Objective 4 - Underwriting Flashcards

Question

Steps for developing premium rates in a multiple-choice environment

Answer 1

1. Determine the actuarial value of each benefit option as if it were sold on an independent basis 2. Estimate the enrollment mix by plan option 3. Estimate the relative health status factor for each option based on the expected enrollment mix 4. Calculate the preliminary selection adjusted rates for each option. This equals the actuarial rates from step 1 multiplied by the relative health status factors in step 3. 5. Calculate the average selection load as a ratio of the average of the step 4 selection adjusted rates and the average of the step 1 actuarial rates 6. Calculate the blended selection adjusted rates by multiplying the step 1 actuarial rates by the average selection loading from step 5

Answer 2

1. Definition - the process of adjusting measures of healthcare utilization and cost to reflect the health status of members 2. The first step is risk assessment - the method used to assess the relative risk of each person in a group (may be referred to as a risk adjuster). Consists of: a) Risk classification - to group individuals into classes based on risk characteristics b) Risk measurement - to determine the level of risk for the classes 3. The second step is payment adjustment - the method used to adjust payments to reflect differences in risk 4. Risk assessment methods are used for provider profiling, case management, provider payment, and rating and underwriting 5. Risk adjustment is being used to adjust payments to Medicare and Medicaid plans. And the ACA includes a risk adjustment provision that will apply to most individuals and small group plans

Answer 3

These are the major goals and policy arguments for requiring risk adjustment 1. Require health plans and providers to compete on the basis of efficiency and quality, not on risk selection 2. Preserve choice for consumers 3. Have consumers pay an appropriate prices for their choice of insurer or provider 4. Under certain reforms (such as guaranteed issue and rating limitations), a health risk adjuster is needed to increase the premium for plans covering lower-than-average risks and decrease the premium for plans with higher-than-average risks

Answer 4

These are the criteria that can be used to classify risks 1. Demographics - age, gender, family status, or geographic location 2. Utilization measures or claim expenditures - these are generally viewed as inappropriate for health risk adjustment because they could reward an insurer for high historic costs resulting from inefficiencies 3. Diagnosis and pharmacy codes - these codes are commonly used in health risk assessment 4. Medical information or history - based on biomedical measurements (such as blood pressure, cholesterol, height, and weight) or medical history questionnaires (to determine prior medical conditions). 5. Perceived health status - based on answers to a health questionnaire 6. Functional health status - based on ability to perform activities of daily living 7. Lifestyle and behavior factors - such as smoking, fitness level, substance abuse, or diet 8. Multiple classification criteria - it is common to use more than one of the above criteria simultaneously (commonly diagnosis and demographic information)

Answer 5

1. Hierarchial Condition Category (HCC) models - ICD-9 diagnosis codes are classified into diagnostic groups, which are then aggregated into condition categories. Hierarchies are then applied so that an individual is indicated only for the most severe manifestation of a condition. a) The Department of Health and Human Services (HHS) uses the HHS-HCC model for risk adjustment in the individual and small group markets under the ACA b) CMS and the CMS-HCC model to risk adjust payments to Medicare Advantage and Part D plans 2. Adjusted Clinical Groups (ACGs) - groups diagnosis codes into Adjusted Diagnosis Groups (ADGs). Each member is assigned to only on ACG based on his or her age, gender, and ADGs. 3. Chronic Illness and Disability Payment System (CDPS) - individuals are assigned to medical condition categories based on diagnosis codes. Medical costs are predicted based on medical condition and demographic categories. 4. Clinical Risk Groups - uses diagnosis and some procedure codes to calculate a risk score for each member 5. Milliman Advanced Risk Adjusters - can be used with diagnosis-only data, pharmacy-only data, or a combination of the two 6. Diagnostic Cost Groups - medical costs are predicted based on medical condition and demographic categories 7. Episode Risk Groups (ERGs) - claims are grouped based on an episode of care concept. individuals are assigned to medical condition categories based on their diagnosis codes and pharmacy data 8. Impact Pro - designed for underwriting and rating and for identifying potential high cost members for case management 9. Medicaid Rx - members are assigned to medical condition categories based on prescription drugs used. They are also assigned to a demographic category. 10. Pharmacy Risk Groups - a score is computed for each member based on pharmacy risk groups (using a mapping of National Drug Codes (NDCs)) and demographic categories 11. RxGroups - uses a mapping of NDCs into mutually exclusive categories based on each drug's therapeutic indication 12. RxRisk - a pharmacy-based model that assigns each member into medical condition categories and a demographic category 13. Wakely Risk Assessment Model - incorporates cost changes due to benefit and coverage changes newly required under the ACA

Answer 6

Individual measures - 1. Individual R-squared - the percentage of the variation in claim costs explained by the model. Is a standardized measure (results on a scale from 0 to 1), which helps in comparing results between studies. But can be overly sensitive to the prediction error for individuals with large claims. 2. Mean absolute prediction error (MAPE) - the average of the absolute values of the prediction errors. Can be expressed as a percentage by dividing the result by the mean actual medical costs. Group measure - 3. Predictive ratio = predicted claims for the group / actual claims for the group. Is the reciprocal of the common actual-to-expected ratio

Answer 7

1. Bias - risk adjusters should not be statistically biased. The factors used should be directly related to risk. 2. Transparency - knowing how the methodology works helps parties understand why payment is being adjusted 3. Fairness and gaming - a risk adjuster needs to be accurate, practical, predictable, and not subject to gaming 4. Encourage specific coding - the diagnosis grouping used for payment adjustment should not be based on vague or unspecified diagnosis codes. And it should not reward proliferation of coding by assigning higher risk for several clinically-similar codes. 5. Discourage upcoding - certain diagnoses or drugs that are subject to high coding variation due to their discretionary nature should be excluded 6. Data quality and credibility - if diagnosis codes are not captured consistently across insurers, then risk adjustment may produce biased estimates 7. Data availability - some types of data (such as treatment history and perceived health status) are difficult to collect 8. Clinical relevance - the grouping of individuals into risk classes should be clinically meaningful 9. Timing - insurers prefer an adjuster that allows them to determine what their payments will be at the time they set premiums. This criteria favors a prospective adjuster over a concurrent one.

Answer 8

These are also referred to as premium stabilization programs or the "three Rs" 1. Risk adjustment - permanent program (began in 2014) (see separate list) 2. Reinsurance - only in effect for three years (2014-2016) a) Applies to individual only, both within and outside the exchanges b) Administered by the state or HHS for state-run exchanges, or by HHS for the federal exchange 3. Risk corridor - only in effect for three years (2014-2016) a) Applies to qualified health plans sold through an exchange and similar plans offered by the same insurer off the exchange b) Administered by HHS

Answer 9

1. Applies to individual and small group markets 2. Risk adjustment is needed because the ACA requires guaranteed issue and limits the rating variables in these markets, which creates an incentive for a health insurer to select a lower-cost portfolio of individuals 3. The purpose of ACA risk adjustment is to mitigate antiselection between health insurers and also between the markets inside and outside the exchange 4. Insurers that attract a lower-than-average risk will pay into the pool while insurers that attract a higher-than-average risk will be paid from the pool 5. Risk adjustment is administered by the state or HHS for state-run exchanges, or by HHS for the federal exchange

Answer 10

This formula is used to calculate risk transfers for all plans in a market. Ti = { [ (PLRSi * IDFi * GCFi) / SUM(si * PLRSi * IDFi * GCFi) ] - [ (AVi * ARFi * IDFi * GCFi) / SUM(si * AVi * ARFi * IDFi * GCFi) ] } * Ps ``` Ti = Transfer payment to plan i Ps = State average premium PLRSi = Plan i's plan liability risk score IDFi = Plan i's induced demand factor ARFi = Plan i's allowable rating factor AVi = Plan i's actuarial value GCFi = Plan i's geographic cost factor si = Plan i's share of the state enrollment ``` The denominator is summed across all plans in the risk pool in the market in the state

Answer 11

1. Cost savings - premium taxes are avoided, insurer risk and retention charges are minimized, and administrative costs are sometimes lower than those of insured plans 2. Plan design flexibility - design is not limited to the insurer's offerings and is not subject to state mandated benefits 3. Claims management - plan sponsors can select their own claim administration vendors 4. Cash flow - cash position may be improved since the sponsor holds its own IBNR reserves 5. Investment income - the sponsor receives investment income on reserves held

Answer 12

1. Risk assumption - the plan sponsor is liable for losses that exceed expectations 2. Cash flow - fluctuations in benefit plan costs from month the month must be managed 3. Administration - the sponsor must arrange for all services needed by the plan 4. Legal liability - the sponsor may be liable for actions taken by the plan that adversely affect employees

Answer 13

1. Specific stop loss - insures the plan against losses in excess of an annual deductible per covered person 2. Aggregate stop loss - insures the plan against losses in excess of an annual deductible for the entire plan

Answer 14

The contract type is used to limit the period during which eligible losses must be incurred or paid 1. 12/15 - covers losses incurred within a 12-month policy period and paid within 3 months of the end of the policy. The extra 3 months is referred to as run-out coverage 2. 12/12 - covers losses incurred and paid within the 12-month policy period 3. 15/12 - covers claims paid within the 12-month policy period and incurred during that period or within the 3 months before that period. Is referred to as a run-in policy 4. Paid - a run-in policy that covers claims paid during the 12-month policy period and incurred at any time after the original effective date 5. Incurred - pays for all losses incurred in the period but paid at any time. is not common because an integral part of stop loss design is the limitation in payment dates 6. Different run-in and run-out lengths exist, resulting in contracts such as 12/18 and 24/12

Answer 15

1. Trend leveraging - effect increases as the deductible increases 2. Area leveraging - works in same way as trend leveraging (if an area is 10% higher cost, it has the same leveraging effect as a 10% trend rate) 3. Network leveraging - network discounts also leverage 4. Variations by age and sex - for excess medical sots, males are more expensive than females at all ages, partly due to prevalence of accidents among young males 5. Underlying plan design - such as maximums, managed care features, and extension of benefit provisions 6. Industry - may adjust rates based on industry of plan sponsor 7. Contract type - a 12/12 contract is less costly than a 12/15. Watch for antiselection by contract type.

Answer 16

1. Whether any of the current known large losses will have an effect on the upcoming policy year. The underwriter may - rate the policy up for the known loss, - set a separate specific deductible for it (lasering), or - exclude it from coverage (rarely done). 2. How often the plan sponsor switches stop loss insurers 3. Whether or not the specific stop loss deductible is appropriate for the plan 4. Whether the producer has an established track record of success with the insurer 5. Specific stop loss rate history 6. Historical specific stop loss experience

Answer 17

1. Obtain running 12-month paid losses for the past 1-3 years. Use running 12-month due to seasonality. 2. Adjust paid losses for specific stop loss reimbursements. 3. Divide by number of certificates in each period to calculate losses paid PEPM 4. Adjust for plan design changes from experience period to rating period 5. Trend losses PEPM from midpoint of experience periods to midpoint of rating period 6. Calculate weighted average of trended losses PEPM. May give more weight to most recent periods 7. For plans without full credibility, use a credibility formula to blend weighted average trended losses PEPM with manual losses 8. Adjust for contract type (such as 12/12 or 12/15) 9. Multiply by the aggregate margin factor (for example, 125%)

Answer 18

1. Aggregate margin factor - insurers generally have a higher factor for smaller plans due to the volatility caused by low numbers of employees 2. Number of certificates - plans with fewer certificates are more volatile and therefore have a greater chance of exceeding the aggregate attachment point 3. Specific stop loss deductible - plans with higher specific deductibles are more volatile. It should fall within a range from 5-15% of the plan's expected aggregate losses 4. Design of the employee benefit plan - "leaner" plans are more volatile than richer plans 5. Profitability is mostly a function of careful underwriting, not high rates 6. Profitability is also driven by setting appropriate attachment points

Answer 19

1. Monthly accommodation - insurer allows plan to settle losses monthly. Additional costs will need to be added to reflect cost of processing interim benefits, opportunity cost of money, and credit risk. 2. Aggregate only (rarely offered) - includes a maximum amount eligible for reimbursement for covered life (called a ghost deductible - has same effect as the specific stop loss deductible would have had) 3. Terminal liability - converts a 12/12 policy into a 12/15 policy, but only in the year the policyholder terminates. Useful for policyholders wanting to switch from self-funding to conventional funding.

Answer 20

1. External antiselection - occurs as the person is first becoming insured. Those with expensive health conditions will seek insurance. 2. Internal antiselection - occurs while the person is insured. When given the opportunity, healthy individuals will be more likely to decrease coverage while unhealthy individuals will tend to increase coverage. a) Buy-down effect - upon receiving a rate increase, some poliyholders switch to lower cost plans, so the actual premium increase will be less than expected b) Premium leakage - unhealthy individuals are less likely to buy down their benefits. So the claim cost reduction is less than the premium reduction and not enough premium is collected. 3. Durational (cumulative) antiselection - occurs as people make decisions about whether to end coverage. Higher cost insured tend to keep their coverage in force longer because they are: a) Less likely to be able to find coverage elsewhere (although this is no longer true in markets affected by the ACA) b) Less likely to be willing to become uninsured c) Emotionally less willing to change their insurance coverage

Answer 21

1. Individual underwriting before issue - includes initial screening of applicants by the agent 2. Pre-existing condition limitations 3. Requiring an enrollment mechanism that doesn't permit antiselection (such as minimum participation percentages for associations)

Answer 22

1. Individual application - includes individual identifying information, financial information (if relevant to the coverage), medical history, and a release to obtain information from third parties 2. Attending physician statement - the insurer may choose to request an APS from any physician listed in the application 3. Commercial databases - used to check information provided in the application 4. Internal data - such as prior applications and claim databases 5. Telephone interviews - these can replace the need for requesting third party information, thereby speeding up the underwriting process 6. Inspection reports - a class of information obtained through direct contact with the applicant or other related to the applicant 7. Lab testing - may detect tobacco, illegal drugs, or the presence of some medical conditions 8. Medical exams - due to high costs, rarely used in underwriting for medical coverages 9. Tax returns - often the best source of financial information 10. Pre-existing condition provisions - used to protect against antiselection. For some coverages (such as hospital indemnity), these provisions replace underwriting entirely

Answer 23

1. Offer full coverage with no restrictions (for major medical insurance, this is generally the only legal option now, due to the ACA) 2. Decline coverage 3. Offer coverage at a higher premium rate - the added load may be either temporary or permanent, based on the condition 4. Offer a standard policy with an exclusion rider - the rider excludes coverage for a specific condition or body system 5. Offer a different policy than the one applied for - e.g., offer coverage in a substandard risk pool 6. Offer a different benefit plan than the one applied for - e.g., offer a longer elimination period or shorter benefit period on a disability income policy

Answer 24

1. Most carriers have a rigorous process to uncover cases where the applicant has lied during underwriting 2. This process requires scanning claims for further investigation, based on the following criteria: a) Timing - usually do not investigate claims beyond the time limit for rescinding a contract b) Conditions - certain conditions (e.g., accidents) can be ruled out as being pre-existing condition c) Size - don't investigate a claim if the cost of investigation exceed the cost of the claim d) Sentinel conditions or procedures - some conditions are related to other that lend themselves to antiselection (e.g., certain diseases may be an indicator of the presence of HIV) 3. The actions the insurer may take after an investigation include: a) Reformation - the contract is reissued retroactively under the terms which would have applied if the insurer had been aware of the condition b) Rescission - declaring the policy void from the beginning. The ACA prohibits rescissions of the health insurance policies unless the insurer can prove fraud or intentional misrepresentation of a material fact

Answer 25

1. In the first 3-4 durations, when the impact of underwriting wear off overwhelms the CAST effects. The solution is to apply additional underwriting selection factors. 2. In later durations, where only a fraction of the original population remains. The solution is to choose a higher value of k2, and recalibrate the model 3. At all durations, when a rate spiral is sever and volatile. The projection formulas may need stronger terms to fit this type of situation, such as: Shock lapse = [Rate increase - trend] / [(Rate increase - trend) + (1 + trend) / EF] EF = elasticity factor, which measures the ability and willingness of the population to change coverage after a rate increase (e.g., may be 1.3 for health lives and 0.8 for unhealthy lives)

Answer 26

1. Underwriting, including offering alternative coverage or denying coverage 2. Health status rating 3. Pre-existing condition exclusions 4. Exclusionary riders 5. Lifetime or annual dollar limits 6. Limiting benefit coverage or imposing very high cost sharing designed to attract healthier risks 7. Rescissions, except in cases of fraud or intentional misrepresentation 8. Marketing practices that discourage unhealthy risks from signing up

Answer 27

1. Coverage mandates and premium subsidies to encourage participation a) Premium subsidies - available to lower income individuals to make coverage more affordable b) Employer mandate - requires employers with 51 ore more employees to offer affordable insurance coverage that meets a minimum coverage level, or pay a penalty c) Inidividual mandate - requires all individuals to obtain insurance that provides minimum essential coverage, or pay a penalty that is the greater of: i) A flat per-person fee of $95 in 2014, $325 in 2015, $695 in 2016, and increasing with inflation thereafter. The household fee is limited to three times those amounts, and each child counts at 50% of those amounts. ii) A percentage of all income over the tax filing threshold. The percentage is 1% in 2014, 2% in 2015, and 2.5% in 2016 and thereafter. iii) The total penalty for a household cannot exceed the national average premium for a bronze qualified health plan 2. Aligning market rules on and off the exchanges - the subsidies offered in the exchanges will attract a different health risk to the exchanges. To mitigate this selection impact, regulations impose certain requirements (see separate list) 3. Open enrollment periods - to limit the opportunity for antiselection by only allowing members to enroll or change coverage during a set time period (except when there is a qualifying life event). The ACA established a single open enrollment period in the individual market each year. 4. Minimum benefit levels - individual and small group policies must cover all essential health benefits and provide at least a bronze actuarial value (except for catastrophic plans for certain individuals). There is also a cap on out of pocket spending and there must be no cost sharing for preventative services. 5. Premium stabilization programs (the three R's) - the reinsurance, risk corridor, and risk adjustment programs are perhaps the most direct tools used by the ACA to confront antiselection (see separate list)

Answer 28

1. Insurers must include all ACA-compliant policies in a single risk pool. So identical plans must have identical rates on and off the exchanges 2. Risk adjustment will be applied to even out risk between insurers and between the on- and off-exchange portions of the risk pool 3. Insurers must pay the same commissions to brokers and agents on and off exchanges 4. The exchange fee (3.5% of premium for each exchange policy) must be spread across the entire single risk pool, including off-exchange policies 5. Carriers participating in exchanges must offer at least one gold and one silver level plan on the exchange 6. Carriers are prohibited from marketing practices intended to discourage unhealthy individuals from signing up 7. Open enrollment periods are identical on and off the exchange

Answer 29

(some of these overlap with disadvantages of self funding from GHA-104-15) 1. Loss of third-party guarantee for employees - and employer who self funds is responsible for the entire LTD liability, so there is no third-party insurer to guarantee benefit payments 2. Volatility in claims - an employer who self funds will not benefit from insurance risk pooling, so it is not protected against fluctuations in claim incidence and severity. The employer is also at risk for claims liabilities that are larger than expected 3. Economic cycles - LTD claim costs are often tied to economic conditions. Claim costs often increase at the same time the company's profits are suffering 4. Employee relations - any legal suit regarding a claim will be brought against the employer 5. Accounting regulations - financial accounting standards require that employers recognize a liability for self-funded LTD benefits 6. Tax risks - if a trust is used for maintaining reserves, contributions are limited to paid claims plus a reasonable claim reserve. There are substantial penalties for making excess contributions

Answer 30

1. Intended use - consider the degree to which the model was designed to estimate what the actuary is trying to measure 2. Impact on program - consider whether the risk adjustment system may cause changes in behavior because of underlying incentives 3. Model version - if a new version of a previously-utilized model is used, consider the materiality of changes to the model 4. Population and program - consider if the population and program to which the model is being applied are consistent with those used to develop the model 5. Timing of data collection, measurement, and estimation - consider the impact of timing differences between when the model is developed and when it is applied 6. Transparency - consider whether the model provides an appropriate level of transparency for the intended use 7. Predictive ability - consider the predictive ability of the model and the characteristics of the various common predictive performance measures 8. Reliance on experts - consider whether the individuals incorporating their specialized knowledge into the model are experts in risk adjustment 9. Practical considerations - consider practical limitations, such as the cost of the model, the actuary's familiarity with the model, and its availability

Answer 31

1. Valuation of claims a) The 2012 Group LTD valuation standard requires insurers to use credibility to reflect company-specific claim termination experience in their valuation assumptions b) The formula for determining the full credibility standard (f) is: i) 0.05 = 1.44 * (selected variance factor / f) ^ 0.5 ii) f = number of claim terminations required for full credibility iii) The selected variance factor varies by claim duration: 4.0 for 2-24 months, 3.0 for 25-60 months, 2.5 for 61-120 months, and 2.0 for greater than 120 months. This factor ensures that fewer terminations are required to be considered fully credible in later claim durations, since terminations in later durations are less volatile. c) For insurers with fewer terminations than f, the credibility factor (C) = (number of expected terminations / f) ^ 0.5 2. Experience rating - the most common formula is: Premium rate = C * experience rate + (1-C) * manual rate 3. Manual ratemaking - for estimating credibility factors for manual rate development, approaches include: a) Subjective educated judgments, such as deeming experience to be credible if results are stable across multiple time periods i) Advantage: simplicity and flexibility ii) Disadvantage: it may be difficult to justify subjective decisions on credibility b) Formal procedures, such as limited fluctuation credibility concepts i) The minimum number of claims required for full credibility = lambda = (1.96^2 / 0.05^2) * (1 + (standard deviation / mu)^2 ), where mu and standard deviation are the mean and ... of the claim amounts ii) For insurers with fewer claims than lambda, C = (number of expected claims / labmda) ^ 0.5 iii) Advantage: objective and theoretically justifiable iv) Disadvantages: may be difficult to implement and may not be applicable depending on the experience and the underlying credibility model

Answer 32

1. Non-independence of claims a) Claim incidence is not independent due to external factors (such as economic recessions) and group-specific dynamics (such as work conditions and the physical demands of some jobs) b) Claim terminations are not independent due to external factors such as changes in claims management practices or changes in the economy 2. Heterogeneous claims - claim experience does not always emerge similarly to how it did in the past, due to: a) Changes in the demographic mix of employees b) External factors like economic recessions c) Changes in underwriting or claim management practices d) Changes in plan design 3. Competitive pricing pressures - due to a competitive market environment, there is pressure to give past experience more credibility than it theoretically should be given 4. Claim duration - claim experience tends to be more volatile in the early claim durations (see separate list) 5. Benefits from other sources - the approval of Social Security benefits or the loss of workers' compensation benefits can significantly impact net benefit amounts 6. Outlier claims - when credibility is based on claim amounts, large outlier claims could artificially increase the credibility of the past experience 7. Regulatory requirements - some states have adopted credibility requirements, such as requiring credible data to support changes to existing pricing factors 8. Estimating parameters of a credibility model is often based on a combination of subjective opinion and empirical testing

Answer 33

1. Terminations in early durations are dominated by recoveries (as opposed to deaths), and there is a strong correlation between recoveries and the cause of disability 2. Benefits from other sources are typically awarded within the first few years of claim, creating irregular payment streams 3. The change in definition of disability from "own occupation" to "any gainful occupation" usually occurs within the first few years of claim, resulting in a spike in recoveries at that time 4. The maximum benefit period for mental and nervous claims is usually limited to 24 months

Objective 4 - Underwriting Flashcards

(57 cards)