Actuarial Advisor User Manual...Actuarial Advisor is a comprehensive healthcare cost modeling solution developed by actuaries at Claros Analytics (Claros). Original development of

Actuarial Advisor © Claros Analytics. All Rights Reserved Page 1

Health Benefits Rating Manual

Actuarial Advisor

User Manual Actuarial Advisor Version 5.2.0

August 2018

Actuarial Advisor © Claros Analytics All Rights Reserved

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Table of Contents

OVERVIEW ................................................................................................................................................... 5

RATE MODEL INPUTS: PROPER USE AND LIMITS .......................................................................................... 6

Plan Name ................................................................................................................................................ 6

Effective Date ........................................................................................................................................... 6

Date Quote Developed ............................................................................................................................. 6

Underwriter ID ......................................................................................................................................... 6

Underwriting Discretion – First Dollar ...................................................................................................... 6

Underwriting Discretion – Specific Stop Loss ........................................................................................... 6

Underwriting Discretion – Aggregate Stop Loss ....................................................................................... 7

Expense & Risk Load – First Dollar ............................................................................................................ 7

Expense & Risk Load – Specific Stop Loss .................................................................................................. 7

Expense & Risk Load – Aggregate Stop Loss .............................................................................................. 7

Stop Loss Coverage Assumptions ............................................................................................................. 8

Specific Deductible ................................................................................................................................... 8

Specific Maximum .................................................................................................................................... 8

Incurred-In Period – Specific .................................................................................................................... 8

Paid-In Period – Specific ........................................................................................................................... 8

Aggregating Specific Corridor ................................................................................................................... 8

Aggregate Corridor .................................................................................................................................. 8

Incurred-In Period – Aggregate................................................................................................................ 9

Paid-In Period – Aggregate ....................................................................................................................... 9

Rx Covered Under Aggregate ................................................................................................................... 9

Rx Covered Under Specific ....................................................................................................................... 9

Excess Loss Layer Assumptions ................................................................................................................ 9

Layers 1, 2 and 3: Attachment and Limit .................................................................................................. 9

Incurred-In Period – Excess Loss .............................................................................................................. 9

Paid-In Period – Excess Loss ................................................................................................................... 10

Rx Covered Under Excess ....................................................................................................................... 10

Network Penetration – Excess Loss ........................................................................................................ 10

Expense & Risk Load – Excess Loss ......................................................................................................... 10


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Trend Assumptions ................................................................................................................................ 10

SIC Code ................................................................................................................................................. 10

Census Data: Region ............................................................................................................................... 11

Census Data: Age & Gender ................................................................................................................... 11

Rate Tier Relationships ........................................................................................................................... 11

Network Penetration – First Dollar ......................................................................................................... 12

Network Penetration – Stop Loss ........................................................................................................... 12

Provider Discount Assumptions.............................................................................................................. 12

Average Discount from Charges ............................................................................................................. 13

Percent of Medicare .............................................................................................................................. 13

Hospital Per Diem Basis .......................................................................................................................... 13

Plan Design Assumptions: Medical ......................................................................................................... 14

Annual Deductible .................................................................................................................................. 14

Annual Out-of-Pocket Max ..................................................................................................................... 14

Overall Annual Max ................................................................................................................................ 15

Coinsurance ........................................................................................................................................... 15

In-Network Details by Service Category ................................................................................................. 15

Detailed Plan Design Assumptions: Network .......................................................................................... 15

Copay per Admit .................................................................................................................................... 15

Copay per Service .................................................................................................................................. 16

Day Limit on Copay per Day ................................................................................................................... 16

Plan Coinsurance .................................................................................................................................... 16

Service Limit ........................................................................................................................................... 16

Annual Dollar Limit ................................................................................................................................. 16

Deductible Applies ................................................................................................................................. 16

Detailed Plan Design Assumptions: Out of Network ............................................................................... 17

Plan Design Assumptions: Drugs ............................................................................................................. 17

Retail Copay ........................................................................................................................................... 17

Mail Order Copay ................................................................................................................................... 17

Annual Copay Max ................................................................................................................................. 17

Annual Deductible .................................................................................................................................. 17

Plan Coinsurance .................................................................................................................................... 17

Annual Coinsurance Max ....................................................................................................................... 18


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Annual Dollar Limit ................................................................................................................................. 18

RATE MODEL RESULTS: RATES AND REPORTS ........................................................................................... 19

First Dollar Rates .................................................................................................................................... 19

Stop Loss Rates ...................................................................................................................................... 19

Excess Loss Rates ................................................................................................................................... 19

First Dollar Summary .............................................................................................................................. 19

Stop Loss Summary ................................................................................................................................ 19

COMPARE FEATURE: PLAN RELATIVE VALUES ............................................................................................ 20

ARCHIVE FEATURE: SAVING AND RECALLING SESSIONS ............................................................................ 21

FIRST DOLLAR RATING ALGORITHM ........................................................................................................... 22

STOP LOSS AND EXCESS LOSS RATING ALGORITHMS ................................................................................ 25

Specific Stop Loss ................................................................................................................................... 25

Aggregate Stop Loss ............................................................................................................................... 25

Development of Aggregate Attachment Point ....................................................................................... 25

Development of Aggregate Premium Rates ........................................................................................... 26

Excess Loss ............................................................................................................................................. 26

RATE ADJUSTMENT FACTORS .................................................................................................................... 27

Area ....................................................................................................................................................... 27

Trend...................................................................................................................................................... 27

Network Discounts ................................................................................................................................. 27

Utilization and Selection ......................................................................................................................... 27

Contract Type ......................................................................................................................................... 28

Industry .................................................................................................................................................. 28

Age/Gender ........................................................................................................................................... 28

Underwriting Discretion ......................................................................................................................... 29

Aggregating Specific Corridor ................................................................................................................. 29


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OVERVIEW

Actuarial Advisor is a comprehensive healthcare cost modeling solution developed by actuaries at Claros Analytics (Claros). Original development of Actuarial Advisor began in 2006 was done by the actuaries at Windsor Strategy Partners, Inc. (“WSP”), a healthcare actuarial consulting firm specializing in product pricing, model building and data analysis, underwriting, strategic planning and business strategy. Claros Analytics was set up in 2015 as a separate entity to focus on the development, service and support of Actuarial Advisor and other actuarial software applications. The data and algorithms within Actuarial Advisor also form the basis for the Health Benefits Consulting Suite offered by Claros.

Underlying the model is a series of claim curves containing over 200 points (each point representing a particular claim size range) and separated into detailed medical and drug service categories. The claim curves are also separated into utilization and unit cost components. The model generates claim cost estimates by modifying these claim curves to reflect all user inputs as to plan design, effective date, trend, industry, area, age/gender/coverage tier distribution, provider network discounts and expense load. The model generates first dollar rates, specific and aggregate stop loss rates, and aggregate attachment factors all within the same session in order to assure consistency in the claim cost projections. Beginning with version 5, the model’s detailed claim distributions are based a new claims data set than was used in Versions 4 and earlier; This new data set is more than five times larger was available previously. The data set is updated annually in order to capture and utilize the most recent healthcare trends. The size and richness of the database allows for the development of claim distributions reflecting cost and utilization across 34 medical service categories, 8 pharmaceutical categories and over 200 claim size ranges.

Version 5.2.0 can be delivered as a compiled, stand-alone application, which will run as an executable file on a user’s desktop without the need to run Excel. This platform offers greater flexibility, security and stability, and ease of use. The input screen is segmented by category (e.g. plan design, demographics, network discounts, etc.) such that the user can easily step through each variable; the input screens allow for higher-level values when detail is not available and/or a quicker answer is required; and the compiled model easily allows saving and recalling of sessions, minimizing the storage space and time requirements to recall prior work. The rating engine may also be programmed directly into an enterprise underwriting and reporting system; Claros will work directly with the appropriate programmers or vendors to accomplish this set-up.


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RATE MODEL INPUTS: PROPER USE AND LIMITS

All required inputs are collected through a series of screens accessible by selecting among the model’s top-level Navigation buttons. This section describes each input, its use in the rating algorithms, and appropriate ranges of values. Except where otherwise mentioned, all inputs are applicable to both the first dollar and stop loss rating algorithms.

Within the model, move through the Navigation buttons in the following order to view the input items in the order listed below: General Info, Expenses, Stop Loss, Trend, Industry, Area, Census, Rate Tiers, Provider Discount and Plan Design.

Plan Name

For administrative purposes, only; does not impact rates.

Effective Date

The effective date determines the number of months of trend applied to the source data, in developing the final rates. The source data will be trended from the midpoint of the data period, to the midpoint of the period for which rates will be in effect (presumed to be 6 months from the effective date).

Any valid calendar date can be entered in this field.

Date Quote Developed

For administrative purposes only; does not impact rates.

Underwriter ID

For administrative purposes only; does not impact rates.

Underwriting Discretion – First Dollar

This input relates only to development of First Dollar rates. This field provides a means for the user to make a discretionary adjustment to the manual rates generated by the model. The value entered in this field will be applied directly to the otherwise- applicable expected claim costs, prior to the inclusion of expense loads.

Any numeric value greater than zero can be entered. The discretionary adjustment is multiplicative; that is, manual expected claim costs will be multiplied by the factor entered here.

Underwriting Discretion – Specific Stop Loss

This input relates only to development of Specific Stop Loss rates. This field provides a means for the user to make a discretionary adjustment to the manual rates generated by the model. The value entered in this field will be applied directly to the otherwise- applicable expected claim costs, prior to the inclusion of expense loads.

Any numeric value greater than zero can be entered. The discretionary adjustment is multiplicative;


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that is, manual expected claim costs will be multiplied by the factor entered here.

Underwriting Discretion – Aggregate Stop Loss

This input relates only to development of Aggregate Stop Loss attachment factors and rates. This field provides a means for the user to make a discretionary adjustment to the manual factors and rates generated by the model. The value entered in this field will be applied directly to the otherwise- applicable expected claim costs, prior to the inclusion of expense loads.

Any numeric value greater than zero can be entered. The discretionary adjustment is multiplicative; that is, manual expected claim costs will be multiplied by the factor entered here.

Expense & Risk Load – First Dollar

This input relates only to development of First Dollar rates. Separate entry can be made for the variable and fixed components of expenses. The model develops expected claim costs and then grosses up these claim costs according to the values entered here. The algorithm first adds to expected claims the amount provided in the “fixed (PEPM)” field, and then divides that sum by [100% minus the amount entered in the “variable (percentage)” field].

Any percentage less than 100% can be entered in the “variable (percentage)” field. Any dollar amount can be entered in the “fixed (PEPM)” field. Note that the model will treat the entry in the “fixed (PEPM)” field as a Per Employee Per Month value.

Expense & Risk Load – Specific Stop Loss

This input relates only to development of Specific Stop Loss rates. Separate entry can be made for the variable and fixed components of expenses. The model develops expected claim costs and then grosses up these claim costs according to the values entered here. The algorithm first adds to expected claims the amount provided in the “fixed (PEPM)” field, and then divides that sum by [100% minus the amount entered in the “variable (percentage)” field]. The values entered here will be applied to both the specific and the aggregate stop loss rates.

Any percentage less than 100% can be entered in the “variable (percentage)” field. Any dollar amount can be entered in the “fixed (PEPM)” field. Note that the model will treat the entry in the “fixed (PEPM)” field as a Per Employee per Month value.

Expense & Risk Load – Aggregate Stop Loss

This input relates only to development of Aggregate Stop Loss rates. Separate entry can be made for the variable and fixed components of expenses. The model develops expected claim costs and then grosses up these claim costs according to the values entered here. The algorithm first adds to expected claims the amount provided in the “fixed (PEPM)” field, and then divides that sum by [100% minus the amount entered in the “variable (percentage)” field]. The values entered here will be applied to both the specific and the aggregate stop loss rates.

Any percentage less than 100% can be entered in the “variable (percentage)” field. Any dollar amount can be entered in the “fixed (PEPM)” field. Note that the model will treat the entry in the “fixed (PEPM)” field as a Per Employee per Month value.


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Stop Loss Coverage Assumptions

The following inputs are required for purposes of developing specific and aggregate stop loss rates. Note that the specific stop loss rates developed using these assumptions are independent from the Excess Loss Layer Assumptions entered as detailed below.

Specific Deductible The specific deductible is the dollar threshold above which individual claims are covered for purposes of specific stop loss coverage. Any positive dollar amount can be entered.

Specific Maximum The specific maximum is the maximum individual claim amount to be covered under the specific stop loss coverage. Any dollar amount greater than the specific deductible can be entered. Note that this represents the maximum claim amount covered above the specific stop loss deductible; to determine the amount of ground-up coverage, add the Specific Deductible to this amount. Leave the cell blank if there is no maximum.

Incurred-In Period – Specific The incurred-in period is the number of months following the policy effective date during which claims must be incurred, in order to be covered under the specific stop loss coverage. The entry in this field represents a number of months. Any integer value between 12 and 24 (inclusive) can be entered.

Paid-In Period – Specific The paid-in period is the number of months following the policy effective date during which claims must be paid, in order to be covered under the specific stop loss coverage.

The entry in this field represents a number of months. When the Incurred-In Period (see above) is equal to 12, the Paid-In Period value can be any integer between 12 and 24 (inclusive). When the Incurred-In Period is greater than 12, the Paid-In Period value must equal 12.

Aggregating Specific Corridor The aggregating specific corridor represents the transfer of a layer of otherwise-covered specific stop loss claims risk back to the policyholder. When an aggregating specific corridor is present, no claims in excess of the specific stop loss deductible will be covered under the stop loss policy until the sum of those claims exceeds the aggregating specific corridor. The specific stop loss rating algorithm determines the appropriate premium reduction, which is dependent on the corridor as a percentage of the expected specific stop loss claims.

When no aggregating specific corridor will be utilized, the value in this field should be zero or the field may be left blank. When a corridor will be utilized, any positive dollar amount can be entered. In practice the amount of the aggregating specific corridor (as a percentage of expected claims) is typically limited by underwriting guidelines.

Aggregate Corridor The aggregate corridor determines the level at which the manual aggregate stop loss attachment point will be set. The aggregate attachment point will be equal to total expected claims below the specific stop loss deductible, multiplied by the aggregate corridor. Any


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percentage can be entered.

Incurred-In Period – Aggregate The incurred-in period is the number of months following the policy effective date during which claims must be incurred, in order to be covered under the aggregate stop loss coverage. The entry in this field represents a number of months. Any integer value between 12 and 24 (inclusive) can be entered.

Paid-In Period – Aggregate The paid-in period is the number of months following the policy effective date during which claims must be paid, in order to be covered under the aggregate stop loss coverage. The entry in this field represents a number of months. When the Incurred-In Period (see above) is equal to 12, the Paid-In Period value can be any integer between 12 and 24 (inclusive). When the Incurred-In Period is greater than 12, the Paid-In Period value must equal 12.

Rx Covered Under Aggregate This selection indicates whether outpatient prescription drugs will accrue toward the aggregate attachment point and be covered expenses in the event of an aggregate claim. Enter “Y” if so; otherwise enter “N”.

Rx Covered Under Specific This selection indicates whether outpatient prescription drugs will accrue toward the specific deductible and be covered expenses for claims in excess of the specific deductible. Enter “Y” if so; otherwise enter “N”.

Excess Loss Layer Assumptions

The following inputs are required for purposes of developing excess loss rates. Note that the excess loss rates developed using these assumptions are independent from the Stop Loss Coverage Assumptions entered as detailed above.

Layers 1, 2 and 3: Attachment and Limit The model will generate per-member-per-month rates for up to three distinct excess loss layers. For each layer, the pricing will reflect coverage of individual claim dollars in excess of the Attachment up to the specified Limit. As an example, if the Attachment is set at $700,000 and the Limit at $300,000, the pricing will reflect coverage of the portion (if any) of each claim falling between $700,000 and $1,000,000 (the sum of the Attachment and the Limit).

Entries can be any positive dollar amounts. The Attachment for each successive Layer should be equal to the sum of the Attachment and the Limit for the preceding Layer, in order for the resulting rates to be additive.

Incurred-In Period – Excess Loss The incurred-in period is the number of months following the policy effective date during which claims must be incurred, in order to be covered under the excess loss coverage. The entry in this field represents a number of months. Any integer value between 12 and 24 (inclusive) can be entered.


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Paid-In Period – Excess Loss The paid-in period is the number of months following the policy effective date during which claims must be paid, in order to be covered under the excess loss coverage. The entry in this field represents a number of months. When the Incurred-In Period (see above) is equal to 12, the Paid-In Period value can be any integer between 12 and 24 (inclusive). When the Incurred-In Period is greater than 12, the Paid-In Period value must equal 12.

Rx Covered Under Excess This selection indicates whether outpatient prescription drugs will accrue toward the excess loss layers and be covered expenses for claims within each layer. Enter “Y” if so; otherwise enter “N”.

Network Penetration – Excess Loss The Network Penetration factor assigns the percentage of excess loss claims that are expected to occur in-network, when pricing excess loss coverage for plans having benefit differentials for in- and out-of-network claims. The model develops separate expected claim costs for the in- and out-of-network components, and blends them together based upon the entry in this field.

Any percentage between 0% and 100% can be entered. When pricing a plan with no out- of-network option, enter 100%.

Expense & Risk Load – Excess Loss This input relates only to development of Excess Loss rates. The model develops expected per-member-per-month claim costs and then grosses up these claim costs according to the value entered here. The algorithm divides expected claims by [100% minus the amount entered in this field]. Any percentage less than 100% can be entered in this field.

Trend Assumptions

Trend assumptions reflect anticipated changes in unit costs and rates of medical service utilization over time. These cost and utilization trend assumptions are applied separately by medical service category in the rating algorithm, to account for anticipated increases in cost and utilization between the data period (see Section 1) and the period for which rates will be in effect.

The model includes recommended annual trend rates by category, as default settings. However, these default settings can be over-written with any percentage value should the user desire to evaluate the impact of different trend assumptions. All values entered in these fields are treated by the model as annual (12-month) values. Separate values must be entered for utilization and for cost, and by medical service category as indicated. For informational purposes the “Composite Annual Trend” implied by the user’s selected trend values will be displayed in the indicated box.

SIC Code

The Standard Industry Classification code determines the rate adjustment factor (if any) to be applied in the rating algorithm, to reflect the risk uniquely associated with a given industry classification.

Any full or partial SIC code can be entered, using two, three or four digits depending on the level of detail available. Always enter all leading zeroes.


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Census Data: Region

This section allows the user to enter the geographic location of the covered population. Area- based rate adjustment factors reflect regional differences in cost and utilization of healthcare services. The model adjusts for cost and utilization differences at the CBSA level, separately by medical service category. The factors applicable to a given case are determined by the entries in this section.

While the model’s area-based rate adjustment factors vary at the CBSA level, users may have access to more or less detailed data regarding geographic location of the covered employees. Therefore, the model also allows entry of 5- or 3-digit zip codes as alternatives to CBSA. State may also be entered if no further level of detail is available. In order to achieve the greatest level of accuracy in modeling the covered population, always use the left-most column for which data is available. For example, select the CBSA if known; if not, then enter the full zip code. If that is not known, enter the 3-digit zip code. Because cost and utilization can vary widely even within a state, select the state only if no CBSA or zip-level detail is available. When no census data is entered, the model will assume a national average population.

Once the appropriate regional variable is selected/entered, enter the number of employees associated with that region in the right-most column of this section. By default, the model will display space for up to 10 different regions. However, by checking the Detail box next to Area in the upper left corner, up to 50 different regions can be entered. For any unused regional record, leave the “Number of Employees” value blank or equal to zero.

Census Data: Age & Gender

This section allows the user to enter the detailed census for the covered population. The associated age/gender rate adjustment factors reflect demographic differences in utilization of healthcare services.

When the Census button is selected, two additional boxes will appear at the top of the model, toward the right side: one is called “Census” and the other “Rate Structure”. The census can then be entered in a variety of formats, depending on the structure and level of detail available to the user. The first step in entering census data is to click the “Census” and “Rate Structure” buttons that correspond to the tier and type of census data to be entered. When “Employees by Tier” is selected, a 4-, 3- or 2-tier employee census may be entered according to the “Rate Structure” selection. The actual census details are entered in the boxes in the lower section of the screen. Data can be copied and pasted from Excel if desired.

If a full census including dependents is available, select the “Employees and Dependents” button. If no coverage tier or dependent census data is available, select the “Employees Only” button. The census details can then be entered in the box appearing in the lower section of the screen. In order for the model to properly estimate the demographics for the full covered population, when “Employees and Dependents” or “Employees Only” are selected the user must also specify the expected distribution of employees by coverage tier, in the top row of the census data box under “Enter the Number of Employees by Coverage Tier”. The rating algorithm will utilize the demographics of the employee population to estimate the number and demographic profile of dependents. For convenience the tool to the right of the data entry box will convert 3- or 2-tier employee counts to a 4-tier basis, for entry in the top row of the census data box under “Enter the Number of Employees by Coverage Tier”.

Rate Tier Relationships


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The rate tier relationships define the ratio of the final per-employee rate in each rating tier, to the employee-only or single rate. Recommended default values are included with the model; however,

these can be over-written by the user to meet competitive or marketing needs.

The rate algorithm assures that final rates are revenue-neutral according to the group census. As detailed in Section 7 below, projected claim costs and rates are first developed on a per-member- per-month basis. These are then converted to final rates by tier according to the combination of group census (average number of covered lives per employee, and number of employees within each rating tier) and desired rate tier relationships.

The model generates final rates in 4-, 3- and 2-tier structures depending on the user’s needs. Rate tier relationships can be entered separately for each of these structures. The Employee Only ratio should always be set to 1.00. Ratios for the other tiers can be set at any value greater than zero.

Network Penetration – First Dollar

The Network Penetration factor assigns the percentage of claims that are expected to occur in- network, when pricing first dollar medical coverage and aggregate stop loss coverage for plans having benefit differentials for in- and out-of-network claims. The model develops separate expected claim costs for the in- and out-of-network components, and blends them together based upon the entry in this field.

Any percentage between 0% and 100% can be entered. When pricing a plan with no out-of- network option, enter 100%.

Network Penetration – Stop Loss

The Network Penetration factor assigns the percentage of specific stop loss claims that are expected to occur in-network, when pricing specific stop loss coverage for plans having benefit differentials for in- and out-of-network claims. The model develops separate expected claim costs for the in- and out-of-network components, and blends them together based upon the entry in this field.

Any percentage between 0% and 100% can be entered. When pricing a plan with no out-of- network option, enter 100%.

Provider Discount Assumptions

This section allows the user to specify the structure and amount of the discounts from billed charges applicable to the provider network utilized by the case being rated. All assumptions are entered separately by medical service category, and separately for in- and out-of-network providers.

Prior to checking the Detail box next to Provider Discounts in the upper left corner, the user can enter the applicable percentage discounts from charges for high-level service categories, as the basis for determining claims payment. See “Average Discount from Charges” below for more information.

Note that default provider discount values will appear in red in the columns headed “Model Using % from Charges”. These default values are customized according to the region(s) specified under “Census Data – Region” as described above. Average regional discounts by high-level service category were determined from the underlying Advisor data set, and are available here as realistic default values when the user does not have access to network details.


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By checking the Detail box next to Provider Discounts in the upper left corner, the user has the ability to customize the high-level entries and to model network discounts in additional structures as summarized below. Entries for detailed service categories will appear, color-coded to coincide with the related high-level categories entered above. Note that the corresponding high-level Average Discounts for each service category will appear in red in the columns headed “Model Using % from Charges”. These are the user’s indication of the assumptions the model is currently utilizing, based on user high-level inputs.

In this Detail section, for each service category complete only one of the three structures, leaving the others blank. When making entries or adjustments in this section, note that the values shown in red in the “Model Using % from Charges” column will change accordingly (the user is over-writing the high-level entries from above), and will be blank when Percent of Medicare or Hospital Per Diem Basis are utilized.

Average Discount from Charges This option is available for all service categories. It is used when the fee schedule or available network data is structured to indicate percentage discounts from charges as the basis for determining claims payment.

The rating algorithm treats the values entered here as the discount percentage, which determines the resulting ratio of allowed to charges. For example, an entry of 35% generates an average discount equal to 35% of charges, which implies a resulting allowed-to-charges ratio of 0.65. Any percentage between 0% and 100% can be entered.

Entries for prescription drug categories are available. However, note that the source data already reflects Rx claims on an “allowed” basis; that is, net of discounts. Therefore, any non-zero percentage discount or load entered here should indicate the degree to which Rx discounts are anticipated to be better or worse than average.

Percent of Medicare This option is available for all medical service categories. This option is used for Reference Based Pricing situations, when the fee schedule or available network data is structured to indicate a multiple of a Medicare-based fee schedule as the basis for determining claims payment.

The rating algorithm treats the values entered here as percentages of the estimated amount payable under the Medicare prospective payment system for the given service category, in the region(s) specified under “Census Data – Region” as described above. For example, an entry of 140% implies payment equivalent to Medicare payment rates plus 40%; an entry of 90% implies payment equivalent to Medicare payment rates minus 10%. Any positive percentage can be entered.

Hospital Per Diem Basis For inpatient hospital claims only, the model allows entry of per diem provider payment rates along with corresponding outlier threshold and payment provisions. This option is used when inpatient fee schedules define claims payment based on flat per diem rates, often subject to additional payments when charges exceed defined outlier thresholds.

Any positive dollar value (e.g. $2,000) can be entered as the per diem rate. Any positive dollar


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value (e.g. $35,000) can be entered as the outlier charge threshold. Any percentage between 0% and 100% can be entered as the average discount applicable to outliers. The rating algorithm will apply the value entered here in the same manner as described above under “Average Discount from Charges,” except that it will only be applicable to charges in excess of the specified outlier charge threshold.

Plan Design Assumptions: Medical

(NOTE: Similar to functionality for Provider Discounts described above, the user may access additional Plan Design modeling options by checking the Detail box next to Plan Design in the upper left corner. The Detail options available are described below in the sections headed “Detailed Plan Design Assumptions”.)

This section allows the user to specify the high-level cost sharing assumptions applicable to the medical benefits covered under the plan. Separate entry is allowed for cost sharing differences at the Individual and Family levels, where applicable. Separate entry is allowed for in- and out-of- network benefit differences. Values entered in this section are applicable to first dollar, stop loss and excess loss pricing.

Annual Deductible Enter the plan’s comprehensive annual deductible. Any positive dollar amount can be entered. Enter $0 or leave blank if no deductible is applicable. Typically, the Family deductible is a multiple of the Individual deductible. When pricing a plan with no explicit Family deductible, enter the Family deductible as a value equal to at least 4 times the Individual deductible to assure proper modeling.

Some plans (e.g. High Deductible Health Plans) feature what is known as an “Aggregate Family Deductible” in which the plan does not begin to cover the expenses of any member of a family until the entire family deductible has been met. For such plans enter “Y” under “Aggregate Family Deductible”; otherwise enter “N” or leave blank.

Separately indicate whether the annual deductible is applicable to outpatient prescription drugs (e.g. in an HSA-compatible plan). Enter “Y” if so; otherwise enter “N”.

Annual Out-of-Pocket Max The annual out-of-pocket maximum represents the limit on the member’s out-of-pocket cost associated with the plan’s cost sharing provisions including the annual deductible, copays and coinsurance. Any positive dollar amount greater than or equal to the annual deductible can be entered. An entry equal to the annual deductible will imply no cost sharing beyond the deductible (i.e. no effect of copays or coinsurance).

Typically, the Family maximum is a multiple of the Individual maximum. When pricing a plan with no explicit Family maximum, enter the Family maximum as a value equal to at least 4 times the Individual maximum to assure proper modeling.

Separately indicate whether outpatient prescription drugs accrue toward the annual out- of-pocket maximum. Enter “Y” if so; otherwise enter “N”.


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Overall Annual Max This field represents the annual maximum benefit associated with the plan. It is applicable only at the Individual level. Any positive dollar amount can be entered. Enter $0 or leave blank if no overall annual benefit maximum is applicable.

Separately indicate whether outpatient prescription drugs accrue toward the overall annual max. Enter “Y” if so; otherwise enter “N”.

Coinsurance Enter the percentage of claim costs that comprise the plan’s share of the liability after

other cost-sharing requirements (deductible and copays) have been met. Any percentage

between 0% and 100% can be entered. The model will coordinate values entered here

with those entered for “Annual Out-of-Pocket Max” as described above. Enter the

value applicable to most service categories; category-specific values can be overridden

using the Detail functionality described in the following section.

In-Network Details by Service Category These fields allow entry of in-network cost sharing parameters for certain key service categories for which copays are often utilized. Any positive dollar amount can be entered for copays; any percentage between 0% and 100% can be entered for plan coinsurance; enter “Y” or “N” to indicate whether the plan deductible applies. Enter $0 or leave blank any parameters that do not require customization or are not applicable.

Note the values in red, to the right of the Deductible Applies column. These indicate –

for each service category – the values for copay, coinsurance and deductible

applicability to be utilized by the model based on current user entries here and above.

Detailed Plan Design Assumptions: Network

Cost sharing parameters that vary by specific medical service category are entered in this section, which is accessed by checking the Detail box next to Plan Design in the upper left corner. High-level cost sharing features (deductibles and maximums) are entered in the “Cost Sharing Assumptions: Medical” section described above. Values entered here will override entries (e.g. copay, coinsurance) from the high-level section above. These detailed inputs relate only to the in-network component of the plan being priced. Values entered in this section are applicable to first dollar, stop loss and excess loss pricing.

Note again the values in red, in the column headed “Model Using ded/coins/ded applies”. These indicate – for each service category – the values for copay, coinsurance and deductible applicability to be utilized by the model based on current user entries here and above. When high-level entries are overridden using this section, the value in this section will take precedence and appear in red in this column. Otherwise the high-level entry will be utilized. Service category labels are color-coded to indicate the higher-level category with which they are associated.

Copay per Admit These values are applicable only to the Inpatient Hospital service categories. Enter any applicable per-admission copay in each service category to which it applies. Any positive dollar amount can be entered. If there is no per-admission copay, leave blank or enter $0.


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Copay per Service These values are applicable to all service categories. They are interpreted as Per Day copays in the Inpatient Hospital service categories, and as Per Service/Visit copays in all other service categories. Enter any applicable copay in each service category to which it applies. Any positive dollar amount can be entered. If there is no copay, leave blank or enter $0.

Day Limit on Copay per Day These values are applicable only to the Inpatient Hospital service categories. Per-day copays are often accompanied by a limit on the number of inpatient days for which the copay will be collected. Enter any applicable day limit in each service category to which it applies. Any positive integer can be entered. If there is no day limit, leave blank or enter 0.

Plan Coinsurance These values are applicable to all service categories. Enter the percentage of claim costs that comprise the plan’s share of the liability after other cost-sharing requirements (deductible and copays) have been met. Any percentage between 0% and 100% can be entered. The model will coordinate values entered here with those entered for “Annual Out-of-Pocket Max” as described above.

Note that this field can be used to indicate that a particular service category is not covered by the plan. To exclude a service category simply enter 0% as the plan coinsurance percentage.

Service Limit These values are applicable to all service categories. They are interpreted as day limits in the Inpatient Hospital service categories, and as service/visit limits in all other service categories. These values describe plan coverage limits on the number of days/ services/ visits within a category. Enter any applicable annual limit in each service category to which it applies. Any positive integer can be entered. If there is no limit, leave blank or enter 0.

Annual Dollar Limit These values are applicable to all service categories, and describe plan coverage limits on total dollars within a category. Enter any applicable annual dollar limit in each service category to which it applies. Any positive dollar amount can be entered. If there is no annual limit, leave blank or enter $0.

Deductible Applies The high-level plan deductible entered under “Annual Deductible” is often not applicable to all service categories. For example, services to which a copay applies – and especially preventive services – are typically not subject to the annual deductible. This field allows category-by-category selection as to whether or not the deductible applies. Enter “Y” if the deductible applies; otherwise enter “N”.


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Detailed Plan Design Assumptions: Out of Network

Cost sharing parameters that vary by specific medical service category are entered in this section. High-level cost sharing features (deductibles and maximums) are entered in the “Plan Design Assumptions: Medical” section described above. These detailed inputs relate only to the out-of- network component of the plan being priced. Values entered in this section are applicable to first dollar, stop loss and excess loss pricing.

See preceding descriptions of Detailed Plan Design Assumptions for In-Network inputs. All descriptions there are applicable to Out-of-Network inputs as well.

Plan Design Assumptions: Drugs

This section allows the user to specify the cost sharing parameters applicable to the prescription drug benefits covered under the plan. Separate entry is allowed for cost sharing differences by drug category (generic, brand formulary, brand non-formulary and specialty) where applicable. Values entered in this section are applicable to first dollar, stop loss and excess loss pricing, depending on the entries in the “Rx Covered under Aggregate”, “Rx Covered under Specific” and “Rx Covered under Excess” fields described above.

Retail Copay Enter the applicable copay for retail drugs in each category. If there is no copay in a category, enter $0 or leave blank. Any positive dollar amount can be entered.

Mail Order Copay Enter the applicable copay for mail order drugs in each category. If there is no copay in a category, enter $0 or leave blank. Any positive dollar amount can be entered.

Annual Copay Max Enter any applicable annual limit on copayments for drugs in each category. If there is no limit in a category, enter $0 or leave blank. Any positive dollar amount can be entered.

Annual Deductible Enter any applicable annual deductible for drugs in each category. If there is no deductible in a category, enter $0 or leave blank. If a single deductible applies across all categories, enter that amount in each category. Any positive dollar amount can be entered.

Plan Coinsurance Enter the plan’s share of claim costs to be effective after application of any deductibles and copays, for drugs in each category. If there is no member coinsurance, enter 100% (i.e. the plan pays 100% after deductibles and copays). Any percentage between 0% and 100% can be entered.

Note that this field can be used to indicate that a particular service category is not covered by the plan. To exclude a service category simply enter 0% as the plan coinsurance percentage.


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Annual Coinsurance Max The annual coinsurance maximum represents the limit on the member’s out-of-pocket cost associated with the plan’s prescription drug coinsurance provisions. Any positive dollar amount can be entered. Enter $0 or leave blank if no maximum is applicable; for example, when the plan coinsurance in the category is 100%.

Annual Dollar Limit This field represents the annual limit associated with prescription drug benefits in each category. If a single limit applies across all categories, enter that amount in each category. Any positive dollar amount can be entered. Enter $0 or leave blank if no limit is applicable in the given category.


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RATE MODEL RESULTS: RATES AND REPORTS

The “Results” interface allows the user to view the first dollar, stop loss and excess loss rates calculated by the model, as well as reports detailing their development. This interface is accessed by selecting the “Results” button among the model’s Navigation options. When “Results” is selected, a box titled “Show Results” appears which enables the user to select which set of rates or reports is desired. Each option is described below.

First Dollar Rates

First dollar rates are displayed on a 4-, 3- and 2-tier basis. Composite rates, monthly and annual premiums are also displayed according to the census data entered. For information, rates are displayed on all three tier bases no matter which tier structure was used for entry of the census data. Age/gender rates are also displayed (on a 4-tier basis only) to provide the user with anticipated relative costs by age and gender. The age/gender rates are displayed for informational purposes and are not intended to comply with specific regulatory requirements as to rate differential by age and gender.

Stop Loss Rates

Specific stop loss rates, aggregate stop loss premium rates, and aggregate attachments are displayed on all three tier bases. Composite rates, monthly and annual premiums are also displayed according to the census data entered. The medical and drug components of the aggregate attachment are displayed separately.

Excess Loss Rates

This report details the development of PMPM rates for the various excess loss layers entered in Excess Loss Layer Assumptions described in Section 2. The report demonstrates expected PMPM claim costs for each layer, adjusted to reflect contract type, demographics, underwriter discretion and expense loads.

First Dollar Summary

This report details all steps in the development of first dollar rates, with all rates in this report expressed on a PMPM basis. (PMPM values are later converted to PEPM values by rate tier as described in Section 6 below.) The indicated Adjustment Factor for each step is determined by comparing the claim cost distribution after that step in the rating algorithm, to the distribution after the preceding step. In-Network, Out-of-Network and Prescription Drug costs are developed separately then blended together.

Stop Loss Summary

This report is structured identically to that described above for First Dollar, except that separate calculations are shown for Aggregate and Specific Stop Loss rates. The left side of the report addresses Aggregate (claim costs below the specific deductible), and the right side addresses Specific (claim costs above the specific deductible).


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COMPARE FEATURE: PLAN RELATIVE VALUES

The “Compare” interface allows the user to temporarily save up to four scenarios in order to allow side-by-side comparison of the Rates and Reports described above. This interface is accessed by selecting the “Compare” button among the model’s Navigation options. When “Compare” is selected, a series of buttons appears in the top-left section of the model with the headings “Compare what”, “From” and “To”. Once saved as described below, these buttons allow the user to select which scenarios will be compared, and which sets of rates or reports will be displayed for comparison.

A Scenario is saved by clicking among the buttons in the top-left corner labeled “Scen 1”, “Scen 2”, “Scen 3” and “Scen 4”. When a Scenario button is clicked, all model inputs and the resulting rates and reports are temporarily saved and associated with that Scenario number (1 through 4). For example, a user may want to save all current settings as Scenario 1, then change some aspect of Plan Design such as Deductible and save that as Scenario 2. Up to four Scenarios may be created. Any time a Scenario button is clicked, its associated values are overridden with whatever is current in the model when the button is clicked.

When a Scenario button is clicked, a dialogue box opens prompting the user to “Enter a short descriptor”. This can be any text that allows the user to remember what the Scenario represents. Once Scenarios are created, they are listed by descriptor under the “From” and “To” columns at the top of the model. At this point the user may utilize the various buttons under the “Compare What” heading to view side-by-side comparisons of different Scenarios as follows:

• Use the “From” and “To” columns of buttons to select which two Scenarios will be compared. The Scenario selected under “From” will be the Benchmark when results are displayed below; the Scenario selected under “To” will be the Scenario for comparison.

• Using the buttons under “Compare What”, select the report containing the results to be viewed / compared.

• The available reports correspond to those described above in Section 3. For convenience in viewing the side-by-side results, certain of the Section 3 reports are split into different reports in this section (e.g. first dollar age/gender rates, specific and aggregate summaries and rates).

• When a report is selected, side-by-side results for the selected Scenarios appear in the lower section of the screen. Select a different Scenario under the “From” or “To” columns to change the Scenarios for which reports are viewed.

• Note the gray boxes above and to the right of the displayed reports: These demonstrate the Relative Value of the selected Scenario (“To” column) to the selected Benchmark (“From” column). Relative Values are shown as indicated for First Dollar rates, Specific Stop Loss rates, and the Layer 1 Excess Loss rates.


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ARCHIVE FEATURE: SAVING AND RECALLING SESSIONS

The Actuarial Advisor model contains an archiving feature that allows users to save sessions for later recall. This functionality is essential in a production underwriting environment, for example, when it is necessary to retain and exactly reproduce all quotes. Because all inputs are saved to an embedded Access database, this method avoids the need to save multiple copies of a model or spreadsheet; a quote can be exactly replicated when all inputs are recalled.

Following are the key steps to working with the archiving feature:

1. Ensure that all other model/scenario inputs are set as desired.

2. Click on the “Archive System” button in the top left corner.

3. Under “Create a New Archive from the Current Loaded Scenario”, click the button “Click to Add Descriptors to New Scenario”.

4. Type in the “Session Descriptor” box something that is relevant at a high level – probably group name or number, effective date, etc.

5. Type in the “Scenario Descriptor” box something relevant at a more detailed level – probably deductible, plan design indicator, etc.

6. Type an underwriter or user ID (if desired) in the “Created By” box.

7. Then click the “Archive As New Scenario” button. The archived session/scenario has now been saved and the Archive dialogue box will close.

8. Once a session/scenario has been archived, it can be recalled by again clicking the “Archive System” button at the top, then clicking the “Select Scenario” button, and then clicking on the session/scenario which will now be listed in the dialogue box under “Retrieve from the Archive”. Click to highlight the selection to be opened, and then click the “Load the Selected Scenario” button under the list. Now the model will repopulate itself with all of the settings from the saved session/scenario.

9. Note that when working in an archived session/scenario, the details will appear in the box at the top right corner, next to the rates.

10. The user can update a session/scenario if desired, by going back to the Archive system at any time (e.g. to change some aspect of the quote such as plan design, census, network, etc.) and clicking the “Update the Current Scenario” button under the heading “Modify the Current Loaded Scenario”.

11. The user can also delete the session/scenario using the indicated button.


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FIRST DOLLAR RATING ALGORITHM

The foundation of the Actuarial Advisor model is a series of detailed claim curves, also known as claim continuance tables. These claim curves each contain over 200 points (each point representing a particular claim size range) and are separated into detailed medical and drug service categories. The claim curves are also separated into utilization and unit cost components.

In order to generate manual rates from this detailed data, a series of algorithms act on the starting claim curves and modify them to reflect key drivers of cost and utilization including trend, provider network discounts, selection and plan design. The modified claim curves are then recombined to generate an estimate of per-member-per-month (“PMPM”) claim cost. This value is then further modified to reflect specific group demographics (industry and age/gender composition). All relevant expense loads and discretionary adjustments are then applied, resulting in a final PMPM manual rate. This PMPM value is then converted to the necessary 2-, 3- and 4-tier rates based upon the group’s census and the desired rate tier relativities.

The steps in the first dollar rating algorithm are summarized below:

1. Modify the starting claim curves to reflect area-based rate adjustment factors.

In order to recognize regional differences in cost and utilization of healthcare services, the model applies a series of area-based rate adjustment factors to the starting claim curves. Area factors are organized by Core Based Statistical Area (“CBSA”) and vary by medical service category according to inpatient hospital, outpatient hospital, physician, ancillary and prescription drug. Within each of these categories there are separate factors for utilization and unit cost. At this step in the rating algorithm, each point on each claim curve is multiplied by the corresponding factor from the table of area-based rate adjustment factors. See Section 8 for more details on the development, structure and application of the area-based rate adjustment factors.

2. Modify the adjusted claim curves to reflect cost and utilization trend.

The source data is updated annually; however, it is anticipated that group effective dates will be subsequent to the end of the data period. As such it is appropriate that the claim curves be adjusted to reflect cost and utilization trend expected between the base period and the period for which manual rates are being developed. For this purpose, the model utilizes trend factors that vary by medical service category according to inpatient hospital, outpatient hospital, physician, ancillary, traditional and specialty prescription drug. Within each of these categories there are separate factors for utilization and unit cost.

These annual trend factors are applied over the number of months between the middle of the source data period and the middle of the period for which rates are being developed. This time period is determined based upon the proposed effective date of coverage. At this step in the rating algorithm, each point on each claim curve is multiplied by the corresponding adjusted trend factor.

3. Modify the adjusted claim curves to reflect provider network payment rates.

The average unit cost values in the starting claim curves reflect original billed charges as indicated in the source data. Anticipated provider network discounts are next applied in order to convert billed charges to “allowed” or “discounted” levels. Separate user inputs for


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provider network discounts are available for each medical and drug service category represented in the source data and the claim curves, as described in Section 2 above. At this step in the rating algorithm, each point on the unit cost section of each claim curve is multiplied by the corresponding provider network discount assumption as entered by the user.

4. Modify the adjusted claim curves to reflect utilization differences associated with selection.

The model follows the general approach that all else being equal, health benefit plans with relatively greater levels of cost sharing are associated with relatively lower utilization (i.e. positive selection). The reverse is also true; the model assumes that plans with relatively lower levels of cost sharing (“richer” plans) are associated with relatively higher utilization (i.e. negative selection).

This dynamic is implemented within the rating algorithm by associating varying degrees of cost sharing (i.e. deductibles, copays and coinsurance) with utilization adjustments at the service category level. The model first approximates the percent of total cost for the subject plan design that is represented by cost sharing. This cost sharing percentage is then associated with a utilization adjustment factor, either greater than or less than 1.00 depending on whether cost sharing is lower or greater than average.

The utilization adjustment factors are scaled such that their impact is diminished at the higher end of the claim curve. At this step in the rating algorithm each point on the utilization section of each claim curve is multiplied by the corresponding utilization adjustment factor.

5. Apply benefit plan design parameters to the adjusted claim curves.

Having been adjusted for area, trend, network discounts and utilization, the claim curves are next modified to reflect detailed benefit plan design parameters. The following categories of benefit plan design and cost sharing are evaluated, separately for each medical and Rx service category as appropriate:

a. Internal day and/or visit limits

b. Internal dollar limits

c. Deductible

d. Copayments

e. Coinsurance

f. Annual maximum

Each of the above items is considered within the algorithm in the order listed. The user specifies the value of each parameter for each medical and/or Rx service category, within the Rate Model Inputs as described in Section 2 above. Therefore, any reasonable combination of values can be modeled in a given scenario.

The rating algorithm does not rely on tables of plan design adjustment factors. Rather, the claim curves themselves are modified to reflect the appropriate cost sharing provisions. For example, internal (service category-specific) visit or dollar limits are applied by capping the utilization assumptions within the claim curves to be consistent with the limits. Copayments are subtracted directly from their associated cost-per-unit assumptions within the claim curves. Similarly, coinsurance percentages are applied directly to the cost-per-unit assumptions. The rating algorithm correctly reflects plan deductibles and out-of-pocket maximums by calculating the average claim cost at each point on the claim curve and


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comparing it to the deductible and/or maximum as appropriate.

6. Combine in- and out-of-network cost projections and prescription drug cost projections.

The preceding Steps 1 through 5 are carried out distinctly for in-network and out-of- network medical claims. The next step is to blend the resulting in-network and out-of- network PMPM claim costs according to the entry for “Network Penetration” as described in Section 2.

The preceding Steps 1 through 5 are also carried out distinctly for prescription drug claims. At this step the resulting prescription drug PMPM claim cost is added to the combined medical PMPM claim cost, with the sum being the estimate of total PMPM claim costs.

7. Adjust the PMPM claim projection to reflect industry-based rate adjustment factors.

At this step an industry-based adjustment factor is applied to the PMPM claim cost estimate, based upon the SIC code entered by the user (see Section 2). See Section 8 for more details on the industry-based adjustment factors.

8. Adjust the PMPM claim projection to reflect age/gender-based rate adjustment factors.

At this step the calculated average age/gender factor is applied to the PMPM claim projection, based upon the census data entered by the user (see Section 2) and the age/gender rate adjustment factors inherent to the model. See Section 8 for more details on the development, structure and application of the age/gender rate adjustment factors.

9. Adjust the PMPM claim cost projection to reflect underwriter discretion.

At this step the user-specified discretionary rate adjustment (if any) is applied to the PMPM claim projection. This adjustment is outside of and independent from any other rating factor in the rating algorithm.

10. Load the fixed and variable expenses.

Up to this point the rating algorithm has considered only claim costs. At this step provision for all relevant non-claim costs is included, according to user entries for “Expense & Risk Load” (see Section 2). Both fixed and variable expense loads are included, converting PMPM claim costs to PMPM rates.

11. Convert the loaded PMPM rate to final 2-, 3- and 4-tier rates.

The final step in the rating algorithm is to convert PMPM rates to final, per employee per month rates in various rating tiers according to the user’s needs. This calculation assures that the final per-employee rates by rating tier will produce the target PMPM rate, according to the census data and rate tier relativities entered by the user (see “Rate Tier Relationships” and “Census Data: Age & Gender” in Section 2).

For greater flexibility the model generates final rates in 2-tier, 3-tier and 4-tier structures. Final rates in all tiers are distributed to achieve the same target PMPM revenue, according to the census data and rate tier relativities entered by the user.


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STOP LOSS AND EXCESS LOSS RATING ALGORITHMS

Because the Actuarial Advisor model is built on a series of claim curves (see Section 1), expected claim costs can be rolled up above/below any given annual claim threshold, at any point in the rate algorithm. This means that in following Steps 1 through 6 from Section 6, expected claim costs are automatically developed concurrently for specific stop loss, aggregate stop loss and excess loss coverages as well as first dollar coverage. Aspects of the rating algorithm unique to each of these coverages are detailed below.

Specific Stop Loss

Steps 1 through 6 are carried out as described in Section 6, and the resulting claim cost estimates are calculated explicitly with respect to annual claims above the given specific stop loss deductible. Rate adjustment factors for industry, age/gender and underwriter discretion are then applied to the specific stop loss claims estimate, consistent with Steps 7, 8 and 9 in Section 6. See Section 2 for a description of all Specific Stop Loss coverage inputs. As noted in Section 8, rate adjustment factors for industry and age/gender are considered differently for specific stop loss and first dollar coverages.

The specific stop loss rating algorithm next considers stop loss contract type, defined as the number of months (dating from the policy effective date) in which the underlying claims must be incurred and paid in order to be covered liabilities under the stop loss policy. The factor represents the expected difference in claim costs between a “12/24” contract (incurred in 12 months, paid in 24 months following policy effective date) and the contract type being priced.

The specific stop loss rating algorithm next considers the presence of any aggregating specific corridor. The aggregating specific corridor represents the transfer of a layer of otherwise- covered specific stop loss claims risk back to the policyholder. A detailed formula (developed from extensive simulation modeling) defines the appropriate premium reduction, which is dependent on the corridor as a percentage of the expected specific stop loss claims. Finally Steps 10 and 11 from Section 6 are applied to what are up to this point PMPM claim costs, resulting in final 2, 3 and 4-tier PEPM rates.

Aggregate Stop Loss Development of Aggregate Attachment Point Steps 1 through 6 are carried out as described in Section 6, and the resulting claim cost estimates are calculated explicitly with respect to annual claims below the given specific stop loss deductible. Rate adjustment factors for industry, age/gender and underwriter discretion are then applied to the expected claims estimate, consistent with Steps 7, 8 and 9 in Section 6. See Section 2 for a description of all Aggregate Stop Loss coverage inputs.

The aggregate attachment point rating algorithm next considers stop loss contract type, defined as the number of months (dating from the policy effective date) in which the underlying claims must be incurred and paid in order to be covered liabilities under the stop loss policy. The factor represents the expected difference in claim costs between a “12/24” contract (incurred in 12 months, paid in 24 months following policy effective date) and the contract type being priced.


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The aggregate attachment point rating algorithm next considers the aggregate corridor, which is the percentage of expected claims at which the manual aggregate stop loss factors will be set.

Finally Step 11 from Section 6 is applied to what are up to this point PMPM claim costs, resulting in final 2, 3 and 4-tier PEPM aggregate attachment points (factors).

Development of Aggregate Premium Rates Aggregate stop loss premium rates are calculated as a function of the aggregate attachment point (expressed in total dollars per year) described above, the aggregate corridor percentage, the group size (number of employees) and the specific deductible. The detailed aggregate premium formula was developed from extensive simulation modeling, and results in net aggregate premium on a per-member-per year basis.

Steps 10 and 11 from Section 6 are then applied, resulting in final 2, 3 and 4-tier PEPM rates.

Excess Loss

Steps 1 through 6 are carried out as described in Section 6, and the resulting claim cost estimates are calculated explicitly with respect to annual claims within each excess loss layer according to the Excess Loss Layer inputs (see Section 2). Rate adjustment factors for industry, age/gender and underwriter discretion are then applied to the expected claims estimate, consistent with Steps 7, 8 and 9 in Section 6. As noted in Section 8, rate adjustment factors for industry and age/gender are considered differently for excess loss and first dollar coverages.

The excess loss layer rating algorithm next considers contract type, defined as the number of months (dating from the policy effective date) in which the underlying claims must be incurred and paid in order to be covered liabilities under the stop loss policy. The factor represents the expected difference in claim costs between a “12/24” contract (incurred in 12 months, paid in 24 months following policy effective date) and the contract type being priced.

Finally Step 10 from Section 6 is applied to what are up to this point PMPM claim costs, resulting in final PMPM rates inclusive of expenses. Excess loss layer rates are expressed on a PMPM basis rather than the tier-based PEPM rates expressed for other coverages.


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RATE ADJUSTMENT FACTORS

A variety of rate adjustment factors are utilized throughout the rating algorithm for first dollar, stop loss and excess loss coverages as detailed in the preceding sections. This section supplies additional detail regarding the interpretation, development and application of these factors within the Actuarial Advisor model.

Area

Area-based rate adjustment factors are applied to the claim curves in order to recognize regional differences in cost and utilization patterns. Area factors vary by Core Based Statistical Area (“CBSA”), a census bureau distinction somewhat more detailed than Metropolitan Statistical Area.

For each CBSA, separate area factors have been developed for inpatient, outpatient, physician and drug claims. Further, separate sets of factors are applied to the utilization and unit cost components of the claim curves. The rating algorithm scales the utilization-specific area factors such that their impact is diminished at the higher end of the claim curve.

Trend

Trend adjustment factors are applied to account for anticipated increases in cost and utilization between the data period (see Section 1) and the period for which rates will be in effect. Trend factors are applied separately to the following high-level service categories: inpatient, outpatient, physician, traditional drug, specialty drug, and ancillary claims. Further, separate trend factors are applied to the utilization and unit cost components of the claim curves.

The model includes default trend assumptions that reflect WSP’s best estimate of applicable pricing trends as of the date the model is updated. Users can overwrite any of these default assumptions as necessary (see Section 2).

Network Discounts

Network discount adjustments are required because the source claim curves reflect original billed charges (non-discounted). The parameters of the applicable network discounts are defined by the user (see Section 2). Region-specific default discount values are also provided within the model. Network discount adjustment factors are applied directly to the unit cost values in the claim curves, separately by service category.

Utilization and Selection

The model follows the general approach that all else being equal, health benefit plans with relatively greater levels of cost sharing are associated with relatively lower utilization (i.e. positive selection). The reverse is also true; the model assumes that plans with relatively lower levels of cost sharing (“richer” plans) are associated with relatively higher utilization (i.e. negative selection).

This dynamic is implemented within the rating algorithm by associating varying degrees of cost sharing (i.e. deductibles, copays and coinsurance) with utilization adjustments at the service category level. The model first approximates the percent of total cost for the subject plan design that is represented by cost sharing. This cost sharing percentage is then associated with a utilization adjustment factor, either


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greater than or less than 1.00 depending on whether cost sharing is lower or greater than average.

The utilization adjustment factors are scaled such that their impact is diminished at the higher end of the claim curve. Within the rating algorithm each point on the utilization section of each claim curve is multiplied by the corresponding utilization adjustment factor.

Contract Type

The stop loss rating algorithms reflect stop loss contract type, defined as the number of months (dating from the policy effective date) in which the underlying claims must be incurred and paid in order to be covered liabilities under the stop loss policy. The applicable contract type factor represents the expected difference in claim costs between a “12/24” contract (incurred in 12 months, paid in 24 months following policy effective date) and the contract type being priced.

Contract type adjustment factors applicable to specific stop loss rates vary in three specific deductible size ranges as follows: deductibles below $50,000; deductibles between $50,000 and $150,000; and deductibles over $150,000. The contract type adjustment factor is applied to summary-level expected claims rather than at the claim curve level.

Industry

The Industry-based rate adjustment factor is applied in the rating algorithm to reflect to reflect the risk uniquely associated with a given industry classification. Separate industry-based factors are associated with first dollar, specific stop loss and excess loss coverages, for each SIC code. The industry adjustment factor is applied to summary-level expected claims rather than at the claim curve level.

Age/Gender

The age/gender rate adjustment factors reflect demographic differences in utilization of healthcare services. Factors are expressed in 5-year age bands from newborns through ages 80+, separately for males and females.

Multiple sets of age/gender factors are included to reflect varying demographic claim cost patterns at several excess loss claim levels, as follows: first dollar; $10,000; $25,000; $50,000; $75,000; $100,000; $150,000; $200,000; and $250,000. First dollar factors are utilized with respect to first dollar and aggregate stop loss pricing. Factors for the excess loss level (from above) closest to the specific deductible are utilized with respect to specific stop loss pricing.

The rating algorithm utilizes the demographics of the employee population to estimate the number and demographic profile of dependents. Census data is applied to estimate the number and age distribution of children for an employee with child coverage, given the age of the employee. Spouses are assumed to be in the same age band as the employee.

Using these assumptions, a complete census of covered lives (employees plus all dependents) is generated from an employee-only census. The age/gender factors (first dollar or excess loss as appropriate) are then applied to this complete census, resulting in a very accurate age/gender rate adjustment factor which reflects all covered lives. This factor is applied to summary-level expected claims rather than at the claim curve level.


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Underwriting Discretion

The underwriting discretion adjustment is user-defined and is applied as a multiplier to the claim cost estimates developed in the rating algorithm. This adjustment is independent of all other steps in the rating algorithm. The discretionary adjustment factor is applied to summary-level expected claims rather than at the claim curve level.

Aggregating Specific Corridor

The aggregating specific corridor represents the transfer of a layer of otherwise-covered specific stop loss claims risk back to the policyholder. When an aggregating specific corridor is present, no claims in excess of the specific stop loss deductible will be covered under the stop loss policy until the sum of those claims exceeds the aggregating specific corridor.

The specific stop loss rating algorithm determines the appropriate premium reduction, which is dependent on the corridor as a percentage of the expected specific stop loss claims. A detailed formula (developed from extensive simulation modeling) defines the appropriate premium reduction, which is dependent on the corridor as a percentage of the expected specific stop loss claims. This adjustment is applied to summary-level expected claims rather than at the claim curve level.

Documents

Actuarial Advisor User Manual...Actuarial Advisor is a comprehensive healthcare cost modeling solution developed by actuaries at Claros Analytics (Claros). Original development of