Topic 4: Financing/Funding

Question 1

Financing

Answer 1

Who pays the cost of the plan

Question 2

Financing Options

Answer 2

1. ER pays full cost of the plan: Non Contributory
2. Contributory: ER and EE share cost
3. Fully Contributory: EE pays entire cost
   - Voluntary Benefits

Question 3

Funding

Answer 3

1. Who is the risk bearer?
   - Claims/Losses
   - Adm Costs
2. Who Guarantees the payment of the benefits?
   - Insurer; Private/Government
   - ER if self funded
3. Managed Care Plans the provider is at risk: HMO, ACO, Staff Model HMOs

Question 4

What Is The Costs of a Guaranteed Cost Arrangement?

Answer 4

Premium

Question 5

Guaranteed Cost Arrangement

Answer 5

• Guaranteed cost to ER

- Fixed or Unknown cost of risk to the ER is represented by the premium

Question 6

Who Assumes All Claims and Admin Costs and Risks with a Guaranteed Cost Arrangement

Answer 6

Insurer

Question 7

What are Manual and Community Rating Systems Used For?

Answer 7

Used by Insurers to determine the premiums

Question 8

Who Bears The Risk In A Fully Self insured Arrangement?

Answer 8

• ER; Assumes all of the claims and administrative costs

Question 9

What is Experience Rating?

Answer 9

• Claims or losses; “loss experience” for a given time period is used to determine a rate or a cost of coverage

Question 10

Retrospective Experience Rating

Answer 10

• Premium is the initial cost to the ER

- Takes Place at the end of the coverage period

Question 11

Balance Formula For Retrospective Experience Rating

Answer 11

• Balance = Premiums Earned - Claims/Losses - Admin Costs

- Premiums earned as opposed to premiums written

Question 12

Positive Balance For Retrospective Experience Rating

Answer 12

• Refund
• Carry Forward to future year (Paid Interest)
• Surplus Balance

Question 13

Underwriting Profit

Answer 13

• Positive balance after claims and admin costs are paid

Question 14

Negative Balance For Retrospective Experience Rating

Answer 14

• Deficit
• Pay it immediately
• Make up from previous surplus
• Carry it forward; charge interest

Question 15

Cost of Risk If ER has Guaranteed Cost Arrangement

Answer 15

Premium Paid

Question 16

Cost of Risk If ER is totally and Completely Self Insured

Answer 16

• Cost of Claims and Admin Costs

Question 17

Cost of Risk Under Retrospective Experience Rating Arrangement

Answer 17

1. Premium for 2013 adjusted for the end of year 2013 balance
2. Current year loss experience influences current year cost of risk

Question 18

Prospective Experience Rating

Answer 18

Takes place at the rate renewal process

• If balance is (+) rate decreases
• If balance is (-) rate increases
• If balance is (0) rate stays the same??

Question 19

What Is The Current Cost of Risk Influenced By In A Prospective Experience Rating?

Answer 19

Current cost of risk is influenced by the past loss experienced

Question 20

Prospective Experience Rating Formula

Answer 20

Balance = Premiums Earned - Claims/Losses - Admin Costs

Question 21

Loss Experience Credibility Types

Answer 21

1. Fully Credible
2. Partially Credible
3. Not Credible

Question 22

Credibility Factor Formula

Answer 22

[ (ER’s Loss Experience) x CF ] + [ (Expected Loss Experience For The ER Manual Rate) x (1- CF) ]

Question 23

What Is Fully Credible Company

Answer 23

• Large ER
• 1000 + covered
• Disability Insurance; lower frequency and less exposure
• More years to get higher credibility rating

Question 24

Zero Credible Company

Answer 24

• New Account

- Smaller ER

Question 25

Alternate Funding Arrangements

Answer 25

• Insurance Company Environment

- Take advantage of predictable losses

Question 26

Minimum Premium Arrangement

Answer 26

• ER large Medical Plan
• Expected Total Claims = 2 million + 100% credible
• High Deductible Plan
• Insurer provides for claims exceeding 2 million; catastrophic coverage

Question 27

Minimum Premium Arrangement Premium

Answer 27

Premium = Expected Loss + Admin Costs + Risk Charge

• Premium is substantially reduced
• Premium taxes increase
• Potential cash flow advantage as well