Implementing Reporting Rebates PPACA MLR REQUIREMENTS

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1 Medical Loss Ratios Implementing Reporting Rebates Presentation by Russ Willard SEAC - New Orleans November 16, 2011 The Patient Protection and Affordable Care Act (PPACA - enacted March, ) mandates minimum MLR requirements 80% for Small Group and Individual business 85% for Large Group business Initial rules developed by the NAIC 1, with expert, industry and public input Model Rule published October 2010 Rules and regulations through the CMS Interim Final Rule, December Q&A Issued May 13, 2011 Second Q&A Issued July 18, 2011 Subject to Further Revision 1 The NAIC left a well documented trail of decision making. 2 Both the NAIC and Interim Final Rule currently apply through 2013.

2 HHS/NAIC Highlights Supplement Health Exhibit Required by NAIC Within each state, by product, segment and Legal Entity- if the MLR falls below the minimum threshold, rebates must be paid. Applies to commercial fully insured medical 1 business effective 1/1/2011 (though reporting was required for the 2010 reporting year). Comprehensive Medical Health Plan Excludes pure hospital indemnity; and Various ancillary benefit plans; but Includes many low Actuarial Value plans, not heretofore considered Comprehensive Medical. 1 The mandate imposes a minimum MLR requirement of 85% for Medicare Advantage business effective 1/1/2014, with no rebates. HHS/NAIC Highlights Aggregation at the State and Segment level for each Legal Entity. State defined as the State of issue (i.e. the State responsible for product and pricing approval). Segment subdivision: Individual; Small Group; and, Large Group. Segments defined by the State Generally 50 for SG unless the State opts to use the Federal definition of 100; In 2016, the Federal definition will abide; Definition based on eligible employees (not insureds)

3 HHS/NAIC Highlights Association or Group Trust Issued Policies Considered Part of Individual Markets è 80% minimum MLR Credibility Adjustments Allowed Driven by Life Year Count and Deductibles Waivers: 17 States Request Phase-in of MLR Minimums GA Granted Waiver - Latest of 8 Decisions; Delaware and North Dakota Denied Min-Meds and Expatriate Plans Allowed for 2X Factor in Numerator; at the Option of Insurance Plan; but, Required to be Reported for Evaluation of Factor Appropriateness, if Option Used. HHS/NAIC Highlights Dual Contract Plans Allows Issuer to Reflect All Experience within In-Network Entity, for Group Plans Rebate Responsibility Belongs with Health Plans Health Plans, Not the Employer, Must Ensure Appropriate Payment Requires Health Plan to Know Contribution Rates Potential Tax Implications of Rebating Pretax Dollars De Minimus Rules Claims to be Restated with Three Month Run-Out, but No Restatement of Premiums State of Issue Basis Employer Groups Situs of Premium Rate Regulation

4 HHS/NAIC Highlights Vendor Look Through Added to Regulation, Addressed within Q&A on May 13 Requires Third Party Claim Processing Follow Same Rules as Health Plan Deductible Calculations Lesser of Individual Deductible vs [Family Deductible/ Family Member Count] Product Designs Often Based on 2X Individual Tax Accounting within Rebates Taxes within Numerator Limited to Premium Related Taxes Model Regulation Section 4(c) All Calculations to be Completed Excluding Taxes Lack of Industry Uniformity in Interpretation HHS/NAIC Highlights Three R s Reinsurance, Risk Adjustment and Risk Corridor To be Factored into Rebate Calculations Timing Concerns Will Three R s be Processed Consistent with MLR Rebates? HHS Asking the Question Should the Three R s be Included within the Rebate Calculation? Broker and Agent Commissions Remain as Company Administrative Costs Pressure to Lower Administrative Costs Drives Commissions Down Fewer Agents May Lead to Loss of Guidance for Individuals Seeking Coverage HHS Requesting NAIC to Create Working Group to Assess Impact on Brokers Prior to 2014

5 HHS Defines Clinical and/or Quality Related Expenses Improve Health Outcomes; Prevent readmissions; Improve Patient Safety and reduce Errors; Increase Wellness Programs; and, Utilize Health Information Technology for Quality Improvements Outstanding Issues Political Theater Inclusion of Medicare 85% Kerry/Stark US Supreme Court Review Individual Mandate Severability Rebate Responsibility Belongs with Health Plans Health Plans, Not the Employer, Must Ensure Appropriate Payment Requires Health Plan to Know Contribution Rates Potential Tax Implications of Rebating Pretax Dollars Claims to be Restated with Three Month Run-Out, but No Restatement of Premiums

6 Outstanding Issues Broker and Agent Impact NAIC Working Group Congressional Hearings Unreasonable Rate Increases Federal and State Review Posting on Internet Consumer Pushback Consumer Confusion Internet Published MLR vs Rebate MLR IRS Tax Impact of MLR Rebating Tax Consequences of Policy Reserve Decisions What Happens Come 2014? NAIC Guidance Through 2013 Wear Off of State Granted Waivers Final Determination of Mini-Meds and Expatriate Adjustments Tax Considerations Inclusion within Numerator? Rebates Based Before or After Tax Calculations Audits Runoff of Grandfathered Plans

7 Pricing Implications Three Years of MLR Minimums The Three R s Shaping of Risk Pool Guaranteed Issue Underwriting Limits Use of ACO s Medicaid Enrollment Plans To Be Sold On and Off the Exchanges Still awaiting final regulations e.g., reporting formats Vendor look-through (new guidance issued in May) Which vendors qualify and how do we account for 2011? Subscriber level premium, using portion of premium paid personally (Subscriber Contribution %) Currently there is some (questionable) data available in Humana systems Outlining path forward for collection and use of subscriber contribution percentage in MLR calculations Employee Count and MLR Segment Reported Premium vs. Restated Claims Checks vs. Premium Credits De Minimus rule payments less than $5 Preparing for eventual audits and incorporating into design

8 Denominator 15 EXAMPLE 2011 CALCULATION: NUMERATOR (SG - PPO) Paid Claims $ 730,000 Unpaid Claims Reserve (IBNR) $ 25,000 Experience Rating Refunds $ (25,000) Change in Contract Reserves $ 50,000 Change in Contingent Benefit Reserves $ 10,000 Incurred Medical Pool Bonus $ 5,000 Net Healthcare Receivable $ (55,000) Quality $ 50,000 Total for Numerator $ 790,000

9 Numerator 17 EXAMPLE 2011 CALCULATION: DENOMINATOR (SG - PPO) Earned Premium $ 1,250,000 Experience Rating Refunds $ (25,000) Federal/State Taxes and Fees (Premium Related) $ (75,000) Total for Denominator $ 1,000,000 Total for Numerator $ 790,000 Calculated MLR 79.0% Credibility Adjustment 0.0% Credibility Adjusted MLR 79.0% % of Premium Rebate Owed 1.0%

10 Credibility 19 20

11 EXAMPLE 2011 CALCULATION: DENOMINATOR (SG - PPO) Life Years 7,500 Table 1 Factor = Average (.037,.026) 3.15% Average Deductible $ 2,500 Table 2 Factor 1.164% Original Numerator $ 790,000 Credibility Adjustment (1.0315x ) Adjusted Numerator $ 824,370 Credibility Adjusted MLR 82.4% % of Premium Rebate Owed 0.0% Outstanding Issues Consumer Impact Unintended Consequences

12 Suggested Resources oamerican Academy of Actuaries ocms onaic olocal States opublished Materials o NAIC Model Regulation - REGULATION FOR UNIFORM DEFINITIONS AND STANDARDIZED METHODOLOGIES FOR CALCULATION OF THE MEDICAL LOSS RATIO FOR PLAN YEARS 2011, 2012 AND 2013 PER SECTION 2718 (b) OF THE PUBLIC HEALTH SERVICE ACT o Federal Register - Part III - Department of Health and Human Services 45 CFR Part 158, December 1, 2010 o CMS: Insurance Standards Bulletin Series Published May 13 and July 18 23

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