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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
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
