COURSE 8: Fall 2003 -1- GO TO NEXT PAGE
Health, Group Life & Managed Care
Morning Session
**BEGINNING OF EXAMINATION**
HEALTH, GROUP LIFE & MANAGED CARE
MORNING SESSION
1. (4 points) Your CEO is departing for a meeting to discuss the marketing strategy for a
new managed care product. He has asked you to brief him on the following topics:
(a) With regard to distribution models
(i) Describe traditional and alternative distribution models.
(ii) Describe considerations relative to the major constituent groups that
influence the distribution process.
(b) Describe market segments commonly used for managed care products.
Questions 2 – 8 pertain to the Case Study
2. (9 points) You have been asked to analyze the claim experience for Wonderful Life in
Tables MM-6a and MM-6b of the case study.
(a) Describe the impact on trend of company-specific care management initiatives.
(b) Calculate the year-over- year quarterly rolling trend for 3Q02 and 4Q02.
(c) Recommend baseline trends for Hospital, Non-Hospital and Total Medical Costs.
Assume the last half of 2002 is predictive of future trends. Justify your answer.
(d) Based on the following assumptions:
•On January 1, 2003, 50% of the hospitals will accept 10% discount off the
2003 Hospital contracted rate.
•These hospitals deliver 1/3 of your facility care.
•The remaining hospital contract costs will increase as expected.
•Utilizatio n does not change.
Calculate a revised estimate of Hospital and Total Medical Trend. Show your
work.
(e) Marketing has just sold a large group with 5,000 employees (12,000 members).
All of the group members will only use hospitals that accept the 10% discount.
Calculate a revised estimate of Total Medical Trend. Show your work.
COURSE 8: Fall 2003 -2- GO TO NEXT PAGE
Health, Group Life & Managed Care
Morning Session
Questions 2 – 8 pertain to the Case Study
3. (13 points) You are a consultant for Bailey Industries. Bailey has been struggling to
balance increased medical costs against emplo yee demand for more choice in coverage.
Bailey is considering the adoption of a new medical plan with patient-directed benefits.
In addition to Table B-1, you are given the following claims probability distribution and
proposed benefit options:
Claims Range Percentage of Employees
with claims cost in range
Average claims cost per
employee in range
$0 15% 0
$1 - $1,000 40% $400
$1,000 - $2,000 15% $1,500
$2,000 - $5,000 15% $3,500
$5,000+ 15% $25,000
Option A Option B
Deductible $1,000 $2,000
Coinsurance 10% 20%
Annual Employee
Premium $0 $0
Employer funds placed
in Employees PHA
$500 $1,250
(a) (1 point) Describe problematic aspects of the current employer-sponsored system
for employers and employees.
(b) (3 points) Describe key implementation considerations for an employer adopting a
PDHB approach and how they would apply to Bailey Industries.
(c) (3 points) Describe models used to predict selection costs for the medical options.
Identify and explain why certain models are not appropriate for evaluating costs
for Bailey Industries.
(d) (6 points) Assume a group of all single employees who, absent choice, would be
equally distributed between the two options. Assume PHA (Personal Health
Account) funds are expenses to Bailey Industries.
(i) Construct a choice model for Options A&B and calculate maximum
adverse selection cost.
(ii) Explain why adverse selection will be less than the amount calculated by a
choice model.
(iii) Describe methods to manage adverse selection in PDHB models.
COURSE 8: Fall 2003 -3- GO TO NEXT PAGE
Health, Group Life & Managed Care
Morning Session
Questions 2 – 8 pertain to the Case Study
4. (5 points)You are the chief actuary for Wonderful Life. You must determine whether
Wonderful Life needs to hold any premium deficiency reserves (PDR).
(a) (1 point) Outline assumptions to be considered when calculating a PDR.
(b) (1 point) Recommend the groupings Wonderful Life should use to assess the need
for a PDR. Support your recommendation.
(c) (3 points) In addition to Tables MM-1, MM-7, and MM-2a you are given the
following information:
•The overall 2003 rate increase is limited to 12% due to small employer rating
requirements.
•This rate increase limit only applies to 2003.
•Member termination from 2002 to 2003 will be at the same rate as has been
experienced in the past.
•Expenses are calculated assuming an average of 1.75 members per
employee.
•Ignore interest and income taxes.
Determine if a PDR should be held as of 12/31/2002 for the closed block of
business in Wonderful Life’s Small Group Department.
COURSE 8: Fall 2003 -4- GO TO NEXT PAGE
Health, Group Life & Managed Care
Morning Session
Questions 2 – 8 pertain to the Case Study
5. (7 points) Your manager at Wonderful Life Insurance Company has asked you to
calculate renewal rates for Group 6 for a March 1, 2003, renewal date using a
combination of multi- year loss ratio and catastrophic pooling methods.
In addition to information from Tables MM-2a and MM-2b:
•Assume case characteristics for Option 1 and Option 2 are the same for both years as
shown in Table MM-3b.
•The gross premium for Group 6 for July 1, 2000 to June 30, 2001 was $5,800,000.
•Weights for averaging are 75% for current rating period and 25% for prior rating
period.
Calculate the annual gross premium for an employee with dependents selecting Option 1.
Show your work.
6. (3 points) You have been asked to develop materials for a meeting to discuss Wonderful
Life’s 5- year plan.
(a) Describe possible strategies a group insurance company could use to gain a
competitive advantage.
(b) Describe how Wonderful Life Insurance Company has demonstrated these
strategies in their four primary business divisions. Give an example of such a
strategy for each division.
COURSE 8: Fall 2003 -5- GO TO NEXT PAGE
Health, Group Life & Managed Care
Morning Session
Questions 2 – 8 pertain to the Case Study
7. (8 points) In addition to the information provided in Tables C-1, C-2, MM-1, MM-4a to
MM-6b, you have been given the following:
•Investment income and taxes are based on 2002 corporate levels
•Corporate after-tax Return on Equity (ROE) objective for 2003 = 15%
•Cost of Capital = 10%
•Risk-based surplus for Major Medical division is 18% of premium.
•Recast of Major Medical Division’s IBNR as of 12/31/99 is $50,000 more than
originally booked.
Total of MM-6a & 6b
Year Incurred and Paid
($1,000s)
Incurred Estimate
($1,000s)
IBNR Estimate
($1,000s)
2000 $1,004,700 $1,004,700 $0
2001 $1,125,200 $1,126,224 $1,024
2002 $1,121,300 $1,378,977 $257,677
(a) (1 point) Describe the importance of using recast data in financial management.
(b) (3 points) Convert the corporate ROE objective into the equivalent:
(ii) corporate underwriting gain objective
(iii) corporate loss ratio objective
(c) (4 points) Using recast claims data, calculate the Economic Value Added as a
percentage of capital invested for the Major Medical Division for 2000, 2001 and
2002. Show your work.
COURSE 8: Fall 2003 -6- S
Health, Group Life & Managed Care
Morning Session
Questions 2 – 8 pertain to the Case Study8. (6 points) You are evaluating Wonderful Life’s reserves and believe the claim lag pattern
may have recently changed.
(a) Calculate the age-to-age development factors based on 9/2001 to 12/2002
emerging experience using claims paid in the most recent two months on Table
MM-4b.
(b) Estimate incurred claims for December 2002 assuming all claims are complete
after 15 months.
(c) Describe considerations involved in using age-to-age development factors to
estimate incurred claims.
9. (5 points) You are the pricing actuary for the division of LTDC Life Insurance selling
group long term disability and group long term care products. Given the recent
fluctuations in the experience, you are considering implementing a reinsurance agreement
but must convince your Vice-President that it is needed.
(a) Explain the different approaches LTDC Life can use to reinsure its Group LTD
and LTC products.
(b) Explain risk characteristics of each product line that make the use of reinsurance
attractive.
**END OF EXAMINATION*
MORNING SESSION
COURSE 8: Fall 2003 - 7 - GO ON TO NEXT PAGE
Managed Care Segment
Afternoon Session
**BEGINNING OF EXAMINATION**
MANAGED CARE SEGMENT
AFTERNOON SESSION
Beginning With Question 10
10. (3 points) You have been asked to summarize the report of the SOA Medical
Effectiveness Task Force.
(a) Explain the importance of measuring medical effectiveness.
(b) Explain the main health plan performance evaluation categories.
COURSE 8: Fall 2003 - 8 - GO ON TO NEXT PAGE
Managed Care Segment
Afternoon Session
11. (4 points) Your company offers an insurance product with the following equally likely
events.
Severity of Claim Given Event Occurs
Event
Frequency of Claim
Given Event Occurs Probability Claim Size
1 25% 75%
25%
1,000
500
2 50% 50%
50%
1,000
500
3 75% 10%
90%
1,000
500
You are also given the following additional information:
•7 years of claims history for one individual
Year Claims
1 -
2 500
3 -
4 -
5 1,000
6 1,000
7 -
•Expected Value of the Process Variance = 133,581
•Target Loss Ratio = 80%
•Ignore the impact of trend
(a) Calculate the expected gross premium for this product. Show your work.
(b) Calculate the credibility. Show your work.
(c) Calculate the credibility weighted total premium for this individual. Show
your work.
COURSE 8: Fall 2003 - 9 - GO ON TO NEXT PAGE
Managed Care Segment
Afternoon Session
12. (4 points) ABC Company is considering acquiring ITSA, a managed care organization
that services a number of major cities. You are the head of the claims department in the
Major Medical division and you’ve been asked to evaluate claims operations at ITSA,
including systems used to process the claims.
(a) Describe measures of claims quality.
(b) Outline basic steps you would expect to find in the ITSA claims adjudication
process.
(c) Describe specific internal data sources you should include as part of your claims
review.
(d) Describe issues that should be considered in performing an audit.
13. (4 points) You have been asked by your client at BEST HMO to create a presentation that
will enable her to convince management to establish new methods for physician
compensation.
(a) Describe traditiona l and new, alternative forms of capitation and their suitability
for specific types of physicians.
(b) Describe traditional and new, alternative forms of incentive plans.
COURSE 8: Fall 2003 - 10 - GO ON TO NEXT PAGE
Managed Care Segment
Afternoon Session
14. (5 points) You are a consultant hired by TeethFerry.com, a company hoping to use the
Internet to market dental plans. They have created a marketing communication to be sent
to companies that do not currently have a benefits program.
From: TeethFerry.com
Subject: Quality Dental Coverage with 3 Months at No Charge
Affordable Dental Coverage
•save up to 60% on all your dental needs
•choose from 15 of the finest nationwide and regional plans
•pay premiums, submit claims, get the latest information, all on your desktop!
(a) List the general types of delivery systems for dental plans and their major
features.
(b) Outline plan provisions and claim practices that dental insurers can use to
limit cost and anti-selection.
(c) Describe challenges that e-commerce companies must overcome to be
successful.
COURSE 8: Fall 2003 - 11 - GO TO NEXT PAGE
Managed Care Segment
Afternoon Session
Questions 15 - 18 pertain to the case study
15. (4 points) The Bedford Group is exploring alternatives to acute inpatient care. A study
by Bedford’s Medical Director indicates the MCO might benefit from a program to
encourage patients with conditions requiring less intensive treatment to be moved from
acute care facilities to a Skilled Nursing Facility (SNF). The initiative would transfer
acute care patients to the SNF at Hospital ID1 and is expected to result in the following
changes:
Reduction in
Medical Acute Days
Reduction in
Surgical Acute Days
Hosp ID1 1.0% 0.5%
Hosp ID2 2.0% 2.0%
Hosp ID3 1.5% 1.0%
(a) Assuming the above reductions are realized, and based on Table MC-2, calculate
the expected change in medical, surgical and SNF days/1000 and the change in
medical/surgical length of stay in 2002 for the MCO. Show your work.
(b) Describe behavioral health channeling mechanisms available to direct individuals
to the appropriate type of care.
COURSE 8: Fall 2003 - 12 - GO TO NEXT PAGE
Managed Care Segment
Afternoon Session
Questions 15 - 18 pertain to the case study
16. (4 points) You are a consulting actuary for Hospital ID1. The Bedford Group is
proposing to capitate Hospital ID1 for inpatient hospital services incurred by its
members. You have been asked by Hospital ID1 to develop capitation targets for
negotiations with the Bedford Group.
In addition to information provided in Tables MC-2 and MC-7, you have made the
following assumptions:
•administrative expenses: 8% of capitation
•risk charges: 6% of capitation
•the 2002 hospital experience is credible
(a) Using an actuarial cost model based on your current provider contract with
Bedford Group, calculate the base pmpm cost. Show your work.
(b) List key assumptions that should be considered when determining the utilization,
average cost and pmpm targets in an actuarial cost model.
(c) Describe additional considerations that Hospital ID1 should consider when
evaluating a capitation proposal.
COURSE 8: Fall 2003 - 13 - GO TO NEXT PAGE
Managed Care Segment
Afternoon Session
Questions 15 - 18 pertain to the Case Study
17. (12 points) You are an actuary for the Bedford Group. In a meeting with the VP of
Provider Contracting, you are told that a large physician specialty group that provides
15% of all specialty services has left IPA1 and joined IPA2.
Assume that:
•Physician risk share arrangements for 2002 and 2003 do not change.
•For PCP’s in IPA1, the 2002 actual claim cost equals the t arget claim cost.
Using Tables MC-5, MC-7, and MC-8, and based on 2002 experience:
(a) Adjust the 2003 risk share arrangements for IPA1 and IPA2 to reflect the
provider change. Show your work.
(b) Calculate the expected 2003 payments to IPA1 and IPA2 based on the
specialty group shift to IPA2, including any risk share adjustments and
ignoring trend. Show your work.
(c) Excluding any risk share arrangements, calculate the new percent of
Medicare reimbursement to IPA2 to maintain pmpm costs for the Bedford
Group at the 2002 level. Show your work.
(d) In case IPA2 does not accept a change to their Medicare reimbursement
level, you would consider offering a specialty capitation arrangement.
Discuss the advantages and disadvantages of a specialty capitation
arrangement.
COURSE 8: Fall 2003 - 14 - GO TO NEXT PAGE
Managed Care Segment
Afternoon Session
Questions 15 - 18 pertain to the case study
18. (6 points) You are the pricing actuary for the Bedford Group and have been asked by the
Marketing Director to develop new pharmacy premiums. She is interested in having a
more competitively priced product. Yo ur CFO has indicated that your profit goal is 2.5%
of premium.
Assume the HMO and POS plans have identical plan formularies with the following
copays:
•Generic $10
•Formulary Brand $20
•Non-Formulary $40
Using 2003 budgeted experience from Table MC-4, information provided on Table MC-7,
and assuming AWP = $80, then:
(a) Calculate the premium if Bedford:
(i) retains all rebates.
(ii) uses all rebates to reduce premiums.
(b) Describe the purposes of rebates, issues surrounding rebates, and actions which
can be taken to increase rebates.
COURSE 8: Fall 2003 - 15 - GO TO NEXT PAGE
Managed Care Segment
Afternoon Session
19. (5 points) You are a consulting actuary for an HMO that wishes to control utilization, yet
maintain high quality of care.
(a) Describe traditional approaches to quality assessment.
(b) Review regulatory issues relating to quality assurance and their impact on HMOs.
(c) Describe managed care methods used to control medical utilization and the types
of services impacted by each method.
(d) Review state regulations that may limit an HMOs ability to manage utilization
and costs.
20. (4 points) You serve on a professional task force advising a State Senator on health
insurance reform issues. New health reform legislation is being proposed which is
intended to meet the following objectives:
•Promote a reduction in the working uninsured population
•Promote job mobility
•Facilitate the ability of individuals and small employers to compare insurance
policies offered by different health carriers
•Reduce variation in, and volatility of premium rates charged to different groups
(a) Describe key recommendations regarding the above objectives to be included in
reform legislation.
(b) The legislature is also reviewing risk adjustment mechanisms for Medicaid HMO
plans. Compare and contrast methods of risk adjustment and recommend a
method to be included in the legislation. Justify your recommendation.
COURSE 8: Fall 2003 - 16 - S
Managed Care Segment
Afternoon Session
21. (5 points) You are a consulting actuary retained by Capitalized Health Plan, a licensed
HMO in a state that has passed the NAIC Risk-Based Capital For Health Organizations
Model Act (RBC Model). The CFO is unfamiliar with risk-based capital and has asked
you to make a presentation to educate him and his staff. In your research, you have
extracted the following information from Capitalized HP’s 2002 Statutory Annual
Statement:
Assets (Non-Affiliated)
U.S. Government Bonds $ 4.6 million
#61485;Class 1 Bonds $ 9.8 million
Class 1 Preferred Stock $ 2.2 million
Common Stock $ 2.0 million
Underwriting Revenue/Earned Premium
Comprehensive Medical & Hospital $45.0 million
Dental $16.3 million
ASO Fees $ 5.0 million
Claim Payments under:
capitation (paid directly to providers) $11.0 million
professional fee schedule $22.7 million
hospital case rates $10.2 million
discounted charges $ 8.2 million
Underwritten business administrative expenses
(excludes premium taxes & commissions)
$ 2.1 million
(a) Describe regulatory implications of RBC outcomes.
(b) Describe other uses of RBC measurements.
(c) Review the variables and formula for health RBC after covariance as used in the
RBC Model.
(d) Recommend ways to reduce the amount of RBC that Capitalized HP must hold.
**END OF EXAMINATION**
AFTERNOON SESSION
