Living benefit riders to life insurance policies: Pricing considerations and strategy
Adding benefit riders to policies provides meaningful coverage for those who need it, and carriers usually can do so at a relatively low cost.
A Medicare Advantage (MA) shared-savings/shared-risk arrangement (referred to as “shared-risk arrangement” in this article) is typically negotiated between a Medicare Advantage organization (MAO) and a provider before the final details of the contract year are known, particularly when the negotiated risk arrangement applies over multiple contract years.
An MAO submits a “bid” to the Centers for Medicare and Medicaid Services (CMS) in the summer prior to the contract year. For example, bids for the 2017 contract year were submitted to CMS in the summer of 2016. The bid development process is complex, but in short, it determines how much CMS will pay the MAO for providing benefits. CMS sets key data elements and “rules” for the bid development process as part of its rate announcement in the April prior to the bid submission. Meanwhile, MAOs are often in the midst of negotiating MA risk-sharing arrangements before the bids are final when there are still several “unknowns” outstanding. Some of these “unknowns” can have a material impact on the reasonableness of the final negotiated contract terms. Thus, it is imperative that providers review their MA shared-risk arrangements annually, particularly shared-risk arrangements set up to span multiple years.
Many providers enter into shared-risk arrangements with MAOs. The most common method used in MA shared-risk arrangements is a medical loss ratio (MLR) target, i.e., claims divided by revenue. This type of arrangement is often referred to as a “Percentage of Premium.” Revenue includes both member premium and CMS revenue. This approach is often used for MA risk deals because it aligns the carrier’s and provider’s incentives, particularly the incentive to ensure accurate coding. An MAO’s revenue from CMS is directly tied to its risk score; that is, if an MAO’s risk score improves, then its revenue increases. All else equal, as revenue improves, the medical loss ratio also improves. Thus, MA coding improvement creates a win-win situation for both plan and provider in MLR target arrangements.
Cost targets based on revenue introduce additional considerations because there are a number of factors that affect the revenue an MAO will receive from CMS. Many of these factors are beyond the control of both the MAO and the provider because they are set by CMS. Changes in these "external" factors will directly affect the MLR and significant changes in these factors from one year to the next could inadvertently make the target MLR stated in the shared risk arrangement inconsistent with the parties’ goals.
Figure 1 includes key factors set by CMS that influence an MAO’s revenue.
Figure 1: MAO revenue key factors
|County-specific Medicare fee-for-service (FFS) costs|
|County’s quartile assignment|
|Double bonus county assignment|
|Star rating of the MAO|
|Changes to Hierarchical Condition Categories (HCC) risk model|
|Changes to risk score methodology|
|MA coding adjustment “penalty”|
Providers should also review items set at the MAO’s discretion that could affect financial results. Some examples include:
Changes to any of the above factors from one year to the next can directly affect an MAO’s revenue and/or cost. Significant changes can and do occur. Annual check-ups are critical in multi-year MA shared-risk arrangements with an MLR target because CMS changes and the MAO’s bid assumptions may lead to a reduction in revenue without an offsetting reduction to cost. A plan’s reaction to any revenue change, by either changing benefits or member premiums, ultimately determines whether or not the existing proposed MLR target remains reasonable.
CMS releases MA plan information in the fall for the upcoming calendar year. We recommend an annual “check-up” of contractual terms after CMS releases the plan information. Specifically, we recommend providers in an MA shared-risk arrangement with an MAO carefully review key contract provisions (e.g., the MLR target) and consider adjustments to the contract terms if needed. It is also a good idea to engage with that MAO during the development of its MA bids each spring to understand any potential material benefit and premium changes.
Simon J. Moody, FSA, MAAA, is a Principal and Consulting Actuary with the Milwaukee office of Milliman. Contact him at [email protected]
Kimberley K. Hiemenz, FSA, MAAA, is a Principal and Consulting Actuary with the Milwaukee office of Milliman. Contact her at [email protected]