Concepts of Managed Care ? Discussion Topic Of all of the internal administrative functional areas described in this week’s Chapter assignment (e.g. Member Services, Sales, Actuarial

Sales, Governance, and Administration

Introduction

2

Financial management and reporting in the health insurance and managed care

industry is more complex than most other sectors other than banking

Typical Responsibilities of Financial Management • Creation and ongoing monitoring of financial statements

and reports

• Managing the cash and investments – treasury function

• Managing and monitoring reserves

• Managing the budget process

• Financial forecasting

• Internal audit

• Annual reports, including audited statements

• Regulatory reporting

3

Cash Flow • Payers usually have good cash flow as long as they are not

losing money, exactly the opposite of the providers

• For insured business: • Premiums come in before claims are paid • Claims are not paid if premium not paid

• For self-funded business: • Administrative fees must be paid or claims will not be

processed • The payer is shielded from medical costs, unless the payer

is also the reinsurer

• In the provider sector, costs are paid and service is provided before receiving any revenue from the payer, except in capitation

4

Basic Components of a Monthly Financial Operating Statement

5

Above the Line

Revenue Expenses

Premium Revenue •Received •Receivable

Medical Expenses • Incurred and known, whether paid or not • Incurred But Not Yet Reported (IBNR)

Other Revenue, e.g.: •Fee revenue from administration of self- funded accounts, usually a la carte, such as enrollment, claims management, member services, care management, network access fees, etc. •Coordination of benefits recoverable •Reinsurance recoverable • Interest and investment income

Sales, Governance & Administration (SG&A)

•Sales & marketing •Governance •Administration or Operations

Below the Line • Taxes – Both not-for-profit and nonprofit health insurers and HMOs are taxed • Contribution to capital reserves • Profit, or additional reserve contribution for a NFP payer

Basic Components of a Balance Sheet

• Accrual accounting

• Assets

• Cash and Investments

• Premiums Receivable

• Other Assets (w/ limitations on allowance of intangible assets to net worth under SAP), e.g.:

• Fixed assets

• Intangible assets

• Liabilities

• Unearned premiums (ex: premiums paid for month coverage, but month is not over yet)

• Claims payable – processed or known, but not yet paid

• Incurred But Not Reported (IBNR)

• Risk pool liabilities for HMO products with provider risk sharing

6

• Margin • Underwriting margin – margin

based on premiums collected vs. medical cost plus cost to administer

• Net margin – margin taking into account investment income, etc.

• Equity – also differs SAP vs. GAAP

Two Sets of Books: SAP vs. GAAP • The biggest difference between insurers/HMOs and other industries is

Statutory Accounting Principals (SAP) vs. Generally Accepted Accounting Principles (GAAP)

• States may make up their own rules, but in reality they conform to guidance issued by the American Institute of Certified Public Accountants (AICPA)

• Applies to the balance sheet, financial reserves and regulatory financial reporting

• Easiest way to think about the difference is as “fire sale” accounting – if the company stopped doing business and stopped collecting premiums, how much cash could be raised immediately from disposing of assets

• Only assets that are easily and quickly convertible to cash, such as cash, short term notes or liquid investments may be considered an asset under SAP

• Strict limits (e.g., no more than 5% of total value of assets) on how much value may be placed on non-liquid assets such as computers, buildings, non- convertible long term investments, good will, etc., which is why most payers lease equipment and facility space instead of owning it

7

Minimum Statutory Reserve Requirements…

• Also called Statutory Capital or Statutory Surplus

• Under SAP, each state requires a minimum amount of capital reserves, also referred to as minimum net worth, minimum claims reserve or minimal statutory reserve

• Calculated as whole dollars, but often reported in quarterly state filings as “Days in Claims Payable”

• Meaning if no more premium was collected, how many days could a plan continue to pay claims based on normal claims volume?

• Consistently misunderstood by the media and others, who think it means how much of a backlog in claims payment a plan has

• “Days in Claims Payable” has been replaced by Risk Based Capital (RBC)

• Used for all health insurers and MCOs

• Means that reserve requirements only apply to claims costs for which the payer actually has exposure

• Capital requirements can be met, at least in part, by subordinated notes

• States set the requirements, but generally conform to guidance issued by the National Association of Insurance Commissioners (NAIC)

Minimum Statutory Reserve Requirements The NAIC model act for HMOs specifies that minimum capital for HMOs should be determined as follows:

• The greater of $1,000,000, or

• 2 percent of annual premium as reported on the most recent annual financial statement filed with the commissioners of insurance on the first $150 million of premium and 1 percent of annual premium on premium greater than $150 million, or

• An amount equal to the sum of 3 months’ uncovered health care expenditures as reported on the most recent financial statement filed with the commissioners, or

• An amount equal to the sum of: • 8 percent of annual health care expenditures except those paid on

a capitated basis or a managed hospital payment basis as reported on the most recent financial statement filed with the commissioner +

• 4 percent of annual health care expenditures paid on a managed hospital payment basis as reported on the most recent financial statement filed with the commissioner

9

Medical Costs: Claims Received, IBNR and Lag Tables

• Received means non-capitated claims actually received and paid, pended, adjusted or denied

• IBNR is the amount of money an insurer or payer must keep in reserves to pay claims that have not yet been submitted for payment

• Claims may be submitted at any time within a defined period

• Defined in provider contracts – e.g., within 90 days

• Defined in group master contract for member-submitted claims – one year

• Lag tables are used to calculate IBNR claims cost estimates

• Separate lag tables used for physician, facility and ancillary claims estimates

• Many factors can affect lag calculations

• Claim processing backlogs – these are dangerous to calculation of IBNR!

• Significant changes in enrollment

• Unusual or large claims (isolated occurrences versus changes in utilization/cost patterns)

• Changes in pricing or product design

• Seasonal utilization or reporting patterns

• Major changes to the provider network or payment methods

• Inaccurate calculation of IBNR is the biggest risk an inexperienced payer faces

10

ACA’s One-Way Limits on the Medical Loss Ratio…• MLR limits on insured and fully reinsured

• Cannot cost shift between covered groups so harder to absorb underwriting losses

• Limits profits

• No maximum loss ratio • Rebate if under MLR standard

• Absorb if over MLR standard

• MLR Limits: • 80% on individual policies

• 85% on insured group plans

• Pooling of claims done on a state and legal entity level, not on a consolidated basis • Individuals pooled

• Small groups (2 – 50) pooled

• Groups above 50 not pooled

• Cannot pool same company’s experience in a different state 11

MLR: “Medical” vs. “Administration and Profit”

• MLR = percent of premiums spent on medical care • Federal and State taxes (except taxes on investment income and capital gains),

and Licensing or Regulatory Fees excluded from the premiums received

Quality-Improving (QI) Expenses Specifically Added to Benefits Expenses for MLR

Calculation

Expenses Specifically Excluded as Benefits Costs

• Expenses designed to measurably improve health outcomes

• Prevent hospital readmissions • Improve patient safety • Increase wellness • Enhance the use of healthcare data to

improve quality, transparency and outcomes

• HIT costs that are clearly attributable to the above

• Retrospective and concurrent utilization review*

• Developing and maintaining provider networks and contracting*

• Provider credentialing* • Fraud prevention activities • Sales costs and broker commissions • Profit or retained earnings

* In group models, care management activities included in MLR since the capitated medical group carries them out. This does not apply to rental networks or third party administrators.

Third Party Administrators Must Also Report: Quality vs. Administrative Expenses

13

Quality Improvement Activities – Improve health outcomes – Promote wellness – Prevent hospital readmits – Improve patient safety

Third Party Administrators Must Also Report: Quality vs. Administrative Expenses

14

Quality Administrative Accreditation fees Administration Case management Claims adjudication Care coordination Cost containment activities Discharge Planning Marketing Disease management Member & provider appeals Electronic health records & patient portals Provider contracting Fraud recovery & retention (up to recovery amount) Provider credentialing Monitoring/measuring clinical effectiveness

Retrospective & concurrent review

Prospective utilization review Wellness assessment Wellness coaching & communications

Budgeting, Forecasting and Internal Audit• Budgets

• Detailed budgets are required to perform most basic financial functions

• Usually starts with baseline from current budget

• Assumptions about changes in revenue based on enrollment forecasts, premium or fee changes, known major projects

• Budgets created at functional or departmental levels based on

• Ongoing operating costs and projections for changes

• Identified projects and associated costs

• Rolled up to single budget – iterative process, never finalized quickly

• Financial Forecasting

• Project activity and results beyond the current period

• Often developed several months in advance of the reporting period

• Balance between complexity and simplicity

• Internal audit

• Internal, independent audit function

• Audits financial accuracy of all departments and functions

• Integral to internal controls of the company 15

Regulatory Reporting • Quarterly Financial Statements

• Annual Statements

• Minimum Capital Requirements

• Risk-based capital requirements (RBC) • Adjusted capital

• NAIC schedules that also have an impact on RBC

• Schedule D – changes in investments and capital • Schedule L – changes in subsidiaries affecting regulated entity

• Certification on Claims Reserves

• Audited Financial Statements

• SAP basis • GAAP basis

• Sarbanes – Oxley Act of 2002

• 11 titles (sections) that range from board responsibilities to “whistleblower” protections • Section 404(a) describes management’s responsibility for

establishing and maintaining an adequate internal control structure and procedures for financial reporting • Section 404(b) describes the independent auditor’s responsibility

for attesting to and reporting on management’s internal control assessment

• New reporting requirements created under ACA

16

Rating and Underwriting

Basic Goal of Premium Rate Development: Rates Should be Adequate, Competitive, and Equitable

• Underwriting is responsible for creating the premium rates

• Goals of rate development are three:

1. Adequate Rates – high enough to generate sufficient revenue to cover all plan expenses and yield and acceptable return on equity

2. Competitive Rates – low enough to sell enough cases and enroll enough members to meet health plan growth targets

3. Equitable Rates – will approximate any given group’s costs with a reasonable amount of cross-subsidization among groups

18

Actuarial Services • Actuaries analyze the data and predict costs, adjusted

for • Trend

• Utilization

• Costs

• Benefits design • Behavioral shift • Distribution amongst different providers with different cost

profiles

• Actuaries generally do not create the rates, but only model costs

• Large payers have their own, smaller and mid-sized plans use actuarial consulting firms

19

Sample Actuarial Cost Model (Using 2011 Dollar Amounts)

20Source: unit 22, Rating and Underwriting by Michael G. Sturm and Troy M. Filipek in The Essentials of Managed Health Care, Sixth Edition, Kongstvedt (ed), Jones & Bartlett 2013.

•Annual utilization per 1,000 members (Column 1) •The allowed average charge per service (Column 2) •Per Member Per Month (PMPM) medical costs (Column 3 = (1) x (2) / 12,000) – These do not reflect cost sharing provisions •Cost sharing adjustments (Columns 4, 5, and 6) – These should be composited across the underlying benefit plans offered •PMPM medical costs net of cost sharing (column 7)

Medical Service

Category Medical Service

(1) (2) (3) (4) (5) (6) (7)

Annual Utilization per 1,000 Members

Allowed Average Charge Per Service

PMPM Cost

Copay Frequency

Copay Amount

Cost Sharing PMPM

Net Costs PMPM

Hospital Inpatient

Medical / Surgical 170 Days $7,000.00 $99.17 $99.17

Psychiatric / Substance abuse 50 Days 2,000.00 8.33 8.33

Skilled Nursing Care 20 Days 1,000.00 1.67 1.67 Subtotal 240 Days $5,458.33 $109.17 $109.17

Hospital Outpatient

Emergency Room 150 Cases $2,500.00 $31.25 145 $100.00 $1.21 $30.04 Surgery 60 Cases 6,000.00 30.00 55 50.00 0.23 29.77

Radiology / Pathology 350 Cases 750.00 21.88 21.88 Other 300 Cases 455.00 11.38 11.38

Subtotal 860 Cases $1,318.60 $94.50 $1.44 $93.06

Physician

Office and Inpatient Visits 4,500 Visits $100.00 $37.50 4,000 $25.00 $8.33 $29.17

Preventive Care 2,000 Visits 80.00 13.33 13.33 Surgery 500 Procedures 1,000.00 41.67 41.67

Radiology / Pathology 3,500 Procedures 100.00 29.17 29.17 Other 3,000 Services 130.00 32.50 32.50

Subtotal $154.17 $8.33 $145.83

Other

Prescription drugs 10,500 Scripts $65.00 $56.88 10,100 $25.00 $21.04 $35.83 Home health care 50 Visits 500.00 2.08 2.08

Ambulance 30 Cases 800.00 2.00 27 100.00 0.23 1.78

Durable medical equipment 150 Procedures 300.00 3.75 3.75

Subtotal $64.71 $21.27 $43.44 Total Medical Costs PMPM $422.54 $31.04 $391.50 Retention Load PMPM (10% of the Required Rate) $43.50

Required Rate PMPM $435.00

Rating and Underwriting • Underwriting has had two distinct but related meanings:

• Medical underwriting referred to using an individual’s or small group’s medical history to determine whether to offer coverage at all

• General underwriting includes gathering of information to assist in the development of premium rates

• Underwriters use the actuarial data and other factors to calculate rates

• Three types of premium rating: • Community rating

• Experience rating

• Premium equivalent or imputed premium rates

• Type of rating only affects the calculation of the base rate, not the mechanics of creating actual premium rates • Community rating requires the same base rate for all, though may be different

for all individuals vs. all small groups

• Experience rating uses base rate from actual costs of the group

• Premium equivalent is calculated just like experience rating for the base rate 21

ACA Impact on Rating and Underwriting for All Health Benefits Plans • Extension of dependent coverage to age 26

• Prohibition on rescissions except in cases of outright fraud

• Prohibition of preexisting condition exclusions and coverage rescissions

• Elimination lifetime and annual policy coverage limits

• Require first-dollar coverage for preventive services

• Insurers not allowed to use health status as a rating variable

• Beginning in 2020 (delayed from 2018), impose an excise tax of plans with premiums that exceed a certain level – the so-called “Cadillac” plan penalty • 40% excise tax on premiums above $10,800 for single, or $29,500 for family

coverage • Paid by health plan (insurer or self-funded plan), not recipient • Adjusted by CPI + 1% for one year, then by straight CPI – not medical CPI – for

each year thereafter • Just a matter of time before we are all subject to this

22

ACA Impact on Rating and Underwriting in the Fully Insured Markets

23

• Insurers required to guarantee availability and renewability to individuals and groups

• Minimum loss ratios – 85% for mid-sized or large groups – 80% for individuals and small groups

• Annual out-of-pocket cost limitations – Individual and family – Base limits determined by Treasury Dept. – May be lower for low income

• Experience rating allowed for large fully insured groups as long as no individual discrimination

Individual and Small Group Markets

• May not use health status as a rating variable

• Only the following rate adjustments are allowed: • Age related pricing variations are limited to a maximum of 3:1. • The number of people covered under the policy (e.g., “single” or

“family” coverage). • Tobacco use, limited to a maximum of 1.5:1

• Requirement to include Essential Health Benefits at one of four different coverage levels

• Rate filing and approvals • Rate approval by state health insurance departments • Must submit rates to HHS, but no federal approval authority (for

now) • Must file in early May, with only a few months of experience

with costs for existing plans 24

ACA Exchange Market Stabilization Programs

25

• 3 year Reinsurance and Risk Corridor programs – Meant to protect exchange plans from expected losses due to

adverse risk – Defunded by Congress, leaving exchange plans with massive

losses • Premium risk-adjustment mechanism, a/k/a premium transfers – After-the-fact premium transfers from plans with lower risk to

plans with higher risk – Plenty of problems remain with how it’s being done – Clobbers smaller plans in exchange

The ACA’s Four Coverage Tiers for Insured Products What’s in Your Wallet?

• Allows for 40% swing in cost sharing between Platinum and Bronze plan designs

• Coverage levels based on in-network costs for all but emergency care (defined via “prudent layperson), not billed charges

• Coverage based on actuarial equivalency, so may be spread around benefits, except cannot have different cost-sharing for MH/BH than for Med/Surg

• Room to futz with benefits as long as cost sharing ends up where it’s supposed to

• High deductible plan with preventive services and limited office visit coverage for the under-30s

26

Base Rate Calculation Applicable to All

27

Base Rate Buildup

• Population (e.g., commercial, Medicare, Medicaid, or other population) • Set of covered services (including service-specific

limits) • Set of cost sharing provisions • Set of provider payment arrangements • Demographic (i.e., age and gender) • Average Members per Contract • Geographical area • Occupation / industry

•Health status •Degree of health care management •Coverage effective date •Level of out-of-network usage (if applicable) •Presence or not of worker’s compensation

insurance •Set of underwriting practices •Set of claim administration practices •Distribution methods (e.g., agents, brokers,

direct) •Set of other variables affecting medical costs

+ Retention Charge

Base Rate per Member

Base Rate per Member is Not the Premium Rate! It Must now be Converted to Rates for Employees and families

Illustrative Age/Gender Conversion Factors for a Two-Tier Rate Structure

28

Employee Employee with Family

Employee Age Male Female Male Female

< 30 0.50 1.20 2.90 2.80

30–39 0.70 1.30 2.80 2.60

40–49 1.00 1.40 2.70 2.50

50–59 1.40 1.50 2.90 3.10

> 60 1.90 1.80 3.40 3.50

* Overall composite of factors – 2.32 using a standard labor force population.

Example of Four-Tier Premium Rate Calculation

29

Contract Type

(1) Contract

Distribution as (%)

(2) Members

Per Contract

(3) Conversio n Factor

(4) PMPM Rate Requirement

($)

(5) Target Premium Rate

($)

Employee 41 1.0 1.19 $435.00 $517.65

Employee and spouse

15 2.0 3.08 435.00 1,339.80

Employee and child(ren)

10 2.5 2.04 435.00 887.40

Employee with spouse and child(ren)

34 4.0 3.42 435.00 1,487.70

Composite 100 2.32 2.32 435.00 1,009.20

Source: unit 25, Rating and Underwriting by Michael G. Sturm and Troy M. Filipek in The Essentials of Managed Health Care, Fifth Edition, Kongstvedt (ed), Jones & Bartlett 2007.

Management Reports for Rating and Underwriting • Financial gain / loss summaries by:

• Total block of business,

• Line of business (Commercial vs. Medicare),

• Product Line (HMO vs. PPO, Traditional vs. CDHP),

• Group Size (Large Group vs. Small Group),

• Type of business (New vs. Renewal),

• Type of medical service (Hospital Inpatient, Hospital Outpatient, etc.)

• Calendar year or quarter,

• Each group individually (usually large group)

• Incurred claim costs by:

• Total block of business,

• Line of business (Commercial vs. Medicare),

• Product Line (HMO vs. PPO, Traditional vs. CDHP),

• Group Size (Large Group vs. Small Group),

• Type of business (New vs. Renewal),

• Funding Arrangement (Fully-insured vs. Self-funded),

• Geographical area,

• Policy duration of individual/small group (not usually applicable to large groups)

Management Reports for Rating and Underwriting • Group specific reports (applies mostly to large groups) including:

• Earned premium,

• Paid claims,

• Medical loss ratio,

• Large claim

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