AHIP (Health Plan Finance and Risk Management) 2 — Questions and Answers
Question 1: A health plan's medical loss ratio (MLR) is calculated by dividing which of the following by earned premiums?
- Administrative expenses
- Incurred claims plus quality improvement expenses (Correct answer)
- Net investment income
- Total operating expenses
Correct answer: Incurred claims plus quality improvement expenses
MLR equals incurred claims plus quality improvement expenses divided by earned premiums, and must meet minimum thresholds under the ACA.
Question 2: Which of the following best describes 'reinsurance' as used by health plans?
- A method for spreading risk by ceding a portion of liabilities to another insurer (Correct answer)
- A government program that reimburses plans for low-income members
- A technique for increasing premium revenue from high-risk members
- A regulatory requirement to hold additional surplus funds
Correct answer: A method for spreading risk by ceding a portion of liabilities to another insurer
Reinsurance allows a health plan to transfer a portion of its risk to another insurer (reinsurer) in exchange for a premium, protecting against catastrophic losses.
Question 3: Under the ACA's risk adjustment program, which plans receive payments and which plans make payments?
- Plans with healthier-than-average enrollees receive payments; plans with sicker enrollees make payments
- Plans with sicker-than-average enrollees receive payments; plans with healthier enrollees make payments (Correct answer)
- All plans receive payments based on enrollment size
- Only government-sponsored plans receive risk adjustment payments
Correct answer: Plans with sicker-than-average enrollees receive payments; plans with healthier enrollees make payments
ACA risk adjustment transfers funds from plans with lower-risk enrollees to plans with higher-risk enrollees to discourage cherry-picking.
Question 4: What is the primary purpose of an IBNR (Incurred But Not Reported) reserve?
- To fund future administrative expenses
- To account for claims that have occurred but have not yet been submitted to the plan (Correct answer)
- To set aside funds for anticipated premium deficiencies
- To cover the cost of reinsurance premiums
Correct answer: To account for claims that have occurred but have not yet been submitted to the plan
IBNR reserves represent an estimate of claims that members have already incurred but providers have not yet billed to the health plan.
Question 5: A health plan's 'days in claims payable' (DCP) metric is used primarily to measure:
- How quickly members pay their premiums
- The adequacy of the plan's claims processing staff
- The number of days' worth of claims represented by the plan's claims payable balance (Correct answer)
- How long it takes regulators to approve rate filings
Correct answer: The number of days' worth of claims represented by the plan's claims payable balance
DCP measures how many days of claims expense the outstanding claims payable liability represents, serving as an indicator of reserve adequacy.
Question 6: Which financial metric measures the proportion of each premium dollar that a health plan retains after paying medical claims?
- Gross margin (Correct answer)
- Operating leverage ratio
- Administrative expense ratio
- Contribution margin per member
Correct answer: Gross margin
Gross margin (or gross profit margin) represents the portion of premium revenue remaining after deducting medical costs, available to cover administrative expenses and profit.
Question 7: A health plan is considering entering a new market with a capitation arrangement with a provider group. The primary financial risk the plan assumes in this arrangement is:
- The provider group will over-refer patients to specialists
- Medical costs will exceed the capitation payments received from the provider group
- Premium revenue will be insufficient to cover capitation payments (Correct answer)
- Utilization will be lower than projected, reducing premium income
Correct answer: Premium revenue will be insufficient to cover capitation payments
Under capitation, the plan pays providers a fixed per-member per-month amount, so the plan's key risk is that premium revenue is insufficient to cover the fixed capitation payments plus administrative costs.
AHIP (Health Plan Finance and Risk Management) 2
A health plan's medical loss ratio (MLR) is calculated by dividing which of the following by earned premiums?