The basic formula for Caribou's income statement is true:
Revenues - Expenses = Net Income (or Net Loss)
The income statement provides a summary of Caribou's revenues, expenses, and resulting net income or net loss over a specific period of time, typically a fiscal year. Revenues represent the income generated by Caribou through its operations, such as premiums received from policyholders or fees for services rendered. Expenses, on the other hand, encompass the costs incurred by Caribou in conducting its business, including administrative expenses, salaries, marketing expenses, and other operating costs.
By subtracting total expenses from total revenues, Caribou arrives at its net income or net loss figure. If the resulting amount is positive, it indicates a net income, meaning Caribou generated more revenue than it incurred in expenses during the period. Conversely, if the resulting amount is negative, it represents a net loss, indicating that Caribou's expenses exceeded its revenue.
Noble Health Plan's actual underwriting margin would be larger than its assumed underwriting margin, while the plan's actual expense margin would be lower than its assumed expense margin.
Underwriting margin refers to the difference between the premiums earned by an insurance plan, such as Noble Health Plan, and the sum of its claims and underwriting expenses. It is a measure of profitability for the plan's underwriting activities. If the plan's actual morbidity (the frequency and severity of claims) is lower than its assumed morbidity, it means that the plan's claims expenses are lower than expected. As a result, the actual underwriting margin would be larger than the assumed underwriting margin.
The use of stop-loss coverage helps reduce a health plan's underwriting risk. Stop-loss coverage is a type of insurance that protects the health plan from incurring excessive losses due to high individual or aggregate claims. By purchasing stop-loss coverage, the health plan transfers some of the financial risk associated with large claims to the insurer providing the coverage. This reduces the health plan's underwriting risk, as it provides a safety net against unexpected and significant claim expenses.
The use of stop-loss coverage helps reduce a health plan's underwriting risk. Stop-loss coverage is a type of insurance that protects the health plan from incurring excessive losses due to high individual or aggregate claims. By purchasing stop-loss coverage, the health plan transfers some of the financial risk associated with large claims to the insurer providing the coverage. This reduces the health plan's underwriting risk, as it provides a safety net against unexpected and significant claim expenses.
Considering the timing and events described, the correct statement would be that the stop-loss carrier is responsible for paying a portion of the cost of the surgery under the paid claims method, but not the incurred claims method.
The paid claims method considers claims as incurred only when they have been paid by the employer or health plan. In this case, Concord paid the medical expenses associated with the surgery on April 10. Since the term of the stop-loss contract ended on April 1, the paid claims method would apply. According to this method, the stop-loss carrier would be responsible for paying a portion of the cost of the surgery since the payment occurred during the contract term.
One true statement about a health plan's underwriting margin is that both the level of underwriting risk that the health plan assumes in providing benefits and the market competition it encounters most likely directly affect the size of its assumed underwriting margin.
The fact that the Kayak Company self-funds the health plan for its employees, and that it is a completely self-funded plan, indicates that the plan is exempt from the state laws and regulations that apply to health insurance policies.
When a company self-funds its health plan, it means that the company takes on the financial risk of paying for its employees' healthcare expenses directly, rather than purchasing a traditional health insurance policy from an insurance carrier. In a self-funded plan, the company sets aside funds to cover the anticipated healthcare costs of its employees.
If the Ascot health plan's accountants follow the going-concern concept under Generally Accepted Accounting Principles (GAAP), then these accountants most likely assume that Ascot is not about to be liquidated unless there is evidence to the contrary.
The going-concern concept is a fundamental accounting principle that assumes an entity will continue its operations in the foreseeable future, typically at least 12 months from the date of the financial statements. Under this concept, the accountants preparing Ascot's financial statements would assume that the health plan will continue to operate and fulfill its obligations.
