(Health Plan Finance and Risk Management) Flashcards

A for-profit company runs the Caribou health plan. Balance sheets, income statements, and cash flow statements are all parts of the financial statements that Caribou creates. Caribou starts with the net income amount on its income statement and then adjusts this figure to operating cash flows to create its cash flow statement. The health plan's operating, investing, and financing operations all impact Caribou's cash flow. The basic formula for Caribou's Income statement is

Answer: Revenues – Expenses = Net Income (Net Loss)

The income statement, also known as the profit and loss statement, is a financial document that reports a company's financial performance over a specific accounting period. Its fundamental formula is straightforward: Revenues minus Expenses equals Net Income (or Net Loss). This equation calculates the company's profitability by subtracting all costs and expenditures incurred from the total revenue generated during that period.

An actuary for the Noble Health Plan noted that its real administrative costs were greater than its projected administrative costs and that the actual morbidity was lower than its assumed morbidity. Noble's real underwriting margin, in this case, was

Answer: larger than its assumed underwriting margin, but the plan's actual expense margin was lower than its assumed expense margin

The underwriting margin reflects the profitability from claims experience. If actual morbidity (claims) was lower than assumed, it means the health plan paid out less in benefits than anticipated, resulting in a *larger* (more favorable) underwriting margin. Conversely, the expense margin reflects profitability from administrative costs. If actual administrative costs were greater than projected, the plan spent more on operations than expected, leading to a *lower* (less favorable) expense margin.

Two word pairs in parenthesis are used in the statement below. Find the word in each combination that completes the sentence appropriately. Choose the response option that includes the two words you've chosen. The underwriting risk and affiliate risk of a health plan are most likely (increased/reduced) by purchasing stop-loss coverage.

Answer: reduces / increases

Stop-loss coverage is designed to protect a health plan (especially self-funded ones) from unexpectedly high claims costs. By transferring the risk of catastrophic claims to a stop-loss carrier, the health plan's own underwriting risk, which is the risk of claims exceeding expectations, is significantly *reduced*. However, this arrangement introduces or *increases* a form of affiliate risk, as the health plan now relies on the financial stability and performance of the stop-loss provider (the "affiliate" in this business relationship) to cover those large claims.

A stop-loss contract may provide that either the paid claims method or the incurred claims method will be used to resolve claims. Employees at The Concord Company have access to a self-funded health plan for their medical care. A Concord employee covered by this plan had surgery on March 17, and because the procedure was so expensive, Concord's particular stop-loss coverage was triggered. On April 10, Concord covered the costs of the associated medical care. The stop-loss contract's term expired on April 1. According to this information, the stop-loss carrier is liable for covering a portion of the surgery's expense under

Answer: the incurred claims method but not the paid claims method

The incurred claims method covers expenses for services rendered while the stop-loss contract was active, regardless of when the payment occurs. Since the surgery was on March 17, before the April 1 expiration, the claim was incurred within the contract term. Conversely, the paid claims method would only cover expenses if they were actually paid by Concord before the contract expired on April 1, which was not the case here as payment happened on April 10.

The underwriting margin of a health plan can be accurately stated as follows:

Answer: The health plan's projected underwriting margin is likely directly impacted by both the amount of risk it takes on when delivering benefits and the quantity of competition it faces in the market.

The underwriting margin represents the profitability of a health plan, calculated by subtracting claims and administrative costs from premium revenue. This margin is directly influenced by the amount of risk the plan assumes, as higher risk can lead to increased claims expenditures. Additionally, market competition affects pricing strategies and the ability to set premiums, thereby impacting the potential underwriting margin.

The health care plan for its employees is self-funded by the Kayak Company. This plan is an illustration of a general asset plan, a subtype of self-funded plan. This strategy is entirely self-funded, which suggests that

Answer: The plan is exempt from the state laws and regulations that apply to health insurance policies

Self-funded health plans, like Kayak Company's, are typically governed by the Employee Retirement Income Security Act (ERISA). A key feature of ERISA is its preemption clause, which exempts self-funded plans from state laws and regulations that apply to traditional health insurance policies. This means states cannot mandate specific benefits or solvency requirements for these plans, providing employers with greater flexibility in plan design.

When it comes to going-concern accounting under GAAP, the Ascot health plan's accountants probably

Answer: Assume that Ascot is not about to be liquidated, unless there is evidence to the contrary

The going-concern assumption under Generally Accepted Accounting Principles (GAAP) dictates that a business entity, such as the Ascot health plan, is presumed to continue operating for the foreseeable future. Accountants apply this principle by assuming the entity will not be liquidated unless there is clear evidence to the contrary. This assumption influences how assets are valued and liabilities are presented, reflecting the business's ability to meet its obligations in the normal course of operations.