14. (11 points) It is currently late in the year 2000. As The Bedford Group’s pricing actuary,
you must prepare manual rates for 2001. In addition to data from Table MC – 6, you
have decided to use the following assumptions:
•Calendar year 2000 will be used as the experience period
•Anticipated increase in average charge per service from 2000 to 2001
Hospital Services = 10%
Physician Services = 5%
All Other Services = 15%
•Administrative Costs will increase by 4%
•Adjustments for risk sharing, bonus, and withhold arrangements will not
affect the currently reported results
•Average charges per service are the same for the HMO and POS products
•Utilization changes occur uniformly for both the HMO and POS
(a) Using the information provided:
(i) (3 points) Calculate the expected PMPM hospital inpatient costs for the
HMO and POS plans separately for 2001. Show your work.
(ii) (1 point) Determine the required total premium PMPM assuming the total
projected claims costs for 2001 are $170.00 and $185.00 PMPM for the
HMO and POS products respectively. Show your work.
(b) (4 points) The head of the Marketing Department has to present a quote effective
January 1, 2001 for the HMO product to a prospect, Bailey Industries. He has
indicated three-tier premium rates are required.
Current Rate Information for Bailey Industries
Tier Number of
Contracts
No. of Persons
per Contract
HMO Ratio to
Single
POS Ratio to
Single
Single 35% 1.0 1.0 1.0
Two Party 15% 2.0 1.9 1.7
Family 50% 3.8 3.5 4.2
COURSE 8: November 2001 -11- GO ON TO NEXT PAGE
Managed Care
Afternoon Session
14. Continued
(i) Calculate the manual premium rates by tier for Bailey Industries using HMO
rate relativities in the table above and the total premium you calculated in
(a) (ii) above. Show your work.
(ii) Bailey Industries requires that the HMO premium rates be recalculated
using the POS rating relativities. Develop revised rates to meet this
requirement. Explain why offering HMO premium rates that mirror the
POS rating slope may or may not be in Bailey Industries’ best interest.
Show your work.
(iii) Describe the documentation you would include in your files to demonstrate
that Actuarial Standards of Practice concerning HMOs or other managed
care health plans were followed in your work.
(c) (3 points) Outline a report for Bailey Industries explaining the potential impact of
adverse selection resulting from the following types of market reform:
(i) Insurer Rules of Issue,
(ii) Government mandated benefits and laws,
(iii) Rating methodologies, and
(iv) Marketing practices.
COURSE 8: November 2001 -12- GO ON TO NEXT PAGE
Managed Care
Afternoon Session
Questions 14 through 16 pertain to the Case Study
15. (14 points) You are an actuary for The Bedford Group. A meeting has been called to
address spiraling costs in two areas: behavioral health/chemical dependency and
radiology services.
Radiological Services
Your CEO also has concerns regarding the increase in radiology costs even though
utilization has decreased. The VP of Provider Contracts is predicting a 25% increase in
2001 in physician radiology average charges. None of the benefit plans sold require any
member cost sharing for physician radiology benefits.
Behavioral Health and Chemical Dependency (BH/CD)
Your CEO is considering carving-out all BH/CD services due to increasing costs and
increased regulatory pressures. Total claims for BH/CD services in 2000 were $24
million for both HMO and POS products.
Lighthouse Behavioral Services (LBS), a managed behavioral health company, has
approached The Bedford Group to provide the full continuum of care for BH/CD
services. LBS will provide all BH/CD services on a capitated basis. After reviewing The
Bedford Group’s 2000 BH/CD claims, LBS believes they can affect BH/CD claim costs
under the following assumptions:
•LBS uses The Bedford Group provider contracts
•Utilization of services in Hospital ID1 will not change
•Utilization of services at Hospital ID2 and ID3 will be reduced by 50%
•80% of the reduced Hospital ID3 services will then be moved to Hospital ID2
•Outpatient utilization will increase by 15%
•Hospital ID1 and ID3 costs/admission will not change
•Hospital ID2 costs/admission will increase by 50%
•Outpatient charges/services will go down by 25%
•LBS will add an administrative charge of $1.10 PMPM
(a) (2 points) Discuss differences between BH/CD and radiology services in how
access to care is obtained and utilization is controlled in a managed care
environment.
(b) (2 points) Describe mechanisms The Bedford Group can use to reduce provider
reimbursement costs for BH/CD and for radiology services.
COURSE 8: November 2001 -13- GO ON TO NEXT PAGE
Managed Care
Afternoon Session

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