Sales, Governance, and Administration



Financial management and reporting in the health insurance and managed care

industry is more complex than most other sectors other than banking

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

and reports

• Managing the cash and investments – treasury function

• Managing and monitoring reserves

• Managing the budget process

• Financial forecasting

• Internal audit

• Annual reports, including audited statements

• Regulatory reporting


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

losing money, exactly the opposite of the providers

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

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

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

is also the reinsurer

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


Basic Components of a Monthly Financial Operating Statement


Above the Line

Revenue Expenses

Premium Revenue•Received•Receivable

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

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

Sales, Governance & Administration (SG&A)

•Sales & marketing•Governance•Administration or Operations

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

Basic Components of a Balance Sheet

• Accrual accounting

• Assets

• Cash and Investments

• Premiums Receivable

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

• Fixed assets

• Intangible assets

• Liabilities

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

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

• Incurred But Not Reported (IBNR)

• Risk pool liabilities for HMO products with provider risk sharing


• Margin• Underwriting margin – margin

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

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

• Equity – also differs SAP vs. GAAP

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

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

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

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

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

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

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


Minimum Statutory Reserve Requirements…

• Also called Statutory Capital or Statutory Surplus

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

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

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

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

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

• Used for all health insurers and MCOs

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

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

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

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

• The greater of $1,000,000, or

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

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

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

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

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


Medical Costs: Claims Received, IBNR and Lag Tables

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

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

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

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

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

• Lag tables are used to calculate IBNR claims cost estimates

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

• Many factors can affect lag calculations

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

• Significant changes in enrollment

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

• Changes in pricing or product design

• Seasonal utilization or reporting patterns

• Major changes to the provider network or payment methods

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


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

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

• Limits profits

• No maximum loss ratio• Rebate if under MLR standard

• Absorb if over MLR standard

• MLR Limits:• 80% on individual policies

• 85% on insured group plans

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

• Small groups (2 – 50) pooled

• Groups above 50 not pooled

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

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

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

and Licensing or Regulatory Fees excluded from the premiums received

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


Expenses Specifically Excluded as Benefits Costs

• Expenses designed to measurably improve health outcomes

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

improve quality, transparency and outcomes

• HIT costs that are clearly attributable to the above

• Retrospective and concurrent utilization review*

• Developing and maintaining provider networks and contracting*

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

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

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


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

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


Quality AdministrativeAccreditation fees AdministrationCase management Claims adjudicationCare coordination Cost containment activitiesDischarge Planning MarketingDisease management Member & provider appealsElectronic health records & patient portals Provider contractingFraud recovery & retention (up to recovery amount) Provider credentialingMonitoring/measuring clinical effectiveness

Retrospective & concurrent review

Prospective utilization reviewWellness assessmentWellness coaching & communications

Budgeting, Forecasting and Internal Audit• Budgets

• Detailed budgets are required to perform most basic financial functions

• Usually starts with baseline from current budget

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

• Budgets created at functional or departmental levels based on

• Ongoing operating costs and projections for changes

• Identified projects and associated costs

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

• Financial Forecasting

• Project activity and results beyond the current period

• Often developed several months in advance of the reporting period

• Balance between complexity and simplicity

• Internal audit

• Internal, independent audit function

• Audits financial accuracy of all departments and functions

• Integral to internal controls of the company15

Regulatory Reporting• Quarterly Financial Statements

• Annual Statements

• Minimum Capital Requirements

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

• NAIC schedules that also have an impact on RBC

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

• Certification on Claims Reserves

• Audited Financial Statements

• SAP basis• GAAP basis

• Sarbanes – Oxley Act of 2002

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

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

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

• New reporting requirements created under ACA


Rating and Underwriting

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

• Underwriting is responsible for creating the premium rates

• Goals of rate development are three:

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

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

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


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

for• Trend

• Utilization

• Costs

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


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

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


Sample Actuarial Cost Model (Using 2011 Dollar Amounts)

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

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

Medical Service

CategoryMedical Service

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

Annual Utilization per 1,000 Members

Allowed Average Charge Per Service


Copay Frequency

Copay Amount

Cost Sharing PMPM

Net Costs PMPM

Hospital Inpatient

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

Psychiatric / Substance abuse 50 Days 2,000.00 8.33 8.33

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

Hospital Outpatient

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

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

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


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

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

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

Subtotal $154.17 $8.33 $145.83


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

Ambulance 30 Cases 800.00 2.00 27 100.00 0.23 1.78

Durable medical equipment 150 Procedures 300.00 3.75 3.75

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

Required Rate PMPM $435.00

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

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

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

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

• Three types of premium rating:• Community rating

• Experience rating

• Premium equivalent or imputed premium rates

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

for all individuals vs. all small groups

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

• Premium equivalent is calculated just like experience rating for the base rate21

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

• Prohibition on rescissions except in cases of outright fraud

• Prohibition of preexisting condition exclusions and coverage rescissions

• Elimination lifetime and annual policy coverage limits

• Require first-dollar coverage for preventive services

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

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

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

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


ACA Impact on Rating and Underwriting in the Fully Insured Markets


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

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

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

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

Individual and Small Group Markets

• May not use health status as a rating variable

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

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

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

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

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

with costs for existing plans24

ACA Exchange Market Stabilization Programs


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

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

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

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

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

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

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

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

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

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


Base Rate Calculation Applicable to All


Base Rate Buildup

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

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

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

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

direct)•Set of other variables affecting medical costs

+ Retention Charge

Base Rate per Member

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

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


Employee Employee with Family

Employee Age Male Female Male Female

< 30 0.50 1.20 2.90 2.80

30–39 0.70 1.30 2.80 2.60

40–49 1.00 1.40 2.70 2.50

50–59 1.40 1.50 2.90 3.10

> 60 1.90 1.80 3.40 3.50

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

Example of Four-Tier Premium Rate Calculation


Contract Type


Distribution as (%)


Per Contract

(3)Conversion Factor

(4)PMPM Rate Requirement


(5)Target Premium Rate


Employee 41 1.0 1.19 $435.00 $517.65

Employee and spouse

15 2.0 3.08 435.00 1,339.80

Employee and child(ren)

10 2.5 2.04 435.00 887.40

Employee with spouse and child(ren)

34 4.0 3.42 435.00 1,487.70

Composite 100 2.32 2.32 435.00 1,009.20

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

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

• Total block of business,

• Line of business (Commercial vs. Medicare),

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

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

• Type of business (New vs. Renewal),

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

• Calendar year or quarter,

• Each group individually (usually large group)

• Incurred claim costs by:

• Total block of business,

• Line of business (Commercial vs. Medicare),

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

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

• Type of business (New vs. Renewal),

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

• Geographical area,

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

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

• Earned premium,

• Paid claims,

• Medical loss ratio,

• Large claim information,

• Benefit plan changes,

• Subscriber and membership counts by contract type

• Membership by:

• Line of business (Commercial vs. Medicare),

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

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

• Type of business (New vs. Renewal),

• Contract tier,

• Geographical area,

• Age and gender

• IBNR Calculations:

• Line of business (Commercial vs. Medicare),

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

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

Marketing and Sales

Introduction• Growth is a critical component of any payer organization, and especially so

for a publicly traded company

• Growth can be:

• Intrinsic –growth in the core business such as increasing the number of covered lives

• Extrinsic –through acquisitions and mergers

• Ancillary – meaning growth in related but non-core business , e.g.:

• Dental insurance, life insurance, vision benefits plans, etc.

• Providing services to other plans such as managing claims

• Growth is affected by:

• Ability to control costs

• Reputation in the market

• Breadth of the delivery system

• Member and employer satisfaction

• Reputation

• Etc.


Regulation of Sales and Marketing• States have substantial rules about how fully insured health insurance and

managed care plans may be marketed and sold• Does not apply to self-funded benefits plans

• Rules include how the product is described, what must be included in the description, what sales and marketing practices are prohibited (e.g., door to door sales) how agents and brokers must be appointed, etc.

• ACA created similar rules, but mostly for a uniform way of describing a plan

• States also regulate brokers and agents separately from health plan regulation

• States may conduct a “Market Conduct” review if an insurer or HMO is subject to higher than usual complaints

• Able to impose penalties and sanctions

• States also have substantial rules about how private plans may market and sell Medicaid managed care plans – but usually simply prohibit them from selling, with the state taking on that responsibility

• CMS has substantial rules about market conduct for Medicare Advantage plans, similar to state rules and may also impose penalties and sanctions


Standardized SBC/SOC• ACA requires all health plans, including self-funded, must provide a

standardized Summary of Benefits and Coverage (SBC), also called a Summary of Coverage (SOC) to all current and prospective enrollees

• The SBC/SOC to be done in a uniform and common format that defines the number of pages, the exact information that must be provided, and even the size of the font

• The SBC does not replace the far more detailed Evidence of Coverage (EOC), sometimes called a Certificate of Coverage or Certificate of Insurance


Product Design

• Product development refers to benefits design like cost-sharing and additional services

• Goal is to increase market pull, while addressing cost through behavioral shift (e.g., decreasing use of Tier 3 drugs by increasing co-pays)

• Benefits designs for insured products must meet state requirements

• Benefits designs for self-funded plans usually done by Benefits Management Consulting firms, but may be done by health plan administrators• Immune to state mandates and requirements (mostly)

• Must comply with IRS and DOL requirements, or will lose pre-tax status

• Insured plans must comply with Essential Health Benefits or will not be considered a Qualified Health Benefits Plan

• Each state defines Essential Health Benefits, based (more or less) on one of that state’s currently approved and widely distributed commercial plans

• Self-funded plans are exempt from some requirements, but not all


Market Segments• Commercial group health – i.e., employers offering health benefits to

employees, and paying at least part of the cost

• Large self-funded market: ~1,000+, usually self-insured, multiple locations

• Large group market: 101 – ~1,000 covered lives, large ones may self-insure, smaller ones usually buy insured products

• Medium group market: 26 – 100 covered lives (not defined in ACA)

• Small group market: 2-25 (some states allow a group of 1)

• Government as employer

• Federal, state, municipal, educational systems

• Treated as large groups, but have unique characteristics


Market Segments• Commercial individual

• Not eligible for group

• Not including entitlement programs

• Sold through the Exchange

• Entitlement programs

• Medicare Advantage

• Managed Medicaid


Marketing vs. Sales• Marketing and sales are related but distinct activities

• Marketing

• Focus is on overall growth goals, strategies and tactics, management of the process

• Compensation combination of salary and overall growth goals

• Role in Insurance Exchange as well as outside exchange

• Sales

– The actual process of selling the plan’s offerings in the marketplace through any distribution channel

– Compensation usually heavily weighted towards achievement of sales goals

– No real role in the insurance exchange


Fundamental Elements of Marketing• Brand Management

• External Communications and Public Relations

• Advertising• Employer versus consumer advertising• Examples of media• Television

• Radio• Print

• Collateral texts: outdoor, direct

• Market Research

• Lead Generation

• Sales Campaign Support

• Heavily regulated for individual and small group market through the Exchange 40

Distribution Channels by Market SegmentDistribution channel Individuals

Small employers Large employers

Individual Health Insurance Exchange

Yes No1 No

Small Business Health Options Program (SHOP) Exchanget2 No2 Yes No

Private Health Insurance Exchange No Yes Only using pre-selected plans.

Direct Through Web Yes Yes NoDirect Mail Yes Yes NoTele-Sales Yes Yes No

Retail StoresYes, but uncommon

Yes, but uncommon


Brokers and Agents Yes Yes Yes, but not common

Benefits Consultants No Rarely Yes

Payer-Employed Sales PersonnelYes, but uncommon

Yes, often w broker

Yes, often w/ a consultant

1 State may combine individual and SHOP exchange risk pools, but access to coverage by individuals and small groups still resides with the specific exchange type.2 Not all states have a SHOP exchange, and the federal SHOP exchange is now closed to new business and has limited remaining functions.

Health Insurance Exchanges…

• ACA created state-based American Health Benefit Exchanges and Small Business Health Options Program (SHOP) Exchanges, administered by a governmental agency or non-profit organization, through which small businesses with up to 100 employees can purchase qualified coverage

• Separate exchanges for individuals to access coverage

• Permit states to allow businesses with more than 100 employees to purchase coverage in the SHOP Exchange beginning in 2017

• States may form regional Exchanges or allow more than one Exchange to operate in a state

• Feds operate exchanges in states that refused to build them

• Office of Personnel Management to contract with insurers to offer at least two multi-state plans in each Exchange. At least one plan must be offered by a non-profit entity

• Creation of plan rating systems similar to that used in Medicare Advantage


Health Insurance Exchanges (cont.)

• Brokers still allowed to operate in this market segment for health

• Exchanges do not prohibit a non-Exchange market for individual and group coverage, but rates must be the same if sold both in and outside of the Exchange

• Require the Office of Personnel Management to contract with insurers to offer at least two multi-state plans in each Exchange. At least one plan must be offered by a non-profit entity

• Each multi-state plan must be licensed in each state and must meet the qualifications of a qualified health plan

• Members of Congress and congressional staff may only enroll in either plans created under ACA (e.g., CO-OPs) or in plans offered in Exchange – but this also required a “fix” because ACA as written did not allow of an employer contribution to coverage purchased through the individual exchanges

• Two-way data exchange requirements are huge, as discussed in Eligibility section and illustrated in next slide…


Individual and Small Group Direct Markets

• Direct Mail

• Walk-in centers

• Field Sales

• Telesales• Cold-calling to small groups• Cold-calling to individuals is prohibited

• Web Sales

• Affinity Programs


Commercial Large Group Market Sales Process (1 of 4)


Source: Figure 21-1, “Employer-Sponsored Sales Process” in unit 21 Sales and Marketing by Rich Birhanzel, in The Essentials of Managed Health Care, Fifth Edition; Kongstvedt (ed), Jones & Bartlett, 2007



Rating and




Rating and


First Sale



Second Sale





First Sale



Second Sale





Applicable primarily to medium and large group market, which will mostly not change under reform

Commercial Large Group Market Sales Process (2 of 4)• Lead generation – The identification of prospective employer customers.

Leads come from a variety of sources, including brokers and consultants, MCO marketing and request for proposals (RFPs) from employers

• Prospecting – The MCO salesperson is assigned a lead to qualify through research, initial conversations with the prospective customer and collaboration with brokers and consultants

• Rating and Underwriting – Underwriting evaluates and score the risk, which drives the initial pricing based on established margin targets. If the prospective customer is interested in ASO, the activity at this stage is focused on underwriting stop/loss insurance coverage and estimating administrative cost, yielding an initial price

• Quoting –Salesperson or distribution partner communicates initial pricing to the prospective customer, and there may be several iterations to underwriting and price quoting as parameters are negotiated and adjusted


Commercial Large Group Market Sales Process (3 of 4)

• First Sale (to the employer) – When the employer customer agrees to pricing, benefit design, products, network and other contract parameters, the salesperson or broker finalizes the contract with the employer and completes the record of the sale

• Employer Needs:• Cost and financial suitability• Compatibility with human resource objectives• Network access that is appropriate to the employee population

• Local business• Regional or national business

• Assurance of quality care, including appropriate accreditation• Choice among different plan designs• Excellent service• Strong partner in health care coverage


Commercial Large Group Market Sales Process (4 of 4)• Case Installation – Upon the close of the “first sale,” the

information including the details of the services purchased, is entered into the health plan’s information systems

• Second Sale (to the employee) – Many large group employers provide multiple health plan options, referred to “slice” business, with an open enrollment period for employees to select a health plan

• Enrollment – When employee selection is complete, the enrolled employees (called subscribers) and dependents (called, along with the subscriber, members) are enrolled in the health plan’s systems


Medicare and Medicaid(Addressed More Fully in unit 7)

• Significantly more restrictions on marketing and sales activities

• Many prohibitions; e.g,:

• Cold calling

• Providing a reward or incentive >$50

• Misleading information

• Any form of discrimination such as:

• Encouraging healthy people to enroll

• Discouraging sick people from enrolling

• Redlining

• Physical barriers

• Requirement that only licensed sales personnel, brokers and/or enrollment agents may market and sell

• In some states, only the state can manage the sales and enrollment processes 49

Information Systems and Electronic Data Interchange

Introduction• Information technology is vital to the delivery of services and support

of a holistic patient record

• Payers have the advantage of all patient data for financial and medical management activities

• Information technology adoption is improving because of maturity of payer vendor software, increasing member demand and legislative mandates (e.g. HIPAA, ACA)

• Information security remains of paramount importance, yet with increased challenge due to ubiquity.

• Future transformational technological opportunities include:

• Participating in health information exchanges and meaningful use with providers

• Leading in provider and employer informatics with predictive modeling

• Becoming consumer-focused in services

• Selling to the individual market

Foundational Informational Systems• Core managed care software vendor marketplace has consolidated and surviving

vendors have greatly added functionality

• New system architectures introduced so integration to other information systems has improved

• Key managed care software functionality includes:

• Benefit configuration

• Employer group and member enrollment

• Premium management

• Provider enrollment, contracting and credentialing

• Claims payment

• Document Imaging and Workflow

• Customer Servicing

• Tools and services can distinguish MCOs

• CRM, intranets and IVRs are examples

• Medical Management

• Systems are vital to manage medical costs

• Captures additional clinical information

• Ability for two-way EDI with insurance exchanges! 52

Electronic Data Interchange (EDI)• Focus on standardized electronic exchange of business-related data &


• Electronic Data Interchange (EDI) ANSI X12 5010 standards:

• 834 for enrollment (which includes adds, updates, terminations)

• 837 for claims

• 270, 271, and 271R for eligibility inquiry request, eligibility reply and eligibility roster respectively

• 835 for remittance advice (or explanation of payment)

• 278 for referral and authorization

• 276 and 277 for claims inquiry request and claims status reply respectively

• 820 for premium payments

• ANSI X12 5010 supports ICD-10

• ACA will further support the adoption of EDI

• Administrative savings through EDI


HIPAA Standards for Transactions using Electronic Data Interchange (EDI) • HIPAA requires covered entities that conduct certain electronic transactions to use only

ANSI X12N 5010 defined standards

• ACA is creating new standards and requiring more standardization of implementation


Transaction Standard

Provider Claims submission ANSI X12 – 837 (different versions exist for institutional, professional, and dental)

Pharmacy claims NCPDP

EligibilityANSI X12 – 270 (inquiry)ANSI X12 – 271 (response)

Claim statusANSI X12 – 276 (inquiry)ANSI X12 – 277 (response)

Provider Referral certification and authorization ANSI X12 – 278Health care payment to provider, with remittance advice ANSI X12 – 835Enrollment and Disenrollment in health plan* ANSI X12 – 834Claims attachment (additional clinical information from provider to health plan, used for claims adjudication)

ANSI X12 – 275 (not finalized at the time of publication), and HL7 CDA

Premium payment to health plan* ANSI X12 – 820First report of injury ANSI X12 – 148 (not yet issued)* These are for voluntarily but not mandatory use by employers, unions, or associations that pay premiums to the health plan on behalf of members.

Source: Compiled by author based on 45 CFR §160.920 and other sources at the Center for Medicare and Medicaid Services (CMS);Accessible at

HIPAA Standardized Code Sets

• ICD-10

• National Drug Codes (NDC) for drugs and biologics.

• Code on Dental Procedures and Nomenclature, as maintained and distributed by the American Dental Association, for dental services.

• The combination of Health Care Common Procedure Coding System (HCPCS), as maintained and distributed by the DHHS, and Current Procedural Terminology, Fourth Edition (CPT–4), as maintained and distributed by the American Medical Association (AMA) for physician services and other health care services. These services include, but are not limited to, the following:

1. Physician services.

2. Physical and occupational therapy services.

3. Radiologic procedures.

4. Clinical laboratory tests.

5. Other medical diagnostic procedures.

6. Hearing and vision services.

7. Transportation services including ambulance.

8. Orthotic and prosthetic devices.

9. Durable medical equipment.55


HIPAA Privacy and Security Requirements

• HIPAA requires high levels of privacy and security for electronic information, to:• ensure the confidentiality, integrity, and availability of electronic PHI;

• protect against any reasonably anticipated threats or hazards to the security and integrity of electronic PHI;

• protect against any reasonably anticipated uses or disclosures of electronic PHI not permitted by the HIPAA privacy rules; and

• ensure compliance with the above by its workforce (Source: Federal Register, 45 CFR § 164.308)

• Prevention, auditing and monitoring is an ongoing critical effort

• There are eighteen standards for HIPAA security rules:


Security Management Process Assigned Security Responsibility Workforce Security

Information Access Management Security Awareness and Training Security Incident Procedures

Contingency Plan Evaluation Business Associate Contracts

Facility Access Controls Workstation Use Workstation Security

Device and Media Controls Access Control Audit Controls

Integrity Person or Identity Authentication Transmission Security

Source: Federal Register, 45 CFR § 164.308(a & b), 45 CFR § 164.310(a-d); 45 CFR § 164.312(a-e)

Data Warehousing• Data warehouse contains all administrative and clinical datasets for analytical


• Examples of data sets• Medical claims – in-network and out of network

• Authorizations and specialty referrals

• Prescription drug claims

• Home care, durable medical equipment, skilled nursing and behavioral health claims

• Case and disease management data,

• Pathology and radiology results

• Immunization data

• Health risk appraisals


– Personal interests, captured from evolving consumer-based systems– Personal health information

  • Slide 1
  • Introduction
  • Typical Responsibilities of Financial Management
  • Cash Flow
  • Basic Components of a Monthly Financial Operating Statement
  • Basic Components of a Balance Sheet
  • Two Sets of Books: SAP vs. GAAP
  • Minimum Statutory Reserve Requirements…
  • Minimum Statutory Reserve Requirements
  • Medical Costs: Claims Received, IBNR and Lag Tables
  • ACA’s One-Way Limits on the Medical Loss Ratio…
  • MLR: “Medical” vs. “Administration and Profit”
  • Slide 13
  • Slide 14
  • Budgeting, Forecasting and Internal Audit
  • Regulatory Reporting
  • Slide 17
  • Slide 18
  • Actuarial Services
  • Sample Actuarial Cost Model (Using 2011 Dollar Amounts)
  • Rating and Underwriting
  • Slide 22
  • Slide 23
  • Individual and Small Group Markets
  • ACA Exchange Market Stabilization Programs
  • Slide 26
  • Base Rate Calculation Applicable to All
  • Slide 28
  • Example of Four-Tier Premium Rate Calculation
  • Management Reports for Rating and Underwriting
  • Management Reports for Rating and Underwriting
  • Slide 32
  • Introduction
  • Regulation of Sales and Marketing
  • Standardized SBC/SOC
  • Product Design
  • Market Segments
  • Market Segments
  • Marketing vs. Sales
  • Fundamental Elements of Marketing
  • Distribution Channels by Market Segment
  • Health Insurance Exchanges…
  • Health Insurance Exchanges (cont.)
  • Individual and Small Group Direct Markets
  • Commercial Large Group Market Sales Process (1 of 4)
  • Commercial Large Group Market Sales Process (2 of 4)
  • Commercial Large Group Market Sales Process (3 of 4)
  • Commercial Large Group Market Sales Process (4 of 4)
  • Medicare and Medicaid (Addressed More Fully in unit 7)
  • Slide 50
  • Introduction
  • Foundational Informational Systems
  • Electronic Data Interchange (EDI)
  • Slide 54
  • HIPAA Standardized Code Sets
  • HIPAA Privacy and Security Requirements
  • Data Warehousing
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