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week_5_lecture.pptxOperational Finance and Budgeting, Underwriting and Rating, Information Systems and Electronic Data Interchange in Managed Health Care, Health Plans and Medicare
WEEK 5 LECTURE
SAP vs. GAAP
The biggest difference between insurers/MCOs and other industries is Statutory Accounting Principals (SAP) vs. Generally Accepted Accounting Principles (GAAP)
States may make up their own rules, but in reality they conform to guidance issued by the American Institute of Certified Public Accountants (AICPA)
Applies to the balance sheet, claims financial reserve calculations and regulatory financial reporting
Easiest way to think about the difference is as “fire sale” accounting – if the company stopped doing business and stopped collecting premiums, how much cash could be raised immediately from disposing of assets
Only assets that are easily and quickly convertible to cash, such as cash, short term notes or liquid investments may be considered an asset under SAP
Strict limits (e.g., no more than 5% of total value of assets) on how much value may be placed on non-liquid assets such as computers, buildings, non-convertible long term investments, good will, etc., which is why most payers lease equipment and facility space instead of owning it
Basic Components of a Balance Sheet
Accrual accounting
Assets
Cash and Investments
Premiums Receivable
Other Assets (w/ limitations on allowance of intangible assets to net worth under SAP), e.g.:
Fixed assets
Intangible assets
Liabilities
Unearned premiums (e.g., premiums paid for a month’s coverage, but month is not over yet)
Claims payable – processed or known, but not yet paid
Incurred But Not Reported (IBNR)
Risk pool liabilities for HMO products with provider risk sharing
Margin
Underwriting margin – margin based on premiums collected vs. medical cost plus cost to administer
Total margin – margin taking into account investment income, etc.
Equity – also differs SAP vs. GAAP
Basic Components of a Monthly Financial Operating Statement
Above the line
Revenue
Premium revenue
Received
Receivable
Other revenue sources such as
Fee revenue from administration of self-funded accounts, usually a la carte, such as enrollment, claims management, member services, care management, network access fees, etc.
Coordination of benefits recoverable
Reinsurance recoverable
Interest and investment income
Expenses
Medical expenses
Incurred and known, whether paid or not
Incurred But Not Yet Reported (IBNR)
SG&A = Administrative Expenses
Sales & marketing
Governance
Administration or Operations
Basic Components of a Monthly Financial Operating Statement
Below the Line
Taxes – Both not-for-profit and for-profit health insurers and MCOs are taxed
Contribution to capital reserves
Profit, or additional reserve contribution for a NFP payer
Minimum Capital Requirements
Under SAP, each state requires a minimum amount of capital reserves, also referred to as minimum net worth or as a minimum claims reserve
Calculated as whole dollars, but often reported in quarterly state filings as “Days in Reserve”
Meaning if no more premium was collected, how many days could a plan continue to pay claims based on normal claims volume?
Consistently misunderstood by the media and others, who think it means how much of a backlog in claims payment a plan has.
Days in Reserve” has been replaced by Risk Based Capital (RBC) requirements
Used for all health insurers and MCOs
Means that reserve requirements only apply to claims costs for which the payer actually has exposure
Capital requirements can be met, at least in part, by subordinated notes
States set the requirements, but generally conform to guidance issued by the National Association of Insurance Commissioners (NAIC)
Minimum Capital Requirements (cont.)
The NAIC model act for HMOs specifies that minimum capital for HMOs should be determined as follows:
The greater of $1,000,000, or
2 percent of annual premium as reported on the most recent annual financial statement filed with the commissioners of insurance on the first $150 million of premium and 1 percent of annual premium on premium greater than $150 million, or
An amount equal to the sum of 3 months’ uncovered health care expenditures as reported on the most recent financial statement filed with the commissioners, or
An amount equal to the sum of:
8 percent of annual health care expenditures except those paid on a capitated basis or a managed hospital payment basis as reported on the most recent financial statement filed with the commissioner, and
4 percent of annual health care expenditures paid on a managed hospital payment basis as reported on the most recent financial statement filed with the commissioner
Medical Costs: Claims Received, IBNR and Lag Tables
Received means non-capitated claims actually received and paid, pended, adjusted or denied
IBNR is the amount of money an insurer or MCO must keep in reserves to pay claims that have not yet been submitted for payment
Claims may be submitted at any time within a defined period
Defined in provider contracts – e.g., within 90 days
Defined in group master contract for member-submitted claims – e.g. one year
Lag tables are used to calculate IBNR claims cost estimates
Limits on Payer’s Medical Loss Ratio
MLR limits on insured and fully reinsured
Cannot cost shift between covered groups
Reduces ability to absorb underwriting losses
Limits profits
No maximum loss ratio
Rebate if under MLR standard
Absorb if over MLR standard
MLR Limits:
80% on individual policies
85% on insured group plans2011 through 2013 calculations will be cumulative
Pooling of claims will be done on a state and legal entity level, not on a consolidated basis
Individuals pooled
Small groups (2 – 50) pooled
Groups above 50 not pooled
Cannot pool same company’s experience in a different state
MLR: “Medical” vs. “Administration and Profit
MLR = percent of premiums spent on medical care
Federal and State taxes (except taxes on investment income and capital gains), and Licensing or Regulatory Fees excluded from the premiums received
* In group models (and some self-funded plans), care management activities included in MLR since the capitated medical group carries them out
Budgeting, Forecasting and Internal Audit
Budgets
Detailed budgets are required to perform most basic financial functions
Usually starts with baseline from current budget
Assumptions about changes in revenue based on enrollment forecasts, premium or fee changes, known major projects
Budgets created at functional or departmental levels based on
Ongoing operating costs and projections for changes
Identified projects and associated costs
Rolled up to single budget – iterative process, never finalized quickly
Financial Forecasting
Project activity and results beyond the current period
Often developed several months in advance of the reporting period
Balance between complexity and simplicity
Internal audit
Internal, independent audit function
Audits financial accuracy of all departments and functions
Integral to internal controls of the company
Regulatory Reporting
Annual Statements
Quarterly Financial Statements
Minimum Capital Requirements
Risk-based capital requirements (RBC)
Adjusted capital
NAIC schedules that also have an impact on RBC
Schedule D – changes in investments and capital
Schedule L – changes in subsidiaries affecting regulated entity
Certification on Claims Reserves
Audited Financial Statements
SAP basis
GAAP basis
Sarbanes – Oxley Act of 2002
11 titles (sections) that range from board responsibilities to “whistleblower” protections
Section 404(a) describes management’s responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting
Section 404(b) describes the independent auditor’s responsibility for attesting to and reporting on management’s internal control assessment
New reporting requirements created under ACA, but exact nature yet to be worked out
Underwriting Function
Currently, underwriting has two distinct but related meanings:
Medical underwriting referred to using an individual’s or small group’s medical history to determine whether to offer coverage at all.
General underwriting includes gathering of information to assist in the development of premium rates.
Beginning 2014, underwriting refers only to premium rate development
ACA requires guaranteed issue, meaning coverage cannot be denied based on medical history
Community rates for individuals and the small group market
Experience rates for large insured groups
Premium equivalent rates for self-funded groups
Basic Goal of Premium Rate Development: Rates Should be Adequate, Competitive, and Equitable
Underwriting is responsible for creating the premium rates
Goals of rate development:
Adequate Rates – high enough to generate sufficient revenue to cover all plan expenses and yield and acceptable return on equity
Competitive Rates – low enough to sell enough policies and enroll enough members to meet health plan volume targets
Equitable Rates – will approximate any given group’s costs without an unreasonable amount of cross-subsidization among groups
Underwriting Margin
Underwriting margin =
MLR + Administrative Loss Ratio (MLO); or said another way
Underwriting margin = Premiums/(cost of benefits + cost to administer benefits)
Company margin = Underwriting margin + margin from other sources
Investments
Other businesses, etc.
Foundational Informational Systems
Core managed care software vendor marketplace has consolidated and surviving vendors have greatly added functionality
New system architectures introduced so integration to other information systems has improved
Key managed care software functionality includes:
Benefit configuration
Employer group and member enrollment
Premium management
Provider enrollment, contracting and credentialing
Claims payment
Document Imaging and Workflow
Customer Servicing
Tools and services can distinguish MCOs
CRM, intranets and IVRs are examples
Medical Management
Systems are vital to manage medical costs
Captures additional clinical information
Electronic Data Interchange (EDI)
Electronic Data Interchange (EDI) ANSI X12 4010 standards:
834 for enrollment (which includes adds, updates, terminations)
837 for claims
270, 271, and 271R for eligibility inquiry request, eligibility reply and eligibility roster respectively
835 for remittance advice (or explanation of payment)
278 for referral and authorization
276 and 277 for claims inquiry request and claims status reply respectively
820 for premium payments.
ANSI X12 5010 will support ICD-10
ACA will further support the adoption of EDI
Payers obtain great administrative savings through EDI
HIPAA requires covered entities that conduct certain electronic transactions to use only ANSI X12N 4010 defined standards (transitioning to release 5010)
ACA is creating new standards and requiring more standardization of implementation
Data Warehousing
Data warehouse contains all administrative and clinical datasets for analytical purposes
Examples of data sets
Medical claims – in-network and out of network
Authorizations and specialty referrals
Prescription drug claims
Home care, durable medical equipment, skilled nursing and behavioral health claims
Case and disease management data,
Pathology and radiology results
Immunization data
Health risk appraisals
Personal interests, captured from evolving consumer-based systems
Personal health information
Medicare
People with Medicare are known as “beneficiaries”:
Elderly (65 and over),
Disabled,
Individuals with end-stage renal disease
Medicare’s broad reach:
Covers over 47 million beneficiaries
Represents 15 percent of federal budget outlays
Though not initially a primary focus, Medicare played a key role in the 2010 health reform law.
The A, B, Cs and Ds of Medicare
Part A:
Inpatient hospital care
Up to 100 days of skilled nursing facility care
Hospice care
Limited home health services post-hospital
Funded by payroll tax that is deposited into the Hospital Insurance Trust Fund
Part B:
Physician services
Outpatient hospital care
Preventive services, such as mammography screening
Mental health services
Home health
X-rays and other diagnostic procedures
Durable medical equipment
Financed by premiums and general revenues
The A, B, Cs and Ds of Medicare
Part C:
Known as Medicare Advantage.
Beneficiaries may choose to enroll in a private plan (such as an HMO or PPO) to receive Medicare-covered benefits.
Medicare pays a fee to the insurers that sponsor these plans; plans provide benefits covered under Parts A and B, and often Part D.
Plans can provide additional benefits to members.
Part D:
Helps pay for outpatient prescription drugs.
Benefits provided by private plans that contract with Medicare.
Two types of plans: stand-alone prescription drug plans and Medicare Advantage plans.
Why Allow Commercial Managed Health Care Plans in Medicare in the First Place?
Organized delivery system providing coordinated care and potentially more efficient care (save $$$)
Plans can provide extra benefits, which are attractive to beneficiaries
Accommodation of retiree coverage
Care coordination
Greater potential for chronic care management
Requirements to be an MA plan
Licensed by the state as a risk-bearing entity with a scope of licensure allowing the entity to bear risk in MA.
Minimum level of enrollment (lower for rural plans).
Meet contracting requirements of the Centers for Medicare and Medicaid Services (CMS) (Medicare).
For example, a network plan shows that it has contracts in place that ensure adequate access to care through the network.
May qualify by “deemed” status if qualified by NCQA, URAC or AAAHC.
Submit acceptable bids and meet all required timelines for establishment of or updates to benefit packages and marketing materials.
Types of MA Plans
Coordinated Care Plans – contracted provider networks.
Local HMOs and POS plans
Regional PPOs
Local PPOs
Special Needs Plans (SNPs)
Medical Savings Account Plans – consumer directed.
Private Fee-for-Service Plans – model unique to Medicare, but on the wane.
Group Retiree Plans – have waivers to encourage employer- or union-sponsored plans to offer retiree coverage through MA plans.
