are eligible

Question 101

Steps in the Medicare Advantage and Part D bid submission process (7)

Answer 101

1) Advance notice of payment policies and draft call letter - CMS publishes these early in the year, outlining proposed changes for the next year 2) Announcement of MA capitation rates and the final call letter - CMS publishes this in early spring 3) Submission of initial bid - the plan sponsor submits a bid for each plan by no later than the first Monday in June. This bid projects the expected cost of providing benefits and is certified by a qualified actuary. 4) Desk review - the bids are reviewed by CMS and third-party actuaries contracted by CMS. This review is usually completed by late July. 5) Rebate reallocation process - Part D bids must be adjusted once the final national average bid amounts and member premiums are known. Plan sponsors do this in early August. 6) Finalize the bid, including a second actuarial certification 7) Bid or financial audit - after bids are approved, the plan may be selected for this more detailed review

Question 102

Methods used by disability income policies to adjust for the cost of living (3)

Answer 102

1) Guaranteed insurability - automatically offering increased coverage to active insureds, at specified intervals 2) Automatic increases - adjust insured amounts over time, without action by the insured 3) Increase benefit payments over time for those on disability (may apply in addition to one of the previous two methods)

Question 103

Major types of business protection coverage (3)

Answer 103

1) Keyperson coverage - sold to businesses to protect them from the risk of key individuals becoming disabled. Benefits last one or two years, to provide time for the key employee to be replaced. 2) Disability buyout coverage - provides the funds needed (generally lump sum) for a totally disabled partner or owner of a business to be bought out by the remaining partners or owners 3) Business overhead expense - pays for business overhead expenses in the event of the owner's disability. Coverage periods are typically fairly short, to provide for short-term needs only.

Question 104

Benefit triggers for LTC insurance policies (2)

Answer 104

The insured must satisfy the benefit trigger to become eligible for benefits. For tax-qualified policies, the trigger must be: 1) The inability to perform (without substantial assistance) at least two activities of daily living (ADLs); or 2) A cognitive impairment that requires substantial supervision to protect the health and safety of the insured. Behaviors that indicate cognitive impairment are: a) Wandering and getting lost b) Combativeness c) Inability to dress appropriately for the weather d) Poor judgment in emergency situations

Question 105

The ADLs allowed by HIPAA, and typical definitions (6)

Answer 105

1) Bathing - washing oneself by sponge bath in either a tub or shower, including the task of getting into or out of the tub or shower 2) Continence - the ability to maintain control of bowel and bladder function, or if unable to do so, the ability to perform associated personal hygiene, including caring for a catheter or colostomy bag 3) Dressing - putting on and taking off all items of clothing and any necessary braces, fasteners, or artificial limbs 4) Eating - feeding oneself from a receptacle (plate, cup, etc.) or by a feeding tube or intravenously 5) Toileting - getting to and from the toilet, getting on and off the toilet, and performing associated personal hygiene 6) Transferring - moving into or out of a bed, chair, or wheelchair

Question 106

Benefits that may be covered by LTC policies (11)

Answer 106

1) Nursing home care - care provided in a facility that provides skilled, intermediate, or custodial care, and is either Medicare-approved or state-licensed to provide this care 2) Assisted living facility (ALF) care - care provided in a facility that is state-licensed as an ALF 3) Home and community-based care - LTC services provided in the person's home or in a community-based facility (like an adult day care center) 4) Hospice care - care provided through a facility or program designed to serve the terminally ill 5) Respite care - formal, paid care provided to relieve an informal care provider 6) Home modifications and equipment - services that allow an individual to remain at home, rather than have to be institutionalized (such as emergency alert systems and wheelchair ramps) 7) Care management services - services provided to develop a plan of care, identify providers, and coordinate care 8) Bed reservation benefit - continues to reimburse the insured for institutional care even if he or she needs to temporarily transfer to an acute care facility due to a medical condition (for up to 21 days per year) 9) Caregiver training - provides training and education to help informal caregivers obtain state licensure as a home health care provider 10) Death benefit - typically pays a percentage of all premiums paid minus any benefits paid 11) Cash alternative benefit - some plans give the option of receiving claim payments for home and community-based care as a cash benefit, rather than as a reimbursement benefit

Question 107

Methods of providing inflation protection on LTC policies (4)

Answer 107

1) Automatic inflation protection - benefit limits increase automatically each year by a preset percentage (required to be at least 5%) on a compound basis 2) Simple inflation protection - like automatic inflation, but using simple interest instead of compound interest 3) Periodic increase offers - the insured is periodically (usually every three or five years) given the opportunity to purchase additional coverage on a guaranteed issue basis 4) Coinsurance (rarely offered) - the insurer covers a specific percentage of actual or reasonable charges, and does not include a maximum indemnity limit

Question 108

Steps of the product development cycle (6)

Answer 108

Product development is the process by which new products are created and existing products evolve 1) Innovate - consists of: a) Understanding the company's strategic perspective b) Idea generation c) Idea screening - check for consistency with corporate goals and feasibility with the corporation's abilities d) Market assessment - to determine if a market exists for the product 2) Design the product - this phase consists of determining the product structure, plan design options, contribution requirements, and regulatory compliance 3) Build the product 4) Sell the product - the product is often test marketed, after which revisions are done before it is mass marketed 5) Assess the product - monitor financial results and consumer and market feedback 6) Revise the product - changes may be indicated by the product assessment, regulatory requirements, or consumer demand

Question 109

Common drivers of product ideas (9)

Answer 109

1) Innovator or follower - some companies are successful at innovating, while others are successful at following and learning from competitors 2) Changing laws and regulations - new rules can lead to new products developed specifically to operate within the new set of rules 3) Consumer demand - companies must constantly seek consumer feedback and market intelligence 4) Marketing and sales - these teams can spot holes in the product spectrum where consumer demand is not being fully met 5) Leveraging insurer capabilities - product development teams must know what the insurer does well and find ways to grow in these areas 6) Social need - for example, Medicare Part D served the social need of helping seniors who were being overwhelmed by the cost of expensive medications 7) Changing economy and financial markets - leads to a shift in the types of products that will be marketable and saleable 8) Changing economy and financial markets - leads to changes in purchasers' views of their need for insurance 9) Competitive advantage - product development ideas should utilize the company's competitive advantages

Question 110

Questions answered by a market assessment (7)

Answer 110

1) What exists in the market today? 2) What is the product objective for the consumer? 3) What is the regulatory environment for this product? 4) What are the financial value and other benefits for the consumer? 5) What are the price targets? (the assessment may indicate a range of acceptable prices) 6) What is the likely reaction from competitors? 7) How will the sales team react?

Question 111

Steps for building a new product (5)

Answer 111

1) Project enrollment - this is critical to helping senior management decide whether the product is worth pursuing 2) Price the product - includes an assessment of the market price sensitivity. After initial pricing, the projected enrollment should be reviewed again 3) Perform financial assessments - to determine whether the new product can meet the company's required return on investment or return on equity 4) Implement the infrastructure needed to administer the product (process claims, bill and collect premiums, and service member inquiries) 5) Get senior management approval

Question 112

Key players in the product development cycle (10)

Answer 112

1) Product development team - is responsible for generating new product ideas and studying the market 2) Senior management - sets the company goals and is responsible for making the decision to pursue a proposed idea 3) Marketing - is focused on advertising, name recognition, and branding 4) Sales - often has insights into price sensitivity and the types of products customers want 5) Underwriters - can help quantify the risk associated with certain plan features 6) Information technology (IT) - can help in understanding the feasibility of the infrastructure needed to administer the product 7) Operations - work with IT teams to administer the product 8) Compliance - ensures the product is compliant with laws and regulations 9) Actuarial - prices the product and works on the projections and feasibility studies 10) Finance - reviews the projected enrollment and pricing to determine whether projections meet corporate profit targets

Question 113

Components of gross premiums (7)

Answer 113

1) Claim costs 2) Administrative expenses - includes the costs of designing, developing, underwriting, and administering the product, as well as an allocation of overhead costs. Frequently much higher in the first year than in renewal years. 3) Commissions and other sales expenses - includes special bonuses, incentives, and advertising. Generally expressed as a percentage of premium. 4) Premium taxes 5) Other taxes and assessments - includes federal and state income taxes and new assessments due to the ACA 6) Risk and profit charges - depends on the degree of risk involved, the amount of capital allocated to support the product, and the expected return on the capital 7) Investment earnings - typically credited based on assets held

Question 114

Considerations in developing administrative expense assumptions (3)

Answer 114

1) How expenses are allocated to the product - allocation methods include: a) Activity based allocation - distributes expenses according to some measure of use (e.g., actual postage expenses can be charged to the function that generated the mail) b) Functional expense allocation - determines how expenses are split by line of business for new and renewal business (done by surveying employees to determine how time is spent) c) Multiple allocation methods - a combination of the other two methods 2) How administrative expenses should be allocated to groups - should differentiate between first year and renewal expenses. Various allocation bases exist. 3) What the competition includes as expenses in its pricing - adjustments may be needed to match what others are doing in the marketplace

Question 115

Types of bases used for allocating expenses (7)

Answer 115

1) Percent of premium 2) Percent of claims 3) Per policy 4) Per employee (certificate) 5) Per member (each person covered) 6) Per claim administered 7) Per case (some expenses are charged directly to the case for very demanding groups)

Question 116

Common rating characteristics included in manual rates for group health insurance (8)

Answer 116

1) Age 2) Gender 3) Health status 4) Rating tiers 5) Geographic factors 6) Industry codes 7) Group size 8) Length of the premium period

Question 117

Common rating tiers for group health insurance (5)

Answer 117

1) One tier: composite 2) Two tier: employee only, family 3) Three tier: employee only, employee and one dependent, family 4) Four tier: employee only, employee with one dependent, employee with children, family 5) Five tier: employee only, couple, employee with child, employee with children, family

Question 118

Common purposes for trend analysis (3)

Answer 118

1) Financial reporting - should meet the following criteria: a) Be done on a retrospective basis b) Be done at the enterprise level, as well as the division or market level c) For statutory reporting, include a provision for adverse deviation. But for GAAP reporting, be on a best-estimate basis. 2) Pricing - for setting premiums or for planning and budgeting. Trend rates may be calculated on the following bases: a) Eligible charges (billed charges before provider contracts or discounts are applied) b) Allowed charges c) Net paid claims - shows the bottom line trend after accounting for changes in provider contracts, member cost sharing, and coordination of benefits 3) Experience analysis - for analyzing changes in a block of business over time

Question 119

Components of medical trend (7)

Answer 119

The component method for developing pricing trends combines the following to get the pricing trend 1) Core cost trend - the rate of increase in the covered cost per service, before adjustments for specific factors such as aging or one-time changes. Consists of three parts: a) Unit cost trend - the change in payments to providers for a fixed basket of services b) Severity - the increase in the intensity of treatment c) Change in mix of services - such as changes in the distribution of type of service or provider 2) Core utilization trend - includes changes in utilization due to external forces, such as the economy, the number of workdays during the period, and changes in medical practice 3) One-time changes - a response to a specific, identifiable situation. Types include: a) a significant change during one period, followed by a return to normal the following period. Examples include a severe flue season and weather events. b) A sustained change in claims level. Examples include legislative changes (new mandated benefits) and internal changes. 4) Expected population shifts - includes changes in geographic mix and age-gender mix 5) Structural changes - includes leveraging, benefit changes, changes to clinical programs, and network changes 6) Capitation - can impact trends if there is a material change in the average capitation fee or bonus payments 7) Margin - added to best estimate trend to minimize the chance of a loss

Question 120

Key questions to ask when analyzing trends (4)

Answer 120

1) How accurate were the original projected trend and PMPM estimates? 2) Which assumptions were driving any variation? 3) How can the process be modified to achieve greater accuracy? 4) What other factors, expected or unexpected, drove the trends?

Question 121

Factors that may influence future trends (3)

Answer 121

1) The impact of exchanges - enrollees will likely change health plans more frequently than in the past, which will require insurers to have a more in-depth understanding of the impact of population shift 2) Cost saving initiatives - including accountable care organizations, clinical interventions, and wellness programs 3) The economy - some economic factors may help in setting better trend estimates

Question 122

Desired characteristics of premium rates (3)

Answer 122

1) Adequate - high enough to generate an acceptable return on equity 2) Competitive - low enough to enroll enough members to meet volume and growth targets 3) Equitable - to avoid an unreasonable amount of cross-subsidization among groups (which will improve persistency)

Question 123

Information gathered during underwriting for managed health care (4)

Answer 123

1) Health status - determined based on: a) For individual and small group: physician exams, prescription drug histories, and medical questionnaires b) For large groups: medical cost experience and a listing of employees' major health conditions 2) Ability to pay the premium - based on income verification and credit history 3) Availability of other coverage - information is needed for coordination of benefits with other insurance and workers' compensation 4) Historical persistency - groups that frequently change carriers may not persist long enough for the insurer to recoup acquisition costs

Question 124

Steps in the rate formula for managed health care (5)

Answer 124

1) Develop the projection period base rate PMPM - based on historical medical costs trended forward, and reflects the average characteristics of the block of business 2) Apply group-specific additive adjustments - such as the added cost of covering mandated services in a given state 3) Apply group-specific multiplicative adjustments - includes factors for the benefit plan, geographical area, age/gender, degree of health care management, and health status 4) Add retention loads - includes administrative expenses, a buildup of contingency reserves, coordination of benefits savings, and profit 5) Convert to a contract rate (per employee or subscriber) - for group coverages, this includes developing tiered rates (employee only, family ,etc.)

Question 125

ACA rating requirements effective in 2014 (4)

Answer 125

1) Plans may not impose pre-existing condition exclusions 2) Rating variation is only allowed based on: a) Age (limited to a 3:1 ratio from highest to lowest age band) b) Geographic rating area c) Plan design and network relativities d) Tobacco use (limited to a 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

Question 126

Rate setting approaches (2)

Answer 126

1) Rerating - rating based on direct, existing experience (e.g., the experience of an existing block) 2) Fundamental pricing - rating from other data sources (used as benchmarks), which are adjusted to apply to the current situation a) Tabular method - an existing table (or modification of it) is used as the morbidity basis for pricing (e.g., using the 1985 CIDA table for pricing DI). Typically used for long-term, non-inflation-sensitive products. b) Buildup and density functions - a model is built to determine expected claims in the rating period. Generally used for inflation-sensitive products. c) Simulation - an existing distribution of expected claims is projected into the rating period, using all known information about the claimants (including prior claim experience)

Question 127

Major considerations in the rate setting process (5)

Answer 127

1) The market - competitors' pricing sets expectations for consumers, limiting pricing options 2) Existing products - expectations will be based on the pricing strategies used for current products 3) Distribution system - the compensation systems, the structure of the distribution system, and the level of company control are all relevant in pricing 4) Regulatory situation - limitations may exist that impact how rates are set, and whether needed rate increases are allowed 5) Strategic plan and profit goals - pricing practices should reflect the company's goals

Question 128

Major rating variables for health insurance (13)

Answer 128

1) Age - claim costs increase significantly by age for almost all health insurance coverages 2) Duration - durational trends are the trends in excess of those generated by insured age alone. They typically come from initial underwriting and from cumulative anti-selection. 3) Gender - most coverages vary rate by gender 4) Marital status - this is a big factor for LTC, since having a spouse at home can decrease the need for a nursing home 5) Parental (or family) status - rates must vary based on how many people are insured 6) Occupation - an important rating factor for DI coverages, but not for other coverages 7) Geographic area - rates my vary by area due to different patterns of care, provider contracts, availability of care, and legal requirements 8) Current health status 9) Past claim history 10) Smoking status 11) Weight 12) Presence and nature of other coverage 13) Situation-specific factors - e.g, whether the policyholder converted from another plan

Question 129

Types of age rating structures (3)

Answer 129

1) Attained age rating - a policyholder's rate is a function of his or her age at renewal. Also referred to as step rating if rates are grouped into age bands. 2) Entry age or issue age rating - the rate reflects the age of the policyholder when the policy was issued 3) Uni-age rating - the rate structure doesn't recognize age at all, leading to subsidization of older individuals. Most community rate structures are uni-age.

Question 130

Tabular method formulas for calculating net premiums

Answer 130

Net Premium (NP) = SUM(z issue yr to final yr) of Pr(Clm(z)) * AC(z) * V(z) * L(z) where - Pr(Clm(z)) is the probability of a claim occurring (incidence rate) in year z - AC(z) is the average claim cost (assuming a claim occurs) in year z - V(z) is the present value factor corresponding to year z - L(z) is the proportion of originally issued lives still in force in year z Average claim cost (AC(z)) = SUM(s=1 to FnlCmPyt) of Cm$(s) * Pr( 1 - Tn(s) ) * V(s) where - s is the claim duration - Cm$(s) is the claim dollars payable at duration s - Pr( 1 - Tn(s) ) is the probability of a claimant at claim duration 0 remaining disabled at duration s - FnlCmPyt is the claim duration of the final possible claim payment

Question 131

Using the buildup and density function approach for pricing (3)

Answer 131

1) Buildup approach - each claim type (inpatient, outpatient, etc.) has its own claim cost calculation, as the product of claim frequency times average cost per service. The total claim cost is the sum of the various categories. Works well for benefits with copays. 2) Density functions - calculates a distribution of the expected annual claims for an individual, with no calculation of the different categories of benefits. Is useful when calculating the impact of deductibles and out-of-pocket limits. 3) Combining buildup and density functions - for PPO products, may calculate in-network costs using the buildup approach (due to copays), and out-of-network cots using the density approach (due to deductibles). The two are combined to get a final claim cost.

Question 132

Steps of the rerating approach for pricing (5)

Answer 132

1) Gather experience on existing business - use incurred claims (preferably on a runout basis) and earned premiums. The reliability of the data should be assessed before using it 2) Restate experience - past premiums should be restated to the rate levels currently in effect 3) Project past results to the future - adjust for items that cause future experience to differ from past experience 4) Compare the projection against desired results - a rate increase is calculated by determining how much rates need to change to produce the desired loss ratio (which is based on the expected level of expenses and profit) 5) Apply regulatory and management adjustments

Question 133

Adjustments needed for using past claims to project future claims (6)

Answer 133

1) Changes in the covered population 2) Changes in duration - should anticipate durational effects in the claim costs 3) Changes in benefits - changes may be explicit (such as a change in copays) or implicit (such as a change in how a policy provision is interpreted 4) Changes in claim costs - must project changes in frequencies and changes in average costs 5) Leveraging - as trends change the average claim cost, the impact of deductibles and copays causes claims to increase at a rate greater than the trend 6) Other changes - includes anti-selection, changes in underwriting, and changes in business practices

Question 134

Formula for future projected claims

Answer 134

``` T represents future period, S represents past period Projected claims (t) = Claim cost PMPM (s) * Number of members (t) * (1 + leveraged claim cost trend)*(EXP(t-s) * Avg durational factor (t) / Avg durational factor (s) * (1 + Anti-selection factor due to lapses (t-s)) * (1 + Adjustment factor for other changes (t-s)) ```

Question 135

Reasons for management adjustments in pricing (5)

Answer 135

1) Competitiveness of the premiums for new business 2) Profitability in other lines of business 3) Relations with the public or the sales force 4) Social policy 5) Desire to manage the block from a long-term perspective (e.g., phase in a large rate increase)

Question 136

Methods for calculating gross premium (2)

Answer 136

1) Block rating (short term horizon) approach - claim costs are calculated for the rating period (typically a one-year period) and premiums are calculated by adding on expenses and profit charges. Gross premium G = [N * (1 + E(n)) + E(f)] / (1 - E(g)), where - N = net premium (claim cost) - E(n) = percent of claim expenses - E(f) = fixed expenses - E(g) = percent of premium expenses + profit as a percent of premium 2) Asset share approach - involves long-term projections of various items, in order to determine the necessary premium

Question 137

Items included in asset share projections (6)

Answer 137

1) Exposure values - including the number of policies sold or in force, number of claims or claim payments, number of premium collections, and number of units sold or in force 2) Revenue values - including premium, investment income, and explicit subsidies 3) Claim values - paid claims, incurred claims, claim reserves, claim adjustment expense reserves, and policy reserves 4) Capital values - must model the cost of the capital used by the line of business 5) Expense targets - expense loadings may be very detailed. The cost of capital is sometimes treated as an expense. 6) Profit targets - profit is calculated in one of the following ways: a) Percent of premium - present value of profits divided by present value of premiums b) Return on investment (ROI) - this is the interest rate at which the present value of future profits will exactly equal the initial investment c) Return on equity (ROE) - this is like the ROI method, except the initial investment is increased by the amount of capital that is set aside to cover the business

Question 138

LTC pricing assumptions (8)

Answer 138

1) Morbidity 2) Mortality - consider the effect of selection and classification of applicants 3) Lapses - consider marketing, competitiveness, payment mode and method, nonforfeiture benefit 4) Expenses - product development, commissions, marketing, compliance, underwriting, issuance, policyholder service and claim administration 5) Taxes - reflect tax reserve basis of the plan as well as the premium, income or other applicable tax rates 6) Investment return - consistent with returns on assets supporting the liabilities 7) Mix of business - consider distribution of age, gender, marital status, underwriting classes, distribution system, and plan options 8) Change over time - for assumptions likely to change, consider reflecting change

Question 139

Considerations in setting LTC claim cost assumptions (9)

Answer 139

1) Claims costs will vary by nursing home, assisted living facility, and home health care 2) Substitution effect among the various benefits 3) Increased demand for LTC services due to the presence of insurance 4) Availability of benefits from other programs (such as Medicare) 5) Availability of LTC services in the geographical area 6) The effect of underwriting selection and underwriting classes 7) The financial benefits to the claimant of remaining eligible for benefits (not getting well) 8) The effect of mortality on termination rates 9) The effect of marketing and claims processes

Question 140

Actuarial standards for the use of data (7) | ASOP #23 - Data Quality

Answer 140

1) Data that is completely accurate, appropriate, and comprehensive is frequently not available, so the actuary should use available data that allows the actuary to perform the analysis 2) Considerations in selecting data 3) Review of data - the actuary should review the data for reasonableness, unless such a review is not necessary or practical 4) The actuary should use appropriate data 5) Reliance on data and other information supplied by others - the accuracy of this information is the responsibility of those who supply it. The actuary may rely on this information, but should disclose this reliance. 6) Confidentiality - the actuary should handle data containing confidential information consistent with Precept 9 of the Code of Professional Conduct 7) Limitation of the actuary's responsibility - the actuary is not required to audit the data or determine whether data supplied by others is intentionally misleading

Question 141

Considerations in selecting data to use in an actuarial analysis (9) ASOP #23 - Data Quality

Answer 141

1) The scope of the assignment and the intended use of the analysis 2) The desired data elements and possible alternative data elements 3) Whether the data is appropriate and sufficiently current 4) Whether the data is internally consistent 5) Whether the data is reasonable given relevant external information that is readily available 6) The degree to which the data is sufficient for the analysis 7) Any known significant limitations of the data 8) The availability of alternative data, and the benefit and practicality of obtaining this data 9) Sampling methods that were used to collect the data

Question 142

Categories of appropriateness of data used in an actuarial analysis (5) ASOP #23 - Data Quality

Answer 142

1) The data is of acceptable quality to perform the analysis 2) The data requires enhancement before the analysis can be performed, and it is practical to obtain additional or corrected data 3) Judgmental adjustments or assumptions can be applied to the data, or the analysis results, to allow the actuary to perform the analysis 4) The data is likely to have significant defects 5) The data is so inadequate that it cannot be used to satisfy the purpose of the assignment

Question 143

Required documentation related to data quality (9) | ASOP #23 - Data Quality

Answer 143

1) The source of the data 2) Any limitations on the use of the actuarial work product due to uncertainty about data quality 3) Whether the actuary reviewed the data, and any limitations due to data that was not reviewed 4) A summary of unresolved concerns the actuary may have about questionable data values 5) A summary of any significant steps the actuary has taken to improve data 6) A summary of significant judgmental adjustments or assumptions the actuary applied to the data or to the results 7) The existence of results that are highly uncertain or potentially biased due to the quality of data 8) The extent of the actuary's reliance on data and other information supplied by others 9) Disclosures in accordance with ASOP #41 if: a) Any material assumption or method was prescribed by law b) The actuary relies on other sources and thereby disclaims responsibility for any material assumption of method c) The actuary has otherwise deviated materially from the guidance of this ASOP

Question 144

Situations in which ASOP #25 applies (4) | ASOP #25 - Credibility Procedures

Answer 144

1) When the actuary is required by applicable law to evaluate credibility 2) When the actuary chooses to evaluate the credibility of subject experience 3) When the actuary is blending subject experience with other experience 4) When the actuary represents the data being used as statistically or mathematically credible

Question 145

Recommended practices for using credibility procedures (4) | ASOP #25 - Credibility Procedures

Answer 145

1) The actuary should use an appropriate credibility procedure when determining if the subject experience has full credibility of when blending the subject experience with the relevant experience. In selecting a procedure, consider: a) Whether the procedure is expected to produce reasonable results b) Whether the procedure is appropriate for the intended use and purpose c) Whether the procedure is practical to implement when considering its cost and benefit 2) The actuary should exercise professional judgment in selecting relevant experience to blend with the subject experience. This relevant experience should have characteristics similar to the subject experience. 3) The actuary should use professional judgment when selecting, developing, or using a credibility procedure 4) The actuary should consider the homogeneity of both the subject experience and the relevant experience

Question 146

Disclosures required in an actuarial report (10) | ASOP #41 - Actuarial Communications

Answer 146

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 replied 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 147

Disclosure requirements for assumptions and methods used in an actuarial report (3) ASOP #41 - Actuarial Communications

Answer 147

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 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 disclose the affected assumption or method, the party who set it, and the reason it was set by this party, rather than by the actuary

Question 148

Purpose of the 2016 Cancer Claim Cost Valuation Tables work group and its report (3)

Answer 148

1) Propose new valuation tables for cancer policies. New tables were created for two types of benefits: a) First occurence benefit - generally a lump sum amount paid on the first occurrence of a cancer b) Hospitalization benefit - generally a daily indemnity amount paid when the person is confined to a hospital for the treatment of a covered cancer 2) Document the processes followed in preparing for the proposed tables 3) Make the experience gathered for this effort available to practitioners in the industry. This should aid actuaries pricing and reviewing product filings.

Question 149

Goals of the graduation method chosen for creating the values in the new 2016 Cancer Clam Cost Valuation Tables (4)

Answer 149

1) Smooth the inherent volatility in the data collected 2) Provide a good fit to the initial data 3) Demonstrate flexibility to control the risk of negative reserve calculations due to declining data patterns for younger and older ages 4) Demonstrate flexibility to develop reasonable patterns where data over a number of attained ages had to be aggregated