AHIP (Health Plan Finance and Risk Management) 3 — Questions and Answers
Question 1: Which of the following best describes 'stop-loss insurance' purchased by a self-funded employer plan?
- Coverage that reimburses employees for out-of-pocket costs above a threshold
- Insurance that protects the employer from catastrophic claims above a specified level (Correct answer)
- A state-mandated reserve requirement for self-insured employers
- A reinsurance treaty covering all claims in a given year
Correct answer: Insurance that protects the employer from catastrophic claims above a specified level
Stop-loss insurance protects self-funded employers by capping their liability for individual claims (specific stop-loss) or aggregate annual claims (aggregate stop-loss).
Question 2: A health plan's 'risk-based capital' (RBC) ratio is used by state regulators primarily to:
- Determine the appropriate premium tax rate
- Assess whether a plan holds sufficient capital relative to its risk exposure (Correct answer)
- Calculate the plan's medical loss ratio for ACA compliance
- Set the maximum profit margin a plan may earn
Correct answer: Assess whether a plan holds sufficient capital relative to its risk exposure
RBC ratios help regulators identify financially vulnerable health plans by comparing actual capital to the minimum capital required given the plan's risk profile.
Question 3: Under experience rating, a large employer group's renewal premium is based primarily on:
- The insurer's overall book-of-business loss experience
- The specific group's own historical claims experience (Correct answer)
- A blend of manual rates and the group's claims, weighted by credibility
- Federal benchmark rates published by CMS
Correct answer: The specific group's own historical claims experience
For large, credible groups, experience rating uses the group's own claims history as the primary basis for setting renewal premiums.
Question 4: A health plan reports a 'premium deficiency reserve' (PDR). What does this indicate?
- The plan has collected more premiums than projected for the period
- The plan expects future losses on existing contracts and must reserve for anticipated shortfalls (Correct answer)
- The plan's administrative expenses are projected to decrease next year
- Members are expected to use less healthcare than initially modeled
Correct answer: The plan expects future losses on existing contracts and must reserve for anticipated shortfalls
A PDR is recorded when a plan's projected future costs (claims plus expenses) exceed the unearned premiums for a block of business, signaling anticipated future losses.
Question 5: Which of the following is an example of a 'prospective' payment methodology?
- Fee-for-service reimbursement after services are rendered
- Payment set in advance per diagnosis-related group (DRG) regardless of actual costs (Correct answer)
- Cost-plus reimbursement based on actual hospital expenditures
- Retrospective cost settlements at year-end
Correct answer: Payment set in advance per diagnosis-related group (DRG) regardless of actual costs
Prospective payment, such as DRG-based hospital payment, sets rates in advance, creating incentives for efficiency since the provider bears the risk of excess costs.
Question 6: A health plan's 'administrative expense ratio' is calculated as:
- Administrative expenses divided by total medical costs
- Administrative expenses divided by total earned premiums (Correct answer)
- Net income divided by administrative expenses
- Total expenses minus medical costs divided by enrollment
Correct answer: Administrative expenses divided by total earned premiums
The administrative expense ratio equals administrative expenses divided by earned premiums, indicating what share of premium dollars goes to non-medical costs.
Question 7: In community rating, premiums are set based on:
- Each individual's personal health history and utilization
- The average expected cost for the entire community or pool, not individual risk (Correct answer)
- Small group-specific loss experience blended with manual rates
- Actuarial projections for each member's age and gender only
Correct answer: The average expected cost for the entire community or pool, not individual risk
Community rating sets the same (or adjusted) premium for all members in a pool regardless of individual health status, spreading risk across the community.
AHIP (Health Plan Finance and Risk Management) 3
Which of the following best describes 'stop-loss insurance' purchased by a self-funded employer plan?