Anatomy Of A Rate. Presented By: Anjanette Simone Vice President, Aon.

2017 HR FLORIDA Anatomy Of A Rate Presented By: Anjanette Simone Vice President, Aon

Agenda Underwriting / Rating Overview Funding Arrangement Options Incurred vs. Mature Claims Underwriting Basics & Components Closing Comments

2017 HR FLORIDA Underwriting / Rating Review

Underwriting Overview Aon s Definition of Underwriting: setting a projected price/rate based on historical experience and other data elements that may impact future costs Underwriting uses both a calculated methodology and applies a judgement based on the needs of each client Developing a future cost projection is an estimate based on using the data that is available today to include the characteristics of the client Underwriting methodology varies between carriers and consulting firms

Underwriting Overview Aon uses underwriting in a few different situations: To assist self-funded clients in projecting future claims costs and setting fully-insured equivalent rates, budget/funding rates, and COBRA rates To properly negotiate fully-insured renewals, we evaluate the carrier s fully-insured underwriting line by line and complete our own internal underwriting projections to compare to the carriers projections to see where any disagreements may arise To evaluate the impact of changes to the plan and how the timing of these changes effects the impact On an ad hoc basis, to provide projections for non-standard time frames (i.e. projecting calendar year costs for a client with a July-June plan year)

2017 HR FLORIDA Funding Arrangement Options

Contract Types At a high level, they are defined as: Fully-insured: Employer/insured pays a set premium amount to the insurer and the insurer accepts all risk. The insurance company absorbs any losses or gains that the plan may experience Self-funded: Employer/insured establishes an internal budget and pays for claims as the are incurred and paid. Typically will pay a third party to administer the plan and may elect to pay a stop loss vendor an additional premium to fully-insure claims above a certain level Minimum Premium: Employers pay the monthly fixed expenses and pays the claims as incurred and paid. This is a fully-insured product with the option for the client or carrier to hold reserves; reconciliation of surplus/deficit at the end of the year.

Contract Types Self-funded contracts are more advantageous/appealing to larger organizations (500+) with predictable claims experience and a comfort level with claims fluctuations and absorbing additional risks. Minimum Premium arrangement is an option for clients who are not ready to transition from fully-insured to self-insured; however the same advantages/disadvantages of being fully-insured apply. The percentage of employers self-insuring versus purchasing a fullyinsured contract varies significantly by market and office. Credibility: To laymen, this typically means trustworthy ; to an actuary, it references a weight that determines the blend of actual claims and a manual rating process

Funding Components: General Concepts Fixed Costs Claims Funding Needed The portion of costs that are held constant from month to month The portion of costs that vary based on utilization from month to month Fully Insured = Premium rates Self-Funded = Premium Equivalent Rates

Funding Components: General Concepts Fixed Costs Claims Funding Needed Administrative Services Disease/case management Network Access Healthy baby programs Nurseline Rx Interface fees (carve out) Telehealth fees* Wellness plan fees* Taxes (state, Reinsurance) ACA adjustments Stop loss / pooling fees HRA/HSA ER Subsidy* Margin/profit Medical claims Adjustments for large claims Pharmacy claims Trend Reserves Employer Paid Employee Paid Does not account for employee paid out of pocket expenses (deductibles, copays, coinsurance)

Funding Components: General Concepts Fixed Costs Claims Funding Needed Things that get buried in the underwriting process Trend factors Capitation fees for DM & Care Management Credibility weighting Reserve adjustments Shared savings programs Inflated pharmacy pricing ( Spread Pricing : what the PBM charges to fill the script versus what they actually paid to the pharmacy) Rx is a carrier s bread and butter. They are often incentivized by the manufacturers to put certain drugs on the formulary and in return, receive rebates & bonus incentives

Funding Components: Areas of Opportunity Fixed Costs ~$0.15 Medical Claims ~$0.65 Pharmacy Claims ~$0.15% Margin ~$0.05 ~80% of Costs are Controllable through Behavior Modification

Premium Paid to Carrier Premium Equivalent Rates Premium Equivalent Rates Funding Components Fully Insured Self-Funded w/ Aggregate Stop Loss Self-Funded w/o Aggregate Stop Loss ASL Corridor (e.g. 120% Uncapped Liability Margin / Profit Margin Margin Pooling Expected Claims ISL* Stop Loss Premium Expected Claims Maximum Liability ISL* Stop Loss Premium Expected Claims Fixed Costs State premium tax, Reserves Fixed Costs Fixed Costs ISL: Individual Stop Loss Limit ASL: Aggregate Stop Loss Level

Fully Insured Pros and Cons Pros Insurance company bears the risk of poor/adverse claims experience Employer s costs are guaranteed by the insurer Monthly costs are fixed and easy to budget consistent cash flow Insurer assumes role of HIPAA Covered Entity and claim fiduciary liability Cons Additional administrative costs due to premium tax, profit margins, insurer fee, and state mandated benefits Premiums are paid by the employer and held by the carrier carrier earns interest on monies held Limited claims and utilization reporting which hinders plan management and decision making Limited plan design options and vendor choices Cost saving measures (wellness programs, disease management, consumer driven plan designs, etc.) directly benefit the insurance company

Self Funded Pros and Cons Pros Lower administrative costs due to no premium tax, limited profit margins, no insurer fee, and reduced overhead Improved cash flow and interest earnings on monies held claims are paid as they occur Exempt from state insurance laws and mandates Greater flexibility and control in plan design, financing and vendor selection Routine access to claims and utilization data you own your claims data Cost saving measures directly benefit client Cons Less predictability in monthly budgeting due to claims fluctuation Increased exposure if claims exceed expected levels Must fund plan reserves (in the event of plan termination) book liability Plan sponsor (usually the employer) assumes the role of HIPAA Covered Entity and claim fiduciary liability (fiduciary role can be assigned to plan administrator for a small fee)

Funding Considerations Fully Insured Self Funding Plan Risk Insurance company will maintain all plan risk; additional funding is not required Plan Risk Client will maintain all plan risk outside of reinsurance; additional funding may be required Stop Loss / Pooling Insurance company will maintain stop loss insurance to protect against catastrophic loss referred to as Pooling Stop Loss Client will need to purchase stop loss insurance to protect against catastrophic loss Funding Rates Insurance company will develop premium rates and COBRA rates Funding Rates Actuarial assistance needed to develop plan funding rates and COBRA rates Plan Reserving Reserves are maintained by insurance company Plan Reserving Must maintain Incurred but Not Paid (IBNP or IBNR) reserve as calculated by actuaries Taxes and Margins States may impose premium taxes to fully insured premiums and insurance carriers build in profit (risk) margins into premiums Taxes and Margins Not subject to state imposed premium tax or insurance company profit (risk) margins Plan Design Flexibility Limited flexibility on covered services and plan design; must be state filed and follow state mandates Plan Design Flexibility Significant flexibility on covered services and plan design; ERISA preemption Banking No banking set up required Banking Centralized location with one banking feed set up with claims administrator Internal Cost Allocation Divisions pay fully insured rates directly to insurance company Internal Cost Allocation Divisions pay actuarial developed fee to central banking location Reporting Limited reporting based on carrier standard reports and no claim level detail Reporting Improved reporting package and ownership of claim level detail

2017 HR FLORIDA Incurred Claims vs. Paid Claims

Incurred Claims vs. Paid Claims Incurred Claims: when the claim is incurred Paid Claims: when the claim is paid by the carrier Sue receives physical therapy for a broken leg on July 8 th. The claim for this service is submitted by the doctor s office to the insurance carrier electronically on July 10 th. The claim is paid on August 10 th. Lag: the time between when a claim is incurred and when it is paid Will vary by line of coverage How long you have been with the current carrier and/or how long you have been self-funded play an important role in whether you are looking at immature or mature claims

2017 HR FLORIDA Immature vs. Mature Claims

Funding Components: Immature Plan (Year 1 of Plan) Immature Claims: Your first year with a new carrier (if an insured plan) or your first year as a self-funded plan, claims in the first few months will be immature do the claim lag Is the underwriter only projecting future claims, or Is the underwriter projecting future claims and building reserves for incurred but not yet paid claims 120 100 80 60 40 20 0 Premium or Premium Equivalent Rates Jan Feb Mar Apr may Jun Jul Aug Sep Oct Nov Dec Fixed Costs Claims Reserves Aggregate stop loss is a key component for the plan whether the risk is held by the carrier or the employer. Typically, stop loss will be at 120-125% of expected claims. This represents the max liability for the holder of the risk for all claims.

Funding Components: Mature Plan Year Mature Claims: Your second + year with a new carrier (if an insured plan) or your second year as a self-funded plan Insured Premium / Aggregate Stop Loss 120 100 80 60 40 20 The reserves you built up in first year would be adjusted annually (IBNR) and set aside to pay run out claims should the plan cease to exist. 0 Jan Feb Mar Apr may Jun Jul Aug Sep Oct Nov Dec Fixed Costs Claims Reserves

Funding Components: Reserves / Run Out 120 Premium or Premium Equivalent Rates 100 80 All the reserves that were built up are used to pay the runout 60 40 20 0 Jan Feb Mar Apr may Jun Jul Aug Sep Oct Nov Dec Jan Feb March Fixed Costs Claims Reserves

Funding Components: Mature Plan Year Mature Claims: Your second + year with a new carrier (if an insured plan) or your second year as a self-funded plan Insured Premium / Aggregate Stop Loss 120 100 80 60 40 20 The reserves you built up in first year would be adjusted annually (IBNR) and set aside to pay run out claims should the plan cease to exist. 0 Jan Feb Mar Apr may Jun Jul Aug Sep Oct Nov Dec Fixed Costs Claims Reserves

2017 HR FLORIDA Underwriting Basics & Components

Basic Underwriting Template There are many variations of how medical claims are underwritten, but in it s simplest terms it follows this Formula: Gross Paid Claims (-) Claims over stop loss (=) Net Paid Claims (/) Average Enrollment (=) Paid Claims Per Capita (x) Adjustment Factors (=) Adjusted Paid Claims Per Capita (x) 1 + Trend (=) Trended Paid Claims Per Capita Major steps (details covered on following slides): Figure out gross claims and enrollment during the experience period Figure out stop loss eligible claims for experience period Calculate PEPM net claims for experience period Calculate trend rate Calculate PEPM projected claims

Basic Underwriting Example Month Enrollment Claims 11/1/2013 942 12/1/2013 930 1/1/2014 913 $501,386 2/1/2014 897 $546,629 3/1/2014 886 $630,459 4/1/2014 876 $999,779 5/1/2014 867 $642,004 6/1/2014 862 $832,498 7/1/2014 853 $815,622 8/1/2014 844 $588,585 9/1/2014 830 $639,150 10/1/2014 819 $678,495 11/1/2014 808 $668,240 12/1/2014 787 $699,756 Total 10,519 $8,242,604 Information as of December 31, 2014 Paid Claims Expected Claimant Number To Date Reimbursement* 1 $599,204 $424,204 2 $215,311 $40,311 3 $149,019 $0 4 $146,324 $0 $8,242,604 (-) $464,515 (=) $7,778,089 (/) 10,519 (=) $739.43 (x) 1.158 (=) $856.26

Underwriting Example: Real Client Experience Period Start Date 6/1/2016 Experience Period End Date 5/31/2017 Projection Period Start Date 1/1/2018 Projection Period End Date 12/31/2018 Claim Lag In Months 2.0 Adjusted Net Claims in Experience Period: $ 2,577,330 Lagged Members in Experience Period 6,943 Credibility of Experience 100% Starting Point of Projection PMPM $ 371.21 Large Claim Adjustment PMPM $ - Adjusted Starting Point of Projection $ 371.21 a Midpoint of Experience Period 11/29/2016 b Midpoint of Projection Period 7/1/2018 c Months Trend 19.0 d Annual Trend Assumption 7% e Trend Factor (d*c/12) 1.113 Projected Paid claims PMPM $ 413.19 Incurred Claims Adjustment 1.015 Projected Incurred Claims PMPM Before Adjustments $ 419.39

Underwriting Example: Real Client Healthcare reform 1 1.000 Healthcare Reform 2 1.000 Plan Changes 1.000 Network Changes 1.000 Demographic Changes 1.000 Capitation Change 1.000 $ 419.39 Current Member to EE Ratio 1.371 Projected Incurred Claims PMPM After Adjustments $ 575.07 Current Increase ASO Fees PEPM $ 36.93 $ 35.85 1.03 ISL Fees PEPM $ 71.98 $ 62.59 1.15 ASL Fees PEPM $ 3.12 $ 2.97 1.05 Health Reform Fees $ - Other Fees $ - Wellness Plan $ - Speciality Rx Adjustment $ - Projected Total Fixed Costs PEPM $ 112.02 Projected total Costs PEPM after Adjustments $ 687.09 Optional Claim Margin 1.05 Projected Total Cost PEPM with Claims Margin $ 721.44 Current PEPM based on rates and enrollment $ 654.73 Required Increase 10.19%

Underwriting Example: Real Client Tier Description Sample Current Enrollment Tier 1 (single) EE EE EE 314 Tier 2 ES ES ES 25 Tier 3 EC EC EC 33 Tier 4 FAM FAM FAM 24 Tier 5 0 Tier 6 0 396 Tier Factors EE 1.00 ES 2.10 EC 1.80 FAM 3.10 0 0 8.00 Claims Projection No Margin $ 575.07 Total Fixed Costs Projection $ 112.02 Total Costs Projection No Margin $ 687.09 Margin 1.05 Total Costs Projection with Margin $ 721.44 Projection by Tier Claims Fixed Margin Total w Margin Total No Margin EE $ 455.18 $ 88.67 $ 27.19 $ 571.04 $ 543.85 ES $ 955.88 $ 186.21 $ 57.09 $ 1,199.18 $ 1,142.09 EC $ 819.32 $ 159.61 $ 48.94 $ 1,027.87 $ 978.93 FAM $ 1,411.06 $ 274.88 $ 84.28 $ 1,770.22 $ 1,685.94 0 $ - $ - $ - $ - $ - 0 $ - $ - $ - $ - $ - Check $ 575.07 $ 112.02 $ 34.35 $ 721.44 $ 687.09

2017 HR FLORIDA Closing Comments

Closing Comments Understand the different types of contracts (e.g. FI, SF, MP) Understand that fixed costs make up ~15% of your total spend, whereas, claims total 85% Understand the pros/cons of fully insured and selffunded contracts Understand the difference between mature and immature claims

2017 HR FLORIDA Thank You! Anjanette Simone Vice President, H&B Office Leader (Tampa) Aon Health & Benefits (813) 636-3613 Anjanette.Simone@Aon.com NOTE: I will be in the Discussion Den on Tuesday from 12:00 12:30