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8M General Notes
Each of these lists comes up in about 10 different chapters on the syllabus. Naturally, the list is presented in a slightly different form every time it comes up. But, rather than memorize the same list in 10 different ways, which is exhausting and redundant, I have combined these topics into standardized, all-inclusive General Lists.

Some of these lists are only for background knowledge, because I found it useful to combine it all in one place (e.g. General-Leveraging). But others, particularly Rating Factors, Data Quality Issues, Data Adjustments, and Trends, are used on the exam and sample exams constantly. Don’t be afraid to write the same list on more than one exam question. The question topics often overlap.

In places where these topics appear in the chapter notes, I have written the chapter notes in small font size and indicated “See General – [ topic ]” to direct you here.

Mnemonics are presented for these lists wherever possible.
RATING FACTORS (also called Rating Indicators, Underwriting Factors, Underwriting Features, Risk Factors, etc.)
The rating factors are used to set adequate premiums for an insurance product. A product’s price should reflect:
 Characteristics of the individual policyholders
 Characteristics of the product
 Characteristics of the employer group (for group products)

Mnemonic: A S H F I L E O A F F E Z P O T
[individual] [misc.] [group]
Individual rating factors
 A ge
 S ex
 H ealth
 F amily (i.e. single; married; # of children.)
 I ndustry
 L ocation
 E nvironmental Factors (smoking, hobbies)
Miscellanceous rating factors
 O ffsets (Coordination Of Benefits with ph’s other coverages)
 A ntiselection controls (Er contribution level; Percent of ees participating)
 F eatures of the product (deductible, guarantees, exclusions, def’n of disability)
Group rating factors
 F inancial viability and Carrier Persistence
 E ase of administration
 Z size of group, Economies of scale

 P ast claims experience
 O verstaffedness / Turnover
 T ype of group

No chapter of the syllabus mentions all of these, but it is clear that they are all important.
DATA QUALITY ISSUES
Considerations concerning the quality of data used in experience studies, pricing, etc.

Mnemonic: AQQRRM FUDD SCAM
A = Adjustments made to the data (see “Data Adjustments”, below)
Q = Quality (accurate? truly random sample?)
Q = Quantity (volume, credibility, frequency)
R = Reasonability
R = Reconcile with known information
M = Medium (paper or electronic; storage; data structure)

F = do Follow-up studies (to interpret emerging trends or anomalies)
U = Usefulness (internal company-specific data is more useful than external national.)
D = Documentation (as per Actuarial Standards of Practice)
D = Disclosure (data used as provided? Actuary’s reservations? as per ASoP)

S = Source of the data (voluntary response? who owns it? ask contributors for more info)
C = Consistency (of assumptions, of data with that of other plans in the area)
A = Applications (what will the data be used for?)
M = Method by which data was gotten / adjusted
DATA ADJUSTMENTS
When using data that came from an external source, you must adjust it to bring it in line with your company’s/product’s special characteristics. Namely, the following:

Mnemonic: must adjust external data for PATIO JUMBLE.
P = Plan Provisions (see below)
A = Age / sex of the insureds (also family status, industry, location, ...)
T = Time period
I = Inflation
O = Outliers removed (if the external data has anomalies)

J = Judgment / subjectivity (if actuary feels it’s necessary)
U = Underwriting method
M = Marketing method
B = Basis for using the data (for pricing? for reserving? conservative or optimistic)
L = Loadings
E = Exposure levels
PLAN PROVISIONS/POLICIES
The factors that define an insurance product are:

Mnemonic: PBGC RoLoDeX
P = Premium rate guarantees
B = Benefit level (richness)
G = Grace period, Good Health Clause, and other riders
C = Cost sharing (copay/deductible level)

R = Renewability guarantees (guar. renewable? noncancelable?)
L = Length of the contract (extra risk, then, since cannot be cancelled)
D = Def’n of Disability (own occ? any occ?)
X = Xclusions
 Preexisting conditions (how long does this exclusion last?)
 experimental treatments
 cosmetics
 war, suicide
DATA SOURCES
Internal vs. External Data
In order of usefulness to a company:
 Cpy’s own data for a similar product (best)
 Industry / intercompany studies (middle)
 SOA studies
 Data from a large insurer
 journals / magazines
 Consulting firms
 Gov’t studies (worst)
 State
 National
 The Health care expenditure part of the GDP
 Consumer Price Index (Health Cost Index)
 Medicare statistics
 National Hospital Discharge survey
 National ambulatory care survey
The External Data Sources are needed by:
 new companies
 for new product lines
 for new target markets
 companies whose own data is not credible.
 e.g. small companies
Considerations in Using External Data:
 Must understand how the data was obtained
 Must adjust it to fit your company’s needs
 Quote General-Data Adjustments, above.
Problems with External Data:
 slow publication (it is out of date)
 coverage eligibility changes over time (so current data is hard to compare to previous data)
An MCO’s Internal Data Sources
(Sources of health plan performance data)
Each of the four parties (the providers, the employer, the patients (members), and the MCO itself), can be a source of internal data for the MCO.
 The providers produce medical records.
 The employer has group data on its employees.
 The patients can provide information in the form of survey responses and questionnaires.
 Finally, the MCO itself has access to billing information, utilization information, submitted claim forms, and many other useful data sources. These data are part of the MCO’s Management Information Systems.
Source 1. Data from the MCO Itself
 Claim and Encounter data
 Actuarial information system (AIS) Reports
 Financial reports
 Quality reports
 Utilization reports
 Group Billing and Eligibility system
 Holds data on an er-group level and on a member level.
 patients’ applications and underwriting files
 patients’ benefit plan info
 the Agent (he might know something about the policyholder he sold insurance to)
 Authorizations, Referrals, and Case Management records
 Provider information
 credentials
 contract information
 provider profiles

Characteristics of data from the MCO:
 Electronic
 Large quantity (100% sample)
 Easily available
But:
 Maybe it was coded wrong.
Source 2. Data from Providers
 Claim forms (this could have been put in the above list instead, since the MCO ends up with them)
 contain patient name, SSN, address, insurer, provider, services done, date, charges, procedure codes.
 Medical records (containing a doctors’ notes)


Characteristics of data from Providers:
 Large quantity (100% sample)
 most detailed description available of patient’s condition
But:
 on paper, not electronic
 only has one doctor’s notes and info on it
doesn’t cover the whole claim or episode.
 expensive to use; time-consuming to copy into the computer.
Source 3. Data from Employers
 Employee Population exposure data

Characteristics of data from Employers:
 useful for showing who didn’t have a claim.
 this can give you “Hospital Admissions per 1000 members” and other exposure statistics
But:
 Er’s data is often inaccurate. Er’s are poor recordkeepers.
Source 4. Data from Patients
 Patient-reported info from surveys and questionnaires
Characteristics of data from Patients
 most “cognitive” data
But:
 limited by patient’s memory
 results influenced by form of survery.
TYPES OF SPLITS (for detailed data analysis)
An Insurance Company or MCO should split its data into different categories for careful analysis. Data should be split up by:

Mnemonic: banana splits need CRèMMe SoDa
C = Category of care (physician, specialist, hospital inpatient, outpatient, laboratory, drugs)
R = Reimbursement method (Ffs, capitation)
M = Medicare vs. commercial market
M = Market segment (Individual, Small Group, Large Group, ASO business, etc.)

S = Source of Coverage (HMO plan, PPO plan, POS plan, Indemnity)
D = Demographics (under 65 / over 65; by age; by sex; by location)
FORCES THAT CAUSE INCREASES IN HEALTH CARE COSTS
 aging population
 providers resisting discounts
 they band together and won't accept reduced payments
 they negate discounts by raising fees, upcoding, and unbundling
 Increased utilization per patient
 Inflation
 “Defensive utilization” – when MCO’s and doctors perform unnecessary tests to avoid costly litigation (malpractice lawsuits) later.
 New Technology  this can reduce cost per surgery, but also causes more surgeries to be done
 Cost shifting to whoever’s paying, e.g. from the Government to commercial insurers and employer plans

This topic can also be answered by using General-Trends. See below.
TRENDS
This is a list of factors which affect a company’s claim cost trend.

The Main 8 Trend Factors:
Mnemonic: Trees are PURE and MILD
(stands for “trend”)

P lan Provisions
U tilization
R eimbursement contract changes with providers
E conomy
-
M ortality improvements
I nflation
L egislation
D emographics of the enrollees
Complete List of Trend Factors
P = plan provisions
Antiselection
U = utilization
R = reimbursement
Cost shifting
Risk transfer
Negation of discounts (Note the word “Acorn” in here)
E = economy
Macroeconomic factors (Wealth; Recession)
(according to GI 25, microeconomic factors are useless)

Group–Specific trend? Or a general, industrywide trend?
One–time shift? Or a continuous trend?
M = mortality
I = inflation
L = legislative
D = demographics of the enrollment
Aging

Others
Mix (severity mix, case mix of the enrollees)
Leveraging (see General–Leveraging, below)
Divergence of Claim Costs from Market Force of Trend (see GI 25)

Spread of managed care
Technology
Random fluctuations & catastrophes
Managed care interventions
MARKET SEGMENTS
(Types Of Coverage Available for Policyholders In The Health Insurance System)
Public Sector (Government and Medicare coverage)
 Medicare (for 65&older, and some younger disabled people)
 Medicaid (for low-income people)
 CHAMPUS and TRICARE (for military personnel)
 State-Sponsored High-Risk Pools
Insurers of last resort for people who can’t get insurance elsewhere. Funded by state taxes.

Private Sector (commercial coverage)
 Coverage for Individuals and Small Groups
 These policyholders have little bargaining power because of their small size
 one unhealthy individual or large claim causes an abrupt upward shock in rates
 leads to Risk Segmentation
meaning that slightly higher-risk people are charged much higher rates.
 Coverage for Large Employer Groups that Purchase Insurance
 an actuarially sound risk pool; one unhealthy person won't cause their rates to rise too much
 Coverage for Large Groups that Self-Insure
 The federal act ERISA governs this type of insuring.

Advantages of Self-Insuring:
 employer retains the trust's assets; has more control over the money than if an insurance cpy held the money.
 no State-mandated benefits (because ERISA preempts the State laws)
 exempt from state premium taxes
although recently, States are starting to tax some self-insuring employers.
 self-insuring firms usually hire an insurance company just to do the administration (an ASO contract).

 Combinations: some people are covered partly by private, partly by public.
 For example, a retiree who is still covered by a former employer’s plan.
 Coordination of benefits must be handled carefully.
LEVERAGING
If an insurance plan has a deductible or a copay, the insurer’s plan cost will grow faster than the underlying health costs grow.
Example:
If the deductible is $500 and yearly claims are $10,000, any increase in claims is a percentage of $10,000, but the increase in claim cost (to the insurer) is that same percentage of $9,500. Therefore, the insurer’s cost grows faster than the medical inflation rate.

Generic Leveraging Diagram
(use this in your exam solutions)
2002 2003
Gross Cost $10,000 —————> $11,000
(without deductible) Trend = 10%
Deductible $500 $500
Net (Actual) Cost
to Insurer $9,500 —————> $10,500
Trend = 11.2%

Different chapters use different terms to describe the higher trend.
 “Leverage Factor” = 11.2 / 10 = 1.2.
 “Trend Leverage” = 11.2% – 10% = 1.2%.
 Leveraging occurs anytime there is a deductible or a copay.
For example:
 In a drug plan: The rate of increase in a drug plan’s expenditures is leveraged. (That is, program cost will increase faster than the underlying cost of drugs itself)
 in Stop-Loss Reinsurance, the reinsurer’s cost trend is higher than the ceding company’s claims trend. (The attachment point acts like a deductible.)
 The effect of leveraging decreases over time (as the deductible or copay becomes less significant compared to total costs)
Solutions to the Leveraging Problem:
 Track claims as soon as possible
 report any claim that gets close to 75% of the deductible
The key to predicting leveraging is noticing how close claims get to the deductible.
DIVERGENCE IN COSTS BETWEEN TWO PLAN OPTIONS
Consider an employer plan with two options: a rich (maximum benefit) option and a lean (minimum benefit) option.

 Due to antiselection, sick people tend to choose the rich plan and healthy people choose the lean plan.
 This causes the prices of the two options to diverge from each other.
 As sick and healthy employees migrate to opposite sides, the cost of the high-cost option to the employer will rise, and the price of the low-cost option will fall.
Similarly, in a Flex Plan, insureds choosing an HMO have lower average costs (are healthier) than insureds choosing an Indemnity or POS program. This is because to healthy people, the cheapness of the HMO plan is more important than the benefit level.
How to Solve “Divergence”
How to Solve “Divergence”
In this example, suppose an MCO is experiencing divergence between its POS plan costs and its HMO plan costs. The POS is the rich, expensive plan, and the HMO is the cheap, lean plan.

Ways to bring the two plans’ prices closer together:
 Reduce benefits for the POS and then lower its prices
 But this causes backlash from the POS patients



 Artificially level the rates by raising HMO rates and lowering POS rates.
 But this causes problems:
 Hinders movement of people from out-of-network into the HMO (since HMO is now too expensive);
 Gives rise to more than one HMO rate in the marketplace  some ers disadvantaged  their ees may quit (employee backlash)
 This HMO is now uncompetitive compared to other HMO’s

 Hope employers will increase their contributions on behalf of the ees (to support the POS price increases).
FACTORS PREVENTING AN INSURANCE COMPANY FROM RAISING PREMIUMS
 Antiselective lapses (healthy people will lapse)
 Premium guarantees in effect
 Regulations
 min/max loss ratio must be satisfied
 community rating regulations
 State approval required
 Enrollee backlash