AHM 520 - Tests

Assignment 1: Health Plan Financial Information

Reading 1A: Health Plan Financial Information

Define financial information and list examples of a health plan's financial information Identify the internal users and external users of a health plan's financial information Distinguish between for-profit and not-for-profit Health Plan organizations Discuss the common types of Health Plan organizations

Instructions: 1. Select or enter the best answer for each of the 4 questions. 2. Answer all the questions. Remember to scroll down if necessary.

3. Click Complete the Test to score your answers and view a report.

1. Users of the Fulcrum Health Plan financial information include: The independent auditors who review Fulcrum's financial statements Fulcrum's controller (comptroller) Fulcrum's plan members The providers that deliver healthcare services to Fulcrum plan

members Fulcrum's competitors

Of these users, the ones that most likely can correctly be classified as external users with a direct financial interest in Fulcrum are the

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2.

independent auditors, the plan members, the providers, and the competitors only

independent auditors, the controller, and the providers only

controller and the competitors only

plan members and the providers only

2. The Eclipse Health Plan is a not-for-profit health plan that qualifies under the Internal Revenue Code for tax-exempt status. This information indicates that Eclipse

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3.

has only one potential source of funding: borrowing money

does not pay federal, state, or local taxes on its earnings

must distribute its earnings to its owners-investors for their personal gain

is a privately held corporation

3. The Challenger Group is a type of management services organization (MSO) that purchases the assets of physician practices, provides practice management and administrative support services to participating providers, and offers physicians a long-term contract and an equity position in Challenger. This information indicates that Challenger is a type of health plan known as

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4.

an integrated delivery system (IDS)

a medical foundation

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a provider-sponsored organization (PSO)

a physician practice management (PPM) company

4. A key factor that distinguishes the various types of health plans is the type and amount of risk that a health plan assumes with respect to the delivery and financing of healthcare benefits. An example of a type of health plan that typically assumes the financial risk of delivering and financing healthcare benefits is a

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third party administrator (TPA)

utilization review organization (URO)

preferred provider organization (PPO)

pharmacy benefit management (PBM) plan

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1 D2 B3 D4 C

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Assignment 2: Risk Management in Health Plans

Reading 2A: Types of Risk

Distinguish between pure risk and speculative risk Define risk management Define the risks included in risk-based capital (RBC) requirements for Health Plans Discuss the three broad strategies Health Plans use to deal with risk Explain how C-risks (Contingency risks) and RBC risks relate to Health Plan solvency



1. The following statements are about pure risk and speculative risk—two kinds of risk that both businesses and individuals experience. Select the answer choice containing the correct statement.

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2.

Healthcare coverage is designed to help plan members avoid pure risk, not speculative risk.

Only pure risk involves the possibility of gain.

An example of speculative risk is the possibility that an individual will contract a serious illness.

Only speculative risk contains an element of uncertainty.

2. The following paragraph contains an incomplete statement. Select the answer choice containing the term that correctly completes the statement. Health plans face four contingency risks (C-risks): asset risk (C-1), pricing risk (C-2), interest-rate risk (C-3), and general management risk (C-4). Of these risks, ________________ is typically the most important risk that health plans face. This is true because a sizable portion of the total expenses and liabilities faced by a health plan come from contractual obligations to pay for future medical costs, and the exact amount of these costs is not known when the healthcare coverage is priced.

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3.

asset risk (C-1)

pricing risk (C-2)

interest-rate risk (C-3)

general management risk (C-4)

3. The Health Maintenance Organization (HMO) Model Act, developed by the National Association of Insurance Commissioners (NAIC), represents one approach to developing solvency standards. One drawback to this type of solvency regulation is that it

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4.

uses estimates of future expenditures and premium income to estimate future risk fails to adjust the solvency requirement to account for the size of an HMO's premiums and expenditures










assumes that the amount of premiums an HMO charges always directly corresponds to the level of the risk that the HMO faces fails to mandate a minimum level of capital and surplus that an HMO must maintain

4. The NAIC has developed a risk-based capital (RBC) formula for all health plans that accept risk. One true statement about the RBC formula for health plans is that it

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5.

is a set of calculations, based on information in a health plan's annual financial report, that yields a target capital requirement for the organization fails to take into account a health plan's underwriting risk, which is the risk that the premiums the health plan receives will be insufficient to pay for the healthcare services it provides to its plan members

applies to all health plans in the United States

fails to assess the specific level of risk faced by each health plan

5. Provider reimbursement methods that transfer some utilization risk from a health plan to providers affect the health plan's RBC formula. A health plan's use of these reimbursement methods is likely to result in

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6.

an increase the health plan's underwriting risk

a decrease the health plan's credit risk

a decrease the health plan's net worth requirement

all of the above

6. Three general strategies that health plans use for controlling types of risk are risk avoidance, risk transfer, and risk acceptance. The following statements are about these strategies. Three of these statements are true, and one statement is false. Select the answer choice containing the FALSE statement.

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Generally, the smaller the likely benefits of accepting a risk, and the lower the costs of avoiding that risk, the greater the likelihood that a health plan will elect to avoid the risk. A health plan is seldom able to transfer any of the risk that utilization rates will be higher than expected and that its cost of providing healthcare will exceed the revenues it receives. If a risk is a pure risk from the point of view of a health plan, then the health plan most likely will attempt to avoid the risk. A health plan would most likely transfer some or all of its utilization risk if it pays a provider a rate that is based on the number of plan enrollees that choose the provider as their primary care provider (PCP).

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1 A2 B3 C4 A









5 C6 B

Reading 2B: Risk Management in Health Plan

List some of the factors that may give rise to the assumption of an agency relationship between Health Plans and their providers

Discuss some measures a Health Plan might take to limit the liability associated with credentialing its providers Explain some of the ways a risk manager can reduce or eliminate risk exposures related to utilization review List some of the actions that a risk manager can take in managing the process of providing healthcare in a Health

Plan environment



1. Under the doctrine of corporate negligence, a health plan and its physician administrators may be held directly liable to patients or providers for failing to investigate adequately the competence of healthcare providers whom it employs or with whom it contracts, particularly where the health plan actually provides healthcare services or restricts the patient's/enrollee's choice of physician.

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2.

True

False

2. The Eagle health plan wants to limit the possibility that it will be held vicariously liable for the negligent acts of providers. Dr. Michael Chan is a member of an independent practice association (IPA) that has contracted with Eagle. One step that Eagle could take in order to limit its exposure under the theory of vicarious liability is to

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3.

supply Dr. Chan with office space

employ nurses, laboratory technicians, and therapists to support Dr. Chan

be responsible for keeping Dr. Chan's medical records updated

ensure that documents provided to Dr. Chan's patients describe him as an independent practitioner

3. Rasheed Azari, the risk manager for the Tower health plan, is attempting to work with providers in the organization in order to reduce the providers' exposure related to utilization review. Mr. Azari is considering advising the providers to take the following actions:

1-Allow Tower's utilization management decisions to override a physician's independent medical judgment

2-Support the development of a system that can quickly render a second opinion in case of disagreement surrounding clinical judgment

3-Inform a patient of any issues that are being disputed relative to a physician's recommended treatment plan and Tower's coverage decision

Of these possible actions, the ones that are likely to reduce physicians' exposures related to utilization review include actions

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4.










1, 2, and 3

1 and 2 only

1 and 3 only

2 and 3 only

4. The following statements are about risk management in health plans. Select the answer choice containing the correct response.

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Risk management is especially important to health plans because the Employee Retirement Income Security Act of 1974 (ERISA) allows plan members to recover punitive damages from healthcare plans. With regard to the relative risk for health plan structures based upon the degree of influence and relationships that health plans maintain with their providers, preferred provider organizations (PPOs) typically have a higher risk than do group HMOs and staff HMOs. Although there are clear risks associated with the provision of healthcare services and coverage decisions surrounding that care, the bulk of risk in health plans is associated with a health plan's benefit administration and contracting activities. A health plan generally structures its risk management process around loss reduction techniques and loss transfer techniques.

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1 A2 D3 D4 D



Assignment 3: Provider Reimbursement Arrangements

Reading 3A: Provider Reimbursement and Plan Risk

Discuss the three main drivers of complexity in the healthcare regulatory environment Describe the influence of the Department of Health and Human Services, the Department of Labor, the Office of

Personnel Management, and the Department of Defense on the healthcare environment Explain the financial effects that mandated benefit laws and regulations have on Health Plans



1. Several federal agencies establish rules and requirements that affect health plans. One of these agencies is the Department of Labor (DOL), which is primarily responsible for _________.

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2.

issuing regulations pertaining to the Health Insurance Portability and Accountability Act (HIPAA) of 1996

administering the Medicare and Medicaid programs

administering ERISA, which imposes various documentation, appeals, reporting, and disclosure requirements on employer group health plans administering the Federal Employees Health Benefits Program (FEHBP), which provides voluntary health insurance coverage to federal employees, retirees, and dependents

2. The Atoll Health Plan must comply with a number of laws that directly affect the plan's contracts. One of these laws allows Atoll's plan members to receive medical services from certain specialists without first being referred to those specialists by a primary care provider (PCP). This law, which reduces the PCP's ability to manage utilization of these specialists, is known as _________.

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3.

a due process law

an any willing provider law

a direct access law

a fair procedure law

3. Mandated benefit laws are state or federal laws that require health plans to arrange for the financing and delivery of particular benefits. Within a market, the implementation of mandated benefit laws is likely to cause __________.

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a reduction in the number of self-funded healthcare plans

an increase in the cost to the health plans

a reduction in the size of the provider panels of health plans

a reduction in the uniformity among the healthcare plans of competing health plans









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Reading 3B: Provider Reimbursement Methods

Discuss the advantages and disadvantages of traditional, salary, fee-for service, and discounted fee-for-service provider reimbursement methods

Explain how utilization risk is distributed in each of the provider reimbursement methods Define churning, upcoding, and unbundling and recognize which provider reimbursement systems are designed to

solve these problems Explain the purpose of using the relative value scale and resource-based relative value scale systems Define global fees, withholds, risk pools, and bonuses and explain how they are used by health plans to motivate

providers to manage overutilization Discuss the methods that health plans use to reimburse hospitals



1. The physicians who work for the Sunrise Health Plan, a staff model HMO, are paid a salary that is not augmented with another type of incentive plan. Compared to the use of a traditional reimbursement method, Sunrise's use of a salary reimbursement method is more likely to

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2.

encourage Sunrise's physicians to perform services that are not medically necessary

completely eliminate service risk for Sunrise's physicians

decrease Sunrise's liability for any negligent acts of the physicians in the plan's network of providers

help stabilize expenses for Sunrise

2. The Acorn Health Plan uses a resource-based relative value scale (RBRVS) to help determine the reimbursement amounts that Acorn should make to providers who are compensated under an FFS system. With regard to the advantages and disadvantages to Acorn of using RBRVS, it can correctly be stated that

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3.

an advantage of using RBRVS is that it can assist Acorn in developing reimbursement schedules for various types of providers in a comprehensive healthcare plan an advantage of using RBRVS is that it puts providers who render more medical services than necessary at financial risk for this overutilization a disadvantage of using RBRVS is that it will be difficult for Acorn to track treatment rates for the health plan's quality and cost management functions a disadvantage of using RBRVS is that it rewards procedural healthcare services more than cognitive healthcare services

3. Health plans sometimes use global fees to reimburse providers. Health plans would use this method of provider reimbursement for all of the following reasons EXCEPT that global fees

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4.

eliminate any motivation the provider may have to engage in churning

transfer some of the risk of overutilization of care from the health plan to the providers










eliminate the practice of upcoding within specific treatments

reward providers who deliver cost-effective care

4. The reimbursement arrangement that Dr. Caroline Monroe has with the Exmoor Health Plan includes a typical withhold arrangement. One true statement about this withhold arrangement is that, for a given financial period,

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5.

Dr. Monroe and Exmoor are equally responsible for making up the difference if cost overruns exceed the amount of money withheld Exmoor most likely distributes to Dr. Monroe the entire amount withheld from her if her costs are below the amount budgeted for the period Exmoor pays Dr. Monroe at the end of the period an amount over and above her usual reimbursement, and this amount is based on the performance of the plan as a whole Exmoor most likely withholds between 3% and 5% of Dr. Monroe's total reimbursement

5. The following statements are about various reimbursement arrangements that health plans have with hospitals. Select the answer choice containing the correct statement.

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6.

A sliding scale per-diem charges arrangement differs from a sliding scale discount on charges arrangement in that only a sliding scale per-diem charges arrangement is based on total volume of admissions and outpatient procedures. Under a typical reimbursement arrangement that is based on diagnosis-related groups (DRGs), if the payment amount is fixed on the basis of diagnosis, then any reduction in costs resulting from a reduction in days will go to the health plan rather than to the hospital. A negotiated straight per-diem charge requires payment of a single charge for a day in the hospital, regardless of any actual charges or costs incurred during the hospital stay. A straight discount on charges arrangement is the most common reimbursement method in markets with high levels of health plans.

6. Health plans seeking to provide comprehensive healthcare plans must contract with a variety of providers for ancillary services. One characteristic of ancillary services is that

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physician behavior typically does not impact the utilization rates for these services package pricing is the preferred reimbursement method for ancillary service providers these services include physical therapy, behavior therapy, and home healthcare, but not diagnostic services such as laboratory tests few plan members seek these services without first being referred to the ancillary provider by a physician

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1 D2 A3 A4 B5 C6 D

Assignment 4: Capitation and Plan Risk

Reading 4A: Capitation in Provider Reimbursement

Describe percent-of-premium capitation and PMPM capitation Explain the differences among and uses of PCP, specialty, full professional, and global capitation arrangements Explain how carve-outs are used in conjunction with some capitation contracts Discuss contact capitation Describe some of the key information requirements for developing a capitation reimbursement system



1. In order to calculate a simple monthly capitation payment, the Argyle Health Plan used the following information:

The average number of office visits each member makes in a year is two

The FFS rate per office visit is $55 The member copayment is $5 per office visit The reimbursement period is one month

Given this information, Argyle would correctly calculate that the per member per month (PMPM) capitation rate should be

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2.

$4.17

$8.33

$9.17

$10.00

2. The provider contract that Dr. Timothy Meyer, a pediatrician, has with the Cardigan health plan states that Cardigan will compensate him under a capitation arrangement. However, the contract also includes a typical low enrollment guarantee provision. Statements that can correctly be made about this arrangement include that the low enrollment guarantee provision most likely

A. Causes Dr. Meyer's capitation contract with Cardigan to transfer more risk to him than the contract otherwise would transfer

B. Specifies that Cardigan will pay Dr. Meyer under an arrangement other than capitation until a specified number of children covered by the plan use him as their PCP

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3.

Both A and B

A only

B only

Neither A nor B







3. One true statement about a type of capitation known as a percent-of-premium arrangement is that this arrangement

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4.

is the most common type of capitation

is less attractive to providers when the arrangement sets provisions to limit risk sets provider reimbursement at a specific dollar amount per plan member transfers some of the risk associated with underwriting and rating from a health plan to a provider

4. The provider contract that Dr. Zachery Cogan, an internist, has with the Neptune Health Plan calls for Neptune to reimburse him under a typical PCP capitation arrangement. Dr. Cogan serves as the PCP for Evelyn Pfeiffer, a Neptune plan member. After hospitalizing Ms. Pfeiffer and ordering several expensive diagnostic tests to determine her condition, Dr. Cogan referred her to a specialist for further treatment. In this situation, the compensation that Dr. Cogan receives under the PCP capitation arrangement most likely includes Neptune's payment for

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5.

all of the diagnostic tests that he ordered on Ms. Pfeiffer

his visits to Ms. Pfeiffer while she was hospitalized

the cost of the services that the specialist performed for Ms. Pfeiffer

all of the above

5. The following statements illustrate common forms of capitation: 1. The Antler Health Plan pays the Epsilon Group, an integrated delivery

system (IDS), a capitated amount to provide substantially all of the inpatient and outpatient services that Antler offers. Under this arrangement, Epsilon accepts much of the risk that utilization rates will be higher than expected. Antler retains responsibility for the plan's marketing, enrollment, premium billing, actuarial, underwriting, and member services functions.

2. The Bengal Health Plan pays an independent physician association (IPA) a capitated amount to provide both primary and specialty care to Bengal's plan members. The payments cover all physician services and associated diagnostic tests and laboratory work. The physicians in the IPA determine as a group how the individual physicians will be paid for their services.

From the following answer choices, select the response that best indicates the form of capitation used by Antler and Bengal.

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6.

Antler = subcapitationBengal = full-risk capitation Antler = subcapitationBengal = full professional capitation Antler = global capitationBengal = subcapitation Antler = global capitationBengal = full professional capitation










6. The following statements are about carve-out programs. Three of these statements are true, and one statement is false. Select the answer choice containing the FALSE statement.

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7.

In the type of carve-out in which entire categories of care are administered by independent organizations, a health plan typically reimburses these organizations under an FFS contract. Typically, a health plan will offer carved-out services to its enrollees, but will manage these services separately. Carve-outs are services that are excluded from a capitation payment, a risk pool, or a health benefit plan. The most rapidly growing area relaed to carve-outs is disease management (DM).

7. The Marble Health Plan sets aside a PMPM amount for each specialty. When a PCP in Marble's provider network refers a Marble plan member to a specialist and the specialist provides medical services to the member, the specialist begins to receive a share of those funds on a monthly basis. Marble determines the monthly payment for each specialist by dividing the number of active patients for that specialty by the total specialty pool for that month. This form of payment, which is similar to a case rate, is known as

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8.

referral circle capitation

risk pod capitation

contact capitation

retrospective reimbursement capitation

8. A reconciliation is the process by which a health plan assesses providers' performance relative to contractual terms and reimbursement. With regard to this process, it can correctly be stated that

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9.

a reconciliation typically includes payment to the providers of any withholds or bonuses due to them a health plan typically should conduct a reconciliation immediately after the evaluation period has ended most agreements between health plans and providers require reconciliations to be performed quarterly a health plan typically should not conduct reconciliation for a provider until the plan has received all claims or other documentation of services that the physician provided during the evaluation period

9. With regard to capitation arrangements for hospitals, it can correctly be stated that

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the most common reimbursement method for hospitals is professional services capitation most jurisdictions prohibit hospitals and physicians from joining together to receive global capitations that cover institutional services provided by the hospitals a health plan typically can capitate a hospital for outpatient laboratory and X-ray services only if the health plan also capitates the hospital for inpatient care












many hospitals have formed physician hospital organizations (PHOs), hospital systems, or integrated delivery systems (IDSs) that can accept global capitation payments from health plans

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Reading 4B: Risk Transfer in Health Plan

Distinguish between the terms stop-loss insurance and stop-loss reinsurance from the insurance industry perspective Explain the differences between specific stop-loss coverage and aggregate stop-loss coverage Discuss the advantages and disadvantages to a Health Plan of transferring risk by obtaining stop-loss coverage Discuss the advantages and disadvantages to a Health Plan of providing stop-loss coverage to providers and

employer groups



1. The Newfeld Hospital has contracted with the Azalea Health Plan to provide inpatient services to Azalea's enrolled members. The contract calls for Azalea to provide specific stop-loss coverage to Newfeld once Newfeld's treatment costs reach $20,000 per case and for Newfeld to pay 20% of the next $50,000 of expenses for this case. After Newfeld's treatment costs on a case reach $70,000, Azalea reimburses the hospital for all subsequent treatment costs. One true statement about this specific stop-loss coverage is that

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2.

the carrier is Newfeld

the attachment point is $20,000

the shared-risk corridor is between $0 and $70,000

this coverage can also be activated when the total covered medical expenses generated by the hospitalizations of Azalea plan members reach a specified level

2. The Newfeld Hospital has contracted with the Azalea Health Plan to provide inpatient services to Azalea's enrolled members. The contract calls for Azalea to provide specific stop-loss coverage to Newfeld once Newfeld's treatment costs reach $20,000 per case and for Newfeld to pay 20% of the next $50,000 of expenses for this case. After Newfeld's treatment costs on a case reach $70,000, Azalea reimburses the hospital for all subsequent treatment costs. The maximum amount for which Newfeld is at risk for any one Azalea plan member's treatment costs is

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3.

$10,000

$14,000

$30,000

$34,000

3. The Sanford Group, a provider group, entered into a risk contract with a health plan. Sanford has purchased aggregate stop-loss coverage with an attachment point of 115% of the group's predicted healthcare costs of $2,000,000 for the year. Sanford has a copayment of 10% for any costs above the attachment point. If Sanford's actual costs for the year are $2,800,000, then, according to the terms of the aggregate stop-loss

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4.










agreement, the amount that Sanford is responsible for is

$2,080,000

$2,300,000

$2,350,000

$2,380,000

4. A stop-loss contract may provide that claims are settled using a paid claims method or an incurred claims method. The Concord Company provides health coverage to its employees through a self-funded health plan. On March 17, a Concord employee who is enrolled in this plan underwent surgery, and the surgery was sufficiently expensive to trigger Concord's specific stop-loss coverage. On April 10, Concord paid the medical expenses associated with the surgery. The term of the stop-loss contract ended on April 1. This information indicates that the stop-loss carrier is responsible for paying a portion of the cost of the surgery under

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5.

both the paid claims method and the incurred claims method

the paid claims method but not the incurred claims method

the incurred claims method but not the paid claims method

neither the paid claims method nor the incurred claims method

5. A health plan that capitates a provider group typically provides or offers to provide stop-loss coverage to that provider group.

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6.

True

False

6. The sentence below contains two pairs of words enclosed in parentheses. Determine which word in each pair correctly completes the statement. Then select the answer choice containing the two words that you have chosen. Purchasing stop-loss coverage most likely (increases / reduces) a health plan's underwriting risk and (increases / reduces) the health plan’s affiliate risk.

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increases / increases

increases / reduces

reduces / increases

reduces / reduces

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3 C4 C5 A6 C

Assignment 5: Fully Funded and Self-Funded Health Plans

Reading 5A: Health Plan Funding

Distinguish between fully funded and self-funded health plans Identify and describe the two main types of self-funded health plans



1. The Poplar Company and a Blue Cross/Blue Shield organization have contracted to provide a typical fully funded health plan for Poplar's employees. One true statement about this health plan for Poplar's employees is that

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2.

Poplar bears the entire financial risk if, during a given period, the dollar amount of services rendered to Poplar plan members exceeds the dollar amount of premiums collected for this health plan Poplar and the Blue Cross/Blue Shield organization share the financial risk of paying for claims under Poplar's health plan the Blue Cross/Blue Shield organization, upon acceptance of a premium, becomes the group plan sponsor for Poplar's health plan the Blue Cross/Blue Shield organization, upon acceptance of a premium, bears the entire financial risk of paying for the administrative expenses associated with health plan operations

2. The Kayak Company self funds the health plan for its employees. This plan is an example of a type of self-funded plan known as a general asset plan. The fact that this is a completely self-funded plan indicates that

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3.

the plan has no funding vehicle

Kayak passes to its employees the financial risk of providing healthcare coverage the plan most likely is exempt from ERISA requirements concerning the limits on benefit discrimination for classes of employees the plan is exempt from the state laws and regulations that apply to health insurance policies

3. The Kayak Company self funds the health plan for its employees. This plan is an example of a type of self-funded plan known as a general asset plan. Because Kayak's plan is a general asset plan, the funds that Kayak sets aside for the health plan are

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subject to the claims of Kayak's creditors

available to Kayak solely for the purpose of paying for the healthcare expenses of Kayak's covered employees

placed in a trust fund established by Kayak to pay for the health plan

considered separate from Kayak's current operating funds









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Reading 5B: Alternative Funding Methods

Distinguish between a contributory plan and a noncontributory plan Describe the individual components of a premium, including the interest charge, the risk charge, and the retention

charge List the key characteristics of premium-delay arrangements, reserve-reduction arrangements, minimum-premium

plans, retrospective-rating arrangements, and administrative-services-only contracts



1. The methods of alternative funding for health coverage can be divided into the following general categories:

Category A—Those methods that primarily modify traditional fully insured group insurance contracts

Category B—Those methods that have either partial or total self-funding

Typically, small employers are able to use some of the alternative funding methods in

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2.

both Category A and Category B

Category A only

Category B only

neither Category A nor Category B

2. Under the alternative funding method used by the Flair Company, Flair assumes financial responsibility for paying claims up to a specified level and deposits the funds necessary to pay these claims into a bank account that belongs to Flair. However, an insurer, which acts as an agent of Flair, makes the actual payment of claims from this account. When claims exceed the specified level, the insurer pays the balance from its own funds. No state premium tax is levied on the amounts that Flair deposits into this bank account. From the following answer choices, choose the name of the alternative funding method described.

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3.

Retrospective-rating arrangement

Premium-delay arrangement

Reserve-reduction arrangement

Minimum-premium plan

3. Under the alternative funding method used by the Trilogy Company, the insurer charges Trilogy an initial premium that is based on the assumption that claims will be 93% of the expected claims for the year. If claims exceed 93% of expected claims, then Trilogy must reimburse the insurer for any additional claims paid, up to 112% of expected claims. The insurer bears the

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4.










responsibility for paying claims in excess of 112% of expected claims. From the following answer choices, choose the name of the alternative funding method described.

Retrospective-rating arrangement

Premium-delay arrangement

Reserve-reduction arrangement

Minimum-premium plan

4. The purest form of a self-funded benefit plan is one in which the employer pays benefits from current revenue, administers all aspects of the plan, and bears the risk that actual benefit payments will exceed the expected amount of payments. A decision to use this kind of self-funding is generally considered most desirable when certain conditions are present. These conditions most likely include that the benefit plan

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5.

is a contributory plan

is subject to collective bargaining

is unable to secure discounts from the physicians who provide medical services to the plan members

has a relatively high frequency of low severity claims

5. The Harp Company self-funds the health plan for its employees. The plan is administered under a typical administrative-services-only (ASO) arrangement. One true statement about this ASO arrangement is that

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6.

this arrangement prevents Harp from purchasing stop-loss coverage for its health plan the amount that Harp pays the administrator to provide the ASO services is not subject to state premium taxes the administrator is responsible for paying claims from its own assets if Harp's account is insufficient the charges for the ASO services must be stated as a percentage of the amount of claims paid for medical expenses incurred by Harp's covered employees and their dependents

6. The Jasmine Company, which self funds the health plan for its 200 employees, has established a 501(c)(9) trust as a means of addressing possible claims fluctuations under the health plan. This plan is not a part of a collective bargaining process. A potential disadvantage to Jasmine of using a 501(c)(9) trust is that

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the cost of maintaining the trust may be prohibitive to Jasmine

the trust must always maintain enough assets to pay the health plan's claims that have been incurred but not yet paid

Jasmine is prohibited from earning any return on the trust assets

the contributions to this trust are not deductible for federal income tax purposes

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1 C2 D3 A4 D5 B6 A

Assignment 6: Financial Aspects of Medicare and Medicaid for Health Plans

Reading 6A: Financial Aspects of Medicare and Medicaid for Health Plans

Describe the new payment methodology for Medicare Define the Medicare adjusted community rate (Medicare ACR) and its relationship to the Medicare average

payment rate (Medicare APR) List the two federal Medicaid law directives to states concerning payment methodology for health plans and

describe some methods used by states to comply with these directives Describe some of the financial risks for a health plan that provides healthcare services to the Medicare and

Medicaid populations versus the commercial population List the key features of a state Medicaid program that will determine a Medicaid MCO's level of risk Describe some of the aspects of health plan's regulatory environment that impose additional costs on health plans

Discuss provider reimbursement in Medicare and Medicaid markets



1. The following statements are about the new methodology authorized under the Balanced Budget Act of 1997 (BBA) for payments by the Centers for Medicaid & Medicare Services (CMS) to Medicare-contracting health plans. Select the answer choice containing the correct statement.

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2.

Under this new methodology, Medicare-contracting health plans are paid the lower of (a) a floor payment amount per enrollee covered or (b) the health plan's payment rate increased by 2% from the previous year. The new methodology has decreased the rate of growth in payments from CMS to Medicare-contracting health plans. Under this new methodology, Medicare-contracting health plans are paid 90% of the adjusted average per capita cost (AAPCC) of providing a service to a beneficiary. Under the principal inpatient diagnostic cost group (PIP-DCG), a new risk adjustment methodology, Medicare-contracting health plans will no longer be required to calculate and submit to CMS a Medicare adjusted community rate (ACR).

2. With regard to the Medicaid program in the United States, it can correctly be stated that

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3.

the federal government provides none of the funding for state Medicaid programs federal Medicaid law is different from Medicare law in that the federal government explicitly sets forth the methodology for payment of Medicaid-contracting plans but not Medicare-contracting plans a state's payment to health plans for providing Medicaid services cannot be more than it would have cost the state to provide the services under Medicaid fee-for-service (FFS) states are prohibited from carving out specific services from the capitation rate that health plans receive for providing Medicaid services

3. Providing services under Medicare or Medicaid can impose on health plans financial risks and costs that are greater than those related to providing

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4.










services to the commercial population. Reasons that an health plan's financial risks and costs for providing services to Medicare and Medicaid enrollees tend to be higher include

most Medicare and Medicaid enrollees can disenroll from a health plan on a monthly basis the high incidences of chronic illness in both the Medicare and Medicaid populations results in higher costs related to coordinating care and case management Medicare and Medicaid enrollees tend to have a high level of costs in the first few months of enrollment as the health plan educates them about the health plan system and performs initial health screening to evaluate their health

all of the above

4. If Grace Wilson is eligible for benefits under both the Medicare and Medicaid programs, then

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5.

Medicare is Ms. Wilson's primary insurer

a Medicare- or Medicaid-contracting health plan is allowed to lock-in Ms. Wilson's enrollment for a maximum period of 24 months the BBA requires the state to guarantee Ms. Wilson's eligibility for a minimum of 18 months once she enrolls in a health plan network Ms. Wilson can only receive Medicare- or Medicaid-covered services from a provider who participates in a health plan network

5. Federal law addresses the relationship between Medicare- or Medicaid-contracting health plans and providers who are at "substantial financial risk." Under federal law, Medicare- or Medicaid-contracting health plans

A. Place a provider at "substantial risk" whenever incentive arrangements put the provider at risk for amounts in excess of 10% of his or her total potential reimbursement for providing services to Medicare and Medicaid enrollees

B. Must provide stop-loss coverage to a provider who is placed at "substantial financial risk" for services that the provider does not directly provide to Medicare or Medicaid enrollees

Go toquestion

6.

Both A and B

A only

B only

Neither A nor B

6. One law prohibits Dr. Laura Cole from making a referral to another provider entity for designated health services if Dr. Cole or one of her immediate family members has a financial relationship with the entity. This law is known as the

Go toquestion

7.

safe harbor law

upper payment limit law

anti-kickback law










physician self-referral law

7. The following statements are about the financial risks for health plans in Medicare and Medicaid markets. Three of these statements are true, and one statement is false. Select the answer choice containing the FALSE statement.

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One reason that health plans in the Medicare and Medicaid markets experience financial risk is that government regulations determine which services must be provided to Medicare and Medicaid enrollees. Effective use of hospital utilization is the single most likely factor to contribute to the success of a Medicare-contracting health plan. If a Medicare-contracting health plan is a provider-sponsored organization (PSO), it is prohibited from sharing financial risk with its providers. Typically, providers are more reluctant to accept financial risk in connection with providing services to the Medicaid population than with providing services to the Medicare population.

>---------- End of the Test ----------<

1 B2 C3 D4 A5 C6 D7 C



Assignment 7: Rating and Underwriting

Reading 7A: The Relationship Between Rating and Underwriting

Explain the relationship between rating and underwriting Describe the actuarial function and the underwriting function in a health plan Discuss the common tiers used in rating methods Define community rating, manual rating, experience rating, and blended rating, and describe circumstances under

which a health plan would use each method



1. The Fiesta Health Plan prices its products in such a way that the rates for its products are reasonable, adequate, equitable, and competitive. Fiesta is using blended rating to calculate a premium rate for the Murdock Company, a large employer. Fiesta has assigned a credibility factor of 0.6 to Murdock. Fiesta has also determined that Murdock's manual rate is $200 PMPM and that Murdock's experience rate is $180 PMPM. According to regulations, Fiesta's premium rates are reasonable if they

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2.

vary only on the factors that affect Fiesta's costs

are at a level that balances Fiesta's need to generate a profit against its need to obtain or retain a specified share of the market in which it conducts business are high enough to ensure that Fiesta has enough money on hand to pay operating expenses as they come due do not exceed what Fiesta needs to cover its costs and provide the plan with a fair profit

2. The Fiesta Health Plan prices its products in such a way that the rates for its products are reasonable, adequate, equitable, and competitive. Fiesta is using blended rating to calculate a premium rate for the Murdock Company, a large employer. Fiesta has assigned a credibility factor of 0.6 to Murdock. Fiesta has also determined that Murdock's manual rate is $200 PMPM and that Murdock's experience rate is $180 PMPM. Fiesta would correctly calculate that its blended rate PMPM for Murdock should be Fiesta's retention charge plus

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3.

$152

$188

$192

$228

3. The Violin Company offers its employees a triple option of health plans: an HMO, an HMO with a point of service (POS) option, and an indemnity plan. Premiums are lowest for the HMO option and highest for the indemnity plan. Violin employees who anticipate that they will be individual low utilizers of healthcare services are most likely to enroll in the

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4.










HMO and are least likely to enroll in the HMO with the POS option

HMO and are least likely to enroll in the indemnity plan

indemnity plan and are least likely to enroll in the HMO

indemnity plan and are least likely to enroll in the HMO with the POS option

4. The following statements illustrate the use of different rating methods by health plans:

The Dover health plan established rates for small groups by using a rating method which requires that the average premium in each group cannot be more than 120% of the average premium for any other group. Under this method, all members of each group pay the same premium, which is based on the experience of the group.

Under the rating method used by the Rolling Hills health plan, the health plan calculates the ratio of a group's experience to the group's historical manual rate. Rolling Hills then multiplies this ratio by the group's future manual rate. Rolling Hills cannot consider the group's experience in determining premium rates.

From the following answer choices, select the response that correctly indicates the rating methods used by Dover and Rolling Hills.

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5.

Dover = modified community ratingRolling Hills = factored rating Dover = modified community ratingRolling Hills = adjusted community rating (ACR) Dover = community rating by class (CRC)Rolling Hills = factored rating Dover = community rating by class (CRC)Rolling Hills = adjusted community rating (ACR)

5. Experience rating and manual rating are two rating methods that the Cheshire health plan uses to determine its premium rates. One difference between these two methods is that, under experience rating, Cheshire

Go toquestion

6.

uses a purchaser's actual experience to estimate the group's expected experience, whereas, under manual rating, Cheshire uses its own average experience—and sometimes the experience of other plans—to estimate the group's expected experience can establish rates for groups that have no previous plan experience, whereas, under manual rating, Cheshire cannot establish rates for groups with no previous plan experience charges each group in the same class the same premium whereas, under manual rating, Cheshire charges lower premiums to groups that have experienced lower utilization rates can use group demographics to help determine the rate for a block of business, whereas, under manual rating, Cheshire cannot use group demographics when determining the rate for a block of business

6. Experience rating methods can be either prospective or retrospective. With regard to these types of experience rating methods, it can correctly be stated that

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a health plan typically can expect much higher profit levels from using retrospective experience rating rather than prospective experience rating a health plan using prospective experience rating is more likely than a health plan using retrospective experience rating to have to pay an experience rating dividend if a group's experience has been better than expected during the rating period the premium determined under retrospective experience rating is usually higher than the premium under prospective experience rating most states require HMOs to use retrospective experience rating rather than prospective experience rating

>---------- End of the Test ----------<1 D2 B3 B4 D5 A6 C

Reading 7B: Group Underwriting

Identify the key federal and state laws and regulations that apply to group underwriting Discuss how a health plan adjusts for morbidity factors and other underwriting risk factors in group underwriting Identify and describe the key aspects associated with underwriting the proposed group and the proposed group

coverage



1. The following statements are about federal laws and regulations which affect health plans that offer products and services to the employer group market. Select the answer choice containing the correct statement.

Go toquestion

2.

Amendments to the HMO Act of 1973 require federally qualified HMOs to adjust a group's prior premiums on the basis of the group's experience during the prior rating period. The Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1986 requires that, if a plan sponsor elects to terminate its group coverage with a health plan, then the health plan must continue its coverage for the COBRA-qualified beneficiaries in the group. The Health Insurance Portability and Accountability Act (HIPAA) of 1996 generally requires the guaranteed renewal of healthcare coverage for certain individuals and for both small and large groups, regardless of the health status of any member. The Mental Health Parity Act (MHPA) of 1996 mandates that all health plans must offer benefits for mental healthcare.

2. One true statement about mandated benefit laws is that they Go to

question 3.

apply equally to self-funded and fully funded groups

require a health plan to cover certain conditions or treatments or to pay a specified level of benefits for certain conditions or treatments

have no impact on a health plan's underwriting and rating decisions

typically decrease a health plan's risk because the health plan may need to delay premium rate decreases or may be prevented from increasing premium rates

3. With regard to the major risk factors associated with group underwriting, it can correctly be stated that, typically,

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4.

the age and gender of group plan members are not predictors of utilization of health services by group members a health plan's product design or delivery system has an impact on member selection of the health plan, unless the members are in an environment in which employees have at least two benefit options or health plans from which to choose a health plan should track demographic factors of groups only if the plan specifically adjusts for demographic factors on a group basis










a large group is more likely to exhibit a consistent claims pattern, level of healthcare cost, or utilization of services than is a small group

4. With regard to a health plan's underwriting of groups, it can correctly be stated that, generally, a

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5.

health plan will require that contributory healthcare plans have a participation level of between 50% and 70% health plan will decline to cover a group that has been formed for the sole purpose of obtaining healthcare coverage health plan's underwriters will not examine the age spread of the entire group being underwritten health plan would expect a group with a large proportion of young females to have lower healthcare costs than does a similar group with a large proportion of young males

5. Most organizations that obtain group healthcare coverage can be classified as one of three types of groups: employer-employee groups, multiple-employer groups, and professional associations. One true statement about these types of groups is that

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6.

antiselection risk is higher for both multiple-employer groups and professional associations than it is for an employer-employee group private employers typically present a higher underwriting risk to health plans than do public employers individual members of a multiple-employer group or a professional association typically are required to obtain healthcare coverage through the group or association a health plan is prohibited, when evaluating the risks represented by a professional association, from considering the industry experience of the agent or broker that sells a group plan to the association

6. Because a health plan cannot decline coverage for individuals who are eligible for conversion of group health coverage to individual health coverage, the bulk of the health plan's underwriting for conversion policies is accomplished through health plan design.

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True

False

>---------- End of the Test ----------<

1 C2 B3 D4 B5 A6 A









Assignment 8: Small Group Underwriting and Individual Underwriting

Reading 8A: Small Group Underwriting and Individual Underwriting

List the common characteristics of small group reform laws Explain the effect of the guaranteed issue provision on the small group markets to which they apply Define risk pooling as it relates to small group markets Discuss state reinsurance programs for small group carriers

Identify and describe some characteristics of small groups and individuals that underwrites consider, where state law permits



1. The Cardinal health plan complies with all of the provisions of HIPAA. Cardinal has received requests for healthcare coverage from the following companies that meet the statutory definition of a small group:

The Xavier Company has excellent claims experience The Youngblood Company has not previously offered group

healthcare coverage to its employees The Zebulon Company has poor claims experience

According to HIPAA's provisions, Cardinal must issue a healthcare contract to

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2.

Xavier, Youngblood, and Zebulon

Xavier and Youngblood only

Xavier only

none of these companies

2. Over time, health plans and their underwriters have gathered increasingly reliable information about the morbidity experience of small groups. Generally, in comparison to large groups, small groups tend to

Go toquestion

3.

have more frequent and larger claims fluctuations

generate lower administrative expenses as a percentage of the total premium amount the group pays

more closely follow actuarial predictions regarding morbidity rates

all of the above

3. The Lighthouse health plan operates in a state that allows the health plan to use an underwriting method of determining a group's premium in which underwriters treat several small groups as one large group for risk assessment purposes. This method, which helps Lighthouse more accurately estimate a small group's probable claims costs, is known as

Go toquestion

4.

case stripping

the low-option rating method










the rate spread method

pooling

4. The following statements are about a health plan's underwriting of small groups. Select the answer choice containing the correct statement.

Go toquestion

5.

Almost all states prohibit health plan s from rejecting a small group because of the nature of the business in which the small business is engaged. Most states prohibit health plans from setting participation levels as a requirement for coverage, even when coverage is otherwise guaranteed issue. In underwriting small groups, a health plan's underwriters typically consider both the characteristics of the group members and of the employer. Generally, a health plan's underwriters require small employers to contribute at least 80% of the cost of the healthcare coverage.

5. The following statement(s) can correctly be made about a health plan's underwriting of small groups:

A. Typically, a health plan medically underwrites both the employees of a small group and their dependents, even though small group reform laws prohibit health plans from singling out individuals for rejection or substandard rate-ups.

B. In the absence of laws mandating otherwise, a health plan's underwriting standards grow stricter as group size gets smaller.

Go toquestion

6.

Both A and B

A only

B only

Neither A nor B

6. State A, which requires guaranteed issue of at least two mandated healthcare plans, has established a typical health coverage reinsurance program for small employer groups. One true statement about this reinsurance program is that it most likely

Go toquestion

7.

is administered by a commercial reinsurance company that operates in State A allows a small employer carrier operating in State A to reinsure either an entire small group or specific individuals within the group has, for the coverage on a plan, a base premium, which is multiplied by a factor of 2 in the case of reinsurance on entire groups or a factor of 3 for reinsurance on individuals prohibits a small employer carrier operating in State A from placing individuals enrolled in small groups in a reinsurance pool

7. Kevin Olin applied for individual healthcare coverage from the Mercury health plan. Before issuing the policy, Mercury's underwriters attached a rider that excludes from coverage any loss that results from Mr. Olin's

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chronic knee problem. This information indicates that Mr. Olin's policy includes

a moral hazard rider

an essential plan rider

an impairment rider

an insurable interest rider

>---------- End of the Test ----------<1 A2 A3 D4 C5 A6 B7 C

Assignment 9: Pricing and Rating

Reading 9A: Pricing a health plan

Describe the relationships among health plan risk, rate-setting, and provider reimbursement Describe how demand and costs combine to establish the upper and lower limit on pricing a health plan Explain how an MCO uses underwriting margins, expense margins, and investment margins in its pricing strategy

Identify and describe rating factors that an MCO uses in developing premium rates for a health plan



1. The ability of a health plan to effectively perform the rating and underwriting functions has become critical to the plan's success. In developing its pricing strategy, a health plan has to address the marketplace's ongoing trends and factors, which include

Go toquestion

2.

a decreased focus on small to mid-size employer groups

an improvement in the financial performance of health plans

a consolidation of the key players in the health plan industry

a decreased complexity of the products being offered.

2. When pricing its product, the Panda Health Plan assumes a 4% interest rate on its investments. Panda also assumes a crediting interest rate of 4%. The actual interest rate earned by Panda on the assets supporting its product is 6%. The following statements can correctly be made about the investment margin and interest margin for Panda's products.

Go toquestion

3.

Panda most likely built the crediting interest rate of 4% into the investment margin of its product. Panda's investment margin is the difference between its actual benefit costs and the benefit costs that it assumes in its pricing.

The interest margin for this product is 2%.

All of these statements are correct.

3. An actuary for the Noble Health Plan observed that the plan's actual morbidity was lower than its assumed morbidity and that the plan's actual administrative expenses were higher than its assumed administrative expenses. In this situation, Noble's actual underwriting margin was

Go toquestion

4.

larger than its assumed underwriting margin, and the plan's actual expense margin was higher than its assumed expense margin larger than its assumed underwriting margin, but the plan's actual expense margin was lower than its assumed expense margin smaller than its assumed underwriting margin, but the plan's actual expense margin was higher than its assumed expense margin smaller than its assumed underwriting margin, and the plan's actual expense margin was lower than its assumed expense margin










4. A product is often described as having a thin margin or a wide margin. With regard to the factors that help determine the size of the margin of a health plan's product, it can correctly be stated that the

Go toquestion

5.

greater the risk a health plan assumes in a health plan, the thinner the product margin should be more that competition acts to force prices down, the wider the product margins tend to become greater the demand for the product, the thinner the margin for this product tends to become longer the premium rates are guaranteed to a group, the wider the health plan's margin should be

5. One true statement about a health plan's underwriting margin is that Go to

question 6.

the only way that the health plan can effectively reduce its exposure to underwriting risk, and therefore adjust its underwriting margin, is to control antiselection a larger assumed underwriting margin will reduce the price of the health plan's product and will make the plan more competitive the health plan's purchase of stop-loss insurance has no effect on its underwriting margin because stop-loss insurance can help the health plan control its expenses but not its underwriting risk 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

6. For each of its products, the Wisteria Health Plan monitors the provider reimbursement trend and the residual trend. One true statement about these trends is that

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the provider reimbursement trend probably is more difficult for Wisteria to quantify than is the residual trend Wisteria's residual trend is the difference between the total trend and the portion of the total trend caused by changes in Wisteria's provider reimbursement levels the residual trend most likely has more impact on Wisteria's total trend than does the provider reimbursement trend an example of a residual trend would be a 5% increase in the capitation rate paid to a PCP by Wisteria

>---------- End of the Test ----------<

1 C2 C3 B4 D5 D6 B









Reading 9B: Rate-Setting in Managed Care

Describe the rate-setting process for HMOs, traditional indemnity plans, PPOs, and plans in a multiple-choice environment



1. One true statement about the rate ratios used by a health plan is that the Go to

question 2.

end result of a typical family rate ratio is that the health plan's family rate is subsidized by its single premium rate health plan cannot arbitrarily increase or decrease its rate ratio for a rate category rate ratios used by the health plan most likely have been established by government regulations health plan should determine its rate ratios by considering family size alone rather than competitive factors such as the ratios that competitors are using

2. The following statements indicate the pricing policies of two health plans that operate in a particular market:

The Accent Health Plan consistently underprices its product The Bolton Health Plan uses extremely strict underwriting practices

for the small groups to which it markets its plan

From the following answer choices, select the response that correctly indicates the most likely market effects of the pricing policies used by Accent and Bolton.

Go toquestion

3.

Accent = unprofitable businessBolton = high acquisition rate Accent = unprofitable businessBolton = low acquisition rate Accent = high profitsBolton = high acquisition rate Accent = high profitsBolton = low acquisition rate

3. The following statements are about a health plan's pricing of a preferred provider organization (PPO) plan. Three of the statements are true, and one statement is false. Select the answer choice containing the FALSE statement.

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Typically, the first step in pricing a PPO is to develop a base indemnity claims cost, which results from adjusting the indemnity plan as though the entire eligible group of employees is enrolled in the indemnity plan. To develop the expected claims costs for the in-network PPO plan, the health plan's actuaries adjust the base indemnity claims costs to reflect pertinent characteristics of the plan, including the specific network plan design and provider discount arrangements.









One difficulty in pricing a PPO is that the health plan's actuaries have no method of estimating which employees would be likely to select which provider groups. After the health plan's actuaries use risk adjustment factors to adjust the existing claims costs for selection issues, the actuaries weight the in-network and out-of-network costs to arrive at a composite claims cost for the PPO plan.

>---------- End of the Test ----------<1 A2 B3 C

Assignment 10: Accounting and Financial Reporting

Reading 10A: Accounting Principles and Concepts

Outline main points of the "entity" and "going-concern" concepts with respect to financial reporting in health plans

Explain the key qualitative factors that affect accounting information and give examples of such factors in health plans



1. Two sets of financial accounting standards are generally accepted accounting principles (GAAP) and statutory accounting practices (SAP). One true statement about these financial accounting standards is that

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2.

state laws and regulations in the United States govern the implementation of GAAP, but not the implementation of SAP health plans must prepare their financial statements for their external users according to applicable laws, regulations, and accounting principles, particularly GAAP GAAP specifically focuses on the requirements of insurance regulators and policyholder interests the Financial Accounting Standards Board (FASB) is a private organization whose purpose is to establish and promote SAP in the United States

2. The Brookhaven Company is the parent company of two subsidiaries: an HMO and an insurance company. The headings on Brookhaven's financial statements read "Consolidated Financial Statements of Brookhaven Company." From the following answer choices, select the response that correctly indicates, under the entity concept, whether the HMO and the insurance company are accounted for as separate entities and whether the subsidiaries' financial results would be included in Brookhaven's consolidated financial statements.

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3.

Accounted for as Separate Entities? = yesResults Included in Brookhaven's Statements? = yes Accounted for as Separate Entities? = yesResults Included in Brookhaven's Statements? = no Accounted for as Separate Entities? = noResults Included in Brookhaven's Statements? = yes Accounted for as Separate Entities? = noResults Included in Brookhaven's Statements? = no

3. If the Ascot health plan's accountants follow the going-concern concept under GAAP, then these accountants most likely

Go toquestion

4.

assume that Ascot will pay its liabilities immediately or in full during the current accounting period defer certain costs that Ascot has incurred, unless these costs contribute to the health plan's future earnings










assume that Ascot is not about to be liquidated, unless there is evidence to the contrary

value Ascot's assets more conservatively than they would under SAP

4. For this question, select the answer choice containing the terms that correctly complete blanks A and B in the paragraph below. The FASB mandates that accounting information must exhibit certain qualitative characteristics. One of these characteristics is _____A_____, which means that a company's financial statements use the same accounting policies and procedures from one accounting period to the next, unless there is a sound reason for changing a policy or procedure. Another characteristic is _____B_____, which requires a company to disclose in its financial statements all significant financial information about the company.

Go toquestion

5.

A = reliabilityB = comparability A = reliabilityB = materiality A = consistencyB = comparability A = consistencyB = materiality

5. The accounting department of the Enterprise health plan adheres to the following policies:

Policy A—Report gains only after they actually occur Policy B—Report losses immediately Policy C—Record expenses only when they are certain Policy D—Record revenues only when they are certain

Of these Enterprise policies, the ones that are consistent with the accounting principle of conservatism are Policies

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A, B, C, and D

A, B, and D only

A and B only

C and D only

>---------- End of the Test ----------<

1 B2 A3 C4 D5 B






Reading 10B: Principles for Maintaining Accounts

Discuss the main points in the cost concept, the measuring-unit concept, the full-disclosure concept, and the time-period concept with respect to financial reporting in health plans

Discuss the realization principle and the matching principle with respect to revenue and expense recognition under generally accepted accounting principles

Distinguish between accrual-basis accounting and cash-basis accounting



1. This concept, which holds that a company should record the amounts associated with its business transactions in monetary terms, assumes that the value of money is stable over time. This concept provides objectivity and reliability, although its relevance may fluctuate. From the following answer choices, choose the name of the accounting concept that matches the description.

Go toquestion

2.

Measuring-unit concept

Full-disclosure concept

Cost concept

Time-period concept

2. This concept, which is an extension of the going-concern concept, holds that the value of an asset that a company reports in its accounting records should be the asset's historical cost, not its current market value. Although this concept offers objectivity and reliability, it may lack relevance, particularly for assets held for a long period of time. From the following answer choices, choose the name of the accounting concept that matches the description.

Go toquestion

3.

Measuring-unit concept

Full-disclosure concept

Cost concept

Time-period concept

3. In the following paragraph, a sentence contains two pairs of words enclosed in parentheses. Determine which word in each pair correctly completes the statement. Then select the answer choice containing the two words that you have selected. The Igloo health plan recognizes the receipt of its premium income during the accounting period in which the income is earned, regardless of when cash changes hands. However, Igloo recognizes its expenses when it earns the revenues related to those expenses, regardless of when it receives cash for the revenues earned. This information indicates that the (realization / capitalization) principle governs Igloo's revenue recognition, whereas the (matching / initial-recording) principle governs its expense recognition.

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4.










realization / matching

realization / initial-recording

capitalization / matching

capitalization / initial-recording

4. Under GAAP, three approaches to expense recognition are generally allowed: associating cause and effect, systematic and rational allocation, and immediate recognition. A health plan most likely would use the approach of systematic and rational allocation in order to

Go toquestion

5.

report the payment of the health plan's utility bills

spread the payment of sales force commissions over the premium-paying period of healthcare coverage

report the fees paid by the health plan to attorneys and consultants

depreciate the cost of a new computer system over the useful life of the system

5. The Zane health plan uses a base of accounting known as accrual-basis accounting. With regard to this base of accounting, it can correctly be stated that accrual-basis accounting

Go toquestion

6.

enables an interested party to view the consequences of obligations incurred by Zane, but only if the health plan ultimately completes the business transaction

is not suitable for measuring Zane's profitability

requires Zane to record revenues when they are earned and expenses when they are incurred, even if cash has not actually changed hands prohibits Zane from making adjusting entries to its accounting records at the end of each accounting year

6. One true statement about cash-basis accounting is that Back to Top

cash receipt, but not cash disbursement, is an important component of cash-basis accounting

most companies use a pure cash-basis accounting system

cash-basis accounting records revenue according to the realization principle and expenses according to the matching principle health insurance companies and health plans that fall under the jurisdiction of state insurance commissioners must report some items on a cash basis for statutory reporting purposes

>---------- End of the Test ----------<

1 A2 C









3 A4 D5 C6 D

Reading 10C: Financial Statements

Describe the components and purposes of a health plan's balance sheet, income statement, cash flow statement, and statement of owners' equity

Explain the importance of notes and supplementary information Provide an example of the relationships among the various financial statements



1. With regard to the financial statements prepared by health plans, it can correctly be stated that

Go toquestion

2.

both for-profit, publicly owned health plans and not-for-profit health plans are required by law to provide all interested parties with an annual report a health plan's annual report typically includes an independent auditor's report and notes to the financial statements any health plan that owns more than 20% of the stock of a subsidiary company must compile the financial statements for the health plan's annual report on a consolidated basis a health plan typically must prepare the financial statements included in its annual report according to SAP

2. The Caribou health plan is a for-profit organization. The financial statements that Caribou prepares include balance sheets, income statements, and cash flow statements. To prepare its cash flow statement, Caribou begins with the net income figure as reported on its income statement and then reconciles this amount to operating cash flows through a series of adjustments. Changes in Caribou's cash flow occur as a result of the health plan's operating activities, investing activities, and financing activities. The main purpose of Caribou's balance sheet is to

Go toquestion

3.

reveal how Caribou obtained particular assets or liabilities

show how much money Caribou has realized from its operations during an accounting period

measure the owners' wealth

reconcile the cash that Caribou has on hand at the beginning and at the end of an accounting period

3. The Caribou health plan is a for-profit organization. The financial statements that Caribou prepares include balance sheets, income statements, and cash flow statements. To prepare its cash flow statement, Caribou begins with the net income figure as reported on its income statement and then reconciles this amount to operating cash flows through a series of adjustments. Changes in Caribou's cash flow occur as a result of the health plan's operating activities, investing activities, and financing activities. The basic formula for Caribou's income statement is

Go toquestion

4.










Cash Inflows – Cash Outflows = Net Cash Inflow (Outflow)

Revenues – Expenses = Net Income (Net Loss)

Sources of Funds – Uses of Funds = Net Change in Cash

Assets = Liabilities + Owners' Equity

4. The Caribou health plan is a for-profit organization. The financial statements that Caribou prepares include balance sheets, income statements, and cash flow statements. To prepare its cash flow statement, Caribou begins with the net income figure as reported on its income statement and then reconciles this amount to operating cash flows through a series of adjustments. Changes in Caribou's cash flow occur as a result of the health plan's operating activities, investing activities, and financing activities. To prepare its cash flow statement, Caribou uses the direct method rather than the indirect method.

Go toquestion

5.

True

False

5. The Caribou health plan is a for-profit organization. The financial statements that Caribou prepares include balance sheets, income statements, and cash flow statements. To prepare its cash flow statement, Caribou begins with the net income figure as reported on its income statement and then reconciles this amount to operating cash flows through a series of adjustments. Changes in Caribou's cash flow occur as a result of the health plan's operating activities, investing activities, and financing activities. Caribou is engaged in an operating activity when it

Go toquestion

6.

purchases or sells assets of the health plan

disposes of a subsidiary

repays funds loaned by its creditors

pays expenses associated with the healthcare services provided to its members

6. The McGwire Health Plan is a for-profit health plan that issues stock. Events that will cause the owners' equity account of McGwire to change include

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McGwire's retention of net income

McGwire's payment of cash dividends on the stock it issued

McGwire's purchase of treasury stock

all of the above

>---------- End of the Test ----------<









1 B2 C3 B4 B5 D6 D

Assignment 11: The Strategic Planning Process in Health Plans

Reading 11A: The Strategic Plan

Define strategic planning, mission statement, and vision statement Explain the steps in a health plan's typical strategic planning framework

Describe the purpose of a SWOT analysis and list some attributes that health plans evaluate to determine their strengths, weaknesses, opportunities, and threats



1. As part of the first step in its strategic planning process, the Trout health plan developed the following statements:

Statement A—Trout will deliver quality healthcare to our customers at a reasonable cost.

Statement B—Within five years, Trout will be recognized as the industry leader in all of our markets.

Statement A can best be described as a

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2.

vision statement, and Statement B also can best be described as a vision statement vision statement, whereas Statement B can best be described as a mission statement mission statement, whereas Statement B can best be described as a vision statement mission statement, and Statement B also can best be described as a mission statement

2. A health plan can use a SWOT (strengths, weaknesses, opportunities, and threats) analysis to analyze its relationships with the major providers in each market in which it conducts business.

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3.

True

False

3. The Column health plan is in the process of developing a strategic plan. The following statements are about this strategic plan. Three of the statements are true, and one statement is false. Select the answer choice containing the FALSE statement.

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Human resources most likely will be a critical component of Column's strategic plan because, in health plan markets, the size and the quality of a health plan's provider network is often more important to customers than are the details of a product's benefit design. Column's strategic plan should only address how the health plan will differentiate its products, rather than where and how it will sell these products. Column most likely will need to develop contingency plans to address the need to make adjustments to its original strategic plan.









Column's information technology (IT) strategy most likely will be a critical element in successfully implementing the health plan's strategic plan.

>---------- End of the Test ----------<1 C2 A3 B

Reading 11B: The Strategic Financial Plan

Distinguish between a health plan's strategic financial plan and operational budget Describe the purpose of the financial planning function in for-profit and not-for-profit health plans Define debt and equity with respect to a health plan's capital structure Define cost of capital and the capital asset pricing model Calculate a health plan's weighted average cost of capital Explain the purpose of a health plan's pro forma financial statements List some key drivers of a health plan's pro forma income statement and balance sheet

Define sensitivity analysis and describe how a health plan uses the optimistic, most likely, pessimistic scenario modeling and Monte Carlo simulation



1. If the operational budget prepared by the Satilla health plan is typical of most operational budgets, then

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2.

its purpose is to track Satilla's operations and short-term profitability

the key information source for this operational budget is Satilla's external environment

the time frame for this operational budget is three to five years

its focus is on the threats that Satilla faces from its external environment

2. The Coral Health Plan, a for-profit health plan, has two sources of capital: debt and equity. With regard to these sources of capital, it can correctly be stated that

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3.

Coral's equity holders have an ownership interest in the health plan

the interest that Coral pays on its debt most likely is not tax deductible to Coral

Coral's debt holders have no legal claim to Coral's assets

equity is a more risky source of capital, from Coral's perspective, than is debt

3. Analysts will use the capital asset pricing model (CAPM) to determine the cost of equity for the Maxim health plan, a for-profit plan. According to the CAPM, Maxim's cost of equity is equal to

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4.

the average interest rate that Maxim is paying to debt holders, adjusted for a tax shield

Maxim's risk-free rate minus its beta

Maxim's risk-free rate plus an adjustment that considers the market rate, at a given level of systematic (nondiversifiable) risk Maxim's risk-free rate plus an adjustment that considers the market rate, at a given level of nonsystematic (diversifiable) risk










4. The Nuevo health plan's capital structure consists of 30% debt and 70% equity. Nuevo's average after-tax cost of debt is 6% and its cost of equity is 12%. The following statement(s) can correctly be made about Nuevo's weighted average cost of capital (WACC):

A. Nuevo has a WACC of 10.2%

B. If Nuevo establishes its WACC as the handle rate for capital investments, then it can expect an investment to add value to the health plan only if the investment is expected to earn a return of less than Nuevo's WACC

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5.

Both A and B

A only

B only

Neither A nor B

5. The core of a health plan's strategic financial plan is the development of its pro forma financial statements. The following statements are about these pro forma financial statements. Select the answer choice containing the correct statement.

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6.

A health plan's pro forma financial statements forecast what the plan's financial condition will be at the end of an accounting period, without regard to whether the health plan achieves its objectives. Forecasting the balance sheet is more critical to the health plan than forecasting either the cash flow statement or the income statement, because the balance sheet drives the development of the other two statements. In order to avoid allowing the desired financial results to drive the assumptions used in developing the pro forma income statement, a health plan should avoid linking these assumptions to the health plan's overall strategic plan. A health plan can use its pro forma cash flow statement to calculate the net present value of the health plan's strategic plan.

6. The Savanna health plan used a risk analysis technique which defines the key assumptions of Savanna's strategic financial plan in terms of mathematical formulas that can be correlated to each other or analyzed independently. This technique allowed Savanna to simulate probable future events on a computer and produce a distribution of possible outcomes. This risk analysis technique, which can be used to predict Savanna's distribution of expected claims, is known as

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a hurdle rate simulation

optimistic, most likely, pessimistic scenario modeling

a Monte Carlo simulation

debt covenant modeling

>---------- End of the Test ----------<









1 A2 A3 C4 B5 D6 C

Assignment 12: Financial Statement Analysis in Health Plans

Reading 12A: Financial Statement Analysis

Differentiate between a health plan's external analysts and internal analysts and describe the types of financial information each one seeks

Distinguish between horizontal analysis and vertical analysis of a health plan's financial statements Analyze the trends a health plan exhibits using trend analysis List and apply the information contained in a common-size financial statement

Explain how to use cash flows that are reported in the cash flow statement to reveal financial information that is not immediately apparent from a health plan's balance sheet and income statement



1. One difference between the internal and external analysis of a health plan's financial information is that

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2.

internal analysis of the health plan can be more detailed and more specific than can external analysis internal analysts are more likely than external analysts to want comparative financial data about the health plan only internal analysts use trend analysis to analyze the health plan's financial statements only internal analysts typically conduct the financial analysis of the health plan themselves

2. The sentence below contains two pairs of terms enclosed in parentheses. Determine which term in each pair correctly completes the statement. Then select the answer choice containing the two terms that you have selected. In analyzing its financial data, a health plan would use (horizontal / common-size financial statement) analysis to measure the numerical amount that corresponding items change from one financial statement to another over consecutive accounting periods, and the health plan would use (trend / vertical) analysis to show the relationship of each financial statement item to another financial statement item.

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3.

horizontal / trend

horizontal / vertical

common-size financial statement / trend

common-size financial statement / vertical

3. A health plan most likely would use benchmarking in order to Go to

question 4.

measure its performance and practices against those of other companies to help identify those practices that will lead to superior performance in a variety of financial and non-financial areas










calculate the percentage changes in its financial statement items over several consecutive accounting periods determine both the direction and velocity of trends in its financial statements

display only percentage relationships in its financial statements

4. Assume that the Lambda, Mesa, and Novella health plans are equal in every way except that the health plans have obtained equal amounts of net cash inflows from different sources, as shown below:Health Plan SourceLambda Financing activitiesMesa Investing activitiesNovella Operating activitiesFrom the following answer choices, select the response which indicates the health plan that would most likely be the most attractive to a potential plan sponsor, to a potential creditor, and to a potential investor.

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Potential Plan Sponsor = LambdaPotential Creditor = MesaPotential Investor = Novella Potential Plan Sponsor = LambdaPotential Creditor = NovellaPotential Investor = Mesa Potential Plan Sponsor = NovellaPotential Creditor = LambdaPotential Investor = Mesa Potential Plan Sponsor = NovellaPotential Creditor = NovellaPotential Investor = Novella

>---------- End of the Test ----------<1 A2 B3 A4 D



Reading 12B: Fundamentals of Ratio Analysis

List and apply the financial ratios under U.S. generally accepted accounting principles (GAAP) that fall into each of these four categories: liquidity, activity, leverage, and profitability

Recognize and apply the ratios that are most important to health plans



1. The traditional financial ratios that analysts use to study a health plan's GAAP-based financial statements include liquidity ratios, activity ratios, leverage ratios, and profitability ratios. Of these categories of ratios, analysts are most likely to use

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2.

liquidity ratios to measure a health plan's ability to meet its current liabilities activity ratios relate the returns of a health plan to its sales, total revenues, assets, stockholders' equity, capital, surplus, or stock share price leverage ratios to measure how quickly a health plan converts specified financial statement items into premium income or cash profitability ratios to measure the effect that fixed costs have on magnifying a health plan's risk and return

2. The Fairway health plan is a for-profit health plan that issues stock. The following data was taken from Fairway's financial statements:

Current assets.....$5,000,000Total assets.....6,000,000

Current liabilities.....2,500,000Total liabilities.....3,600,000

Stockholders' equity.....2,400,000

Fairway's total revenues for the previous financial period were $7,200,000, and its net income for that period was $180,000. From this data, Fairway can determine both its current ratio and its net working capital. Fairway would correctly determine that its

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3.

current ratio is 1.39

current ratio is 2.00

net working capital equals $1,000,000

net working capital equals $3,000,000





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4.










Fairway's total revenues for the previous financial period were $7,200,000, and its net income for that period was $180,000.

Assume that the healthcare industry average for the debt-to-equity ratio is 0.90. The following statement(s) can correctly be made about Fairway's debt-to-equity ratio:

A. Fairway's debt-to-equity ratio is 1.50

B. Fairway relies less than most other healthcare organizations on borrowed funds to cover future and current benefit payments, to pay for ongoing business operations, and to finance growth

Both A and B

A only

B only

Neither A nor B





Fairway's total revenues for the previous financial period were $7,200,000, and its net income for that period was $180,000. For the previous financial period, Fairway's net profit margin was

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5.

2.50%

3.00%

3.60%

7.50%

5. If the total asset turnover ratio for the Fjord health plan is 1.08 and the total asset turnover ratio for the Grove health plan is 1.35, then a financial analyst could correctly infer that Fjord has used its assets more effectively than has Grove.

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6.

True

False

6. A primary reason that a financial analyst would measure the Tapestry health plan's return on assets (ROA) is to determine the

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amount of net income per share of Tapestry's common stock

rate of return on the book value of the stockholders' investment in Tapestry









proportion of earnings paid out to Tapestry stockholders in the form of cash dividends

efficiency of Tapestry's management

>---------- End of the Test ----------<1 A2 B3 B4 A5 B6 D

Reading 12C: Managed Care-Specific Ratio Analysis

List and apply to the Annual Statement statutory ratios of liquidity, capital, financial leverage, and profitability (for health plans that must comply with state insurance regulations)

Recognize and apply the ratios that are most important to health plans



1. In order to determine a health plan's quick liquidity ratio, a financial analyst would divide the health plan's

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2.

total assets not invested in affiliates by its total liabilities

liquid assets by its total liabilities

liquid assets by its contractual reserves

total assets by its contractual reserves

2. One true statement about capital and surplus ratios for health plans is that

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3.

this ratio is calculated by dividing a health plan's total liabilities by its capital and surplus a health plan's capital and surplus position would be likely to weaken because of reserve valuation changes that reduce the health plan's reserves the primary purpose of these ratios is to compare a health plan's obligations to its ability to meet those obligations an increase in the value of a health plan's capital and surplus ratio most likely indicates that the health plan's financial position has strengthened

3. In order to show the efficiency of a health plan's managers in using the health plan's investments to earn a return for stockholders, a financial analyst most likely would use a type of profitability ratio known as

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4.

a net gain-to-total income ratio

an insurance leverage ratio

a statutory return on assets (ROA) ratio

a gross profit ratio

4. The medical loss ratio (MLR) for the Peacock health plan is 80%. Peacock's expense ratio is 16%. One characteristic of Peacock's MLR is that it

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5.

includes claims that have been paid but excludes claims that have not yet been reported

cannot adjust for growth in the health plan's business













is the percentage of Peacock's end-of-period surplus to its earned premiums

measures Peacock's overall claims levels

5. The medical loss ratio (MLR) for the Peacock health plan is 80%. Peacock's expense ratio is 16%. Peacock's MLR and its expense ratio indicate that Peacock

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has a 4% potential profit margin

has a combined ratio of 64%

must increase its premium income in order to remain in business

must rely on investment income in order to avoid financial losses

>---------- End of the Test ----------<1 C2 D3 C4 D5 A



Assignment 13: Management Control

Reading 13A: Management Accounting

Explain the purpose of management accounting Identify the distinguishing features of a cost center, profit center, and investment center

Discuss volume-related variances, cost-related variances, and revenue-related variances in a managed care setting



1. The Danube Health Plan's planning activities include tactical planning, which is primarily concerned with

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2.

establishing standards of performance for Danube's cost centers

forecasting Danube's premium income

planning for the short-term, day-to-day activities of Danube

identifying the markets in which Danube should concentrate its marketing efforts

2. The goals of Diane Tsai, the manager of the Oval Health Plan's accounting department, and the goals of Oval are mutually supportive. Oval's accounting department is able to establish and achieve the appropriate objectives, but the department's costs of operation are too high. The following statement(s) can correctly be made about this situation:

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3.

Ms. Tsai most likely is the manager of a profit center.

The business goals of Oval are congruent with Ms. Tsai's goals.

Oval's accounting department is efficient but not effective.

All of these statements are correct.

3. One true statement about variance analysis is that Go to

question 4.

a price variance is the difference between the budgeted quantities to be sold and the actual quantities sold, multiplied by the budgeted amount

variance analysis suggests solutions to a particular problem

positive variances generally are favorable, from a health plan's point of view, for the plan's expenses but unfavorable for the plan's revenues an effective variance system typically focuses on matters that require management's attention

4. A health plan can use segment margins to evaluate the profitability of its profit centers. One characteristic of a segment margin is that this margin

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5.

is the portion of the contribution margin that remains after a segment













has covered its direct fixed costs incorporates only the costs attributable to a segment, but it does not incorporate revenues considers only a segment's costs that fluctuate in direct proportion to changes in the segment's level of operating activity evaluates the profit center's effective use of assets employed to earn a profit

5. The Puma health plan uses return on investment (ROI) and residual income (RI) to measure the performance of its investment centers. Two of these investment centers are identified as X and Y. Investment Center X earns $10,000,000 in operating income on controllable investments of $50,000,000, and it has total revenues of $60,000,000. Investment Center Y earns $2,000,000 in operating income on controllable investments of $8,000,000, and it has total revenues of $10,000,000. Both centers have a minimum required rate of return of 15%. The following statements are about Puma's evaluation of these investment centers. Select the answer choice containing the correct statement.

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6.

Investment Center Y's RI is greater than Investment Center X's RI.

The ROI for Investment Center X is 16.7%, and the ROI for Investment Center Y is 20.0%. Because Investment Centers X and Y are different sizes, Puma should not use ROI to compare these investment centers. According to the evaluation of ROI, Investment Center Y achieves a higher return on its available resources than does Investment Center X.

6. The Puma health plan uses return on investment (ROI) and residual income (RI) to measure the performance of its investment centers. Two of these investment centers are identified as X and Y. Investment Center X earns $10,000,000 in operating income on controllable investments of $50,000,000, and it has total revenues of $60,000,000. Investment Center Y earns $2,000,000 in operating income on controllable investments of $8,000,000, and it has total revenues of $10,000,000. Both centers have a minimum required rate of return of 15%. One likely way in which Investment Center X or Y could effectively increase its ROI is by

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7.

focusing only on increasing its total revenues

increasing its controllable investments

increasing total revenues, accompanied by a proportionate increase in operating income

increasing expenses in order to increase operating income

7. The Puma health plan uses return on investment (ROI) and residual income (RI) to measure the performance of its investment centers. Two of these investment centers are identified as X and Y. Investment Center X earns $10,000,000 in operating income on controllable investments of $50,000,000, and it has total revenues of $60,000,000. Investment Center Y earns $2,000,000 in operating income on controllable investments of $8,000,000, and it has total revenues of $10,000,000. Both centers have a minimum required rate of return of 15%. One difference between the RI method and the ROI method is that

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8.










the RI method demands greater goal congruence from Puma's managers than does the ROI method the RI method favors Puma's small investment centers more than does the ROI method only RI can lead to decisions that improve Puma's short-term profits at the expense of its long-term objectives only RI is useful to Puma for comparing investment centers of different sizes

8. The following statements are about a health plan's evaluation of its responsibility centers. Select the answer choice containing the correct statement.

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When analyzing budget variances, a health plan's management should pay attention to unfavorable variances only. A health plan can reduce the problem of unattainable goals by involving responsibility managers in the preparation of their centers' budgets. One reason that a health plan would use cost-based transfer prices to evaluate the performance of its profit centers and investment centers is because, under this method of setting transfer prices, the selling center has maximum incentive to operate effectively and control costs. In responsibility accounting, all employees who have any influence over a health plan's department are held equally accountable for the operations and financial outcomes of that department.

>---------- End of the Test ----------<

1 C2 B3 D4 A5 D6 C7 A8 B

Reading 13B: Cost Accounting

Explain the primary uses of cost accounting in managed care Discuss various ways that costs can be accumulated

Compare the three methods of analyzing costs: change analysis, functional cost analysis, and activity-based costing



1. A health plan can use cost accounting in order to A. Determine premium rates for its products

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2.






B. Match the costs incurred during a given accounting period to the income earned in, or attributed to, that same period

Both A and B

A only

B only

Neither A nor B

2. A health plan's costs can be classified as committed costs or discretionary costs. An example of a discretionary cost for a health plan is the cost of its

Go toquestion

3.

facilities

executive salaries

employee training

equipment

3. Costs that can be defined by behavior are most commonly classified as fixed costs, variable costs, and semi-variable costs. From the following answer choices, select the response that correctly indicates a fixed cost and a variable cost for a health plan.

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4.

Fixed Cost = depreciation on computer equipmentVariable Cost = selling expenses Fixed Cost = premium processing expensesVariable Cost = rent on a regional office Fixed Cost = the cost for building maintenanceVariable Cost = the cost for electricity Fixed Cost = the cost for electricityVariable Cost = fire insurance on the home office facility

4. A cost for which a benefit is forfeited in choosing one decision alternative over another alternative is known as

Go toquestion

5.

a marginal unit cost

an opportunity cost

an incremental cost

a differential cost

5. The Sesame health plan uses a method of accumulating cost data that enables the health plan to satisfy financial reporting requirements for compiling financial statements and corporate tax returns. Although this method assists Sesame's managers in studying which types of costs are rising and falling over time, it does not explain which areas of Sesame incur each cost. This method, which is the most basic level of cost accumulation, is known as accumulating costs by

Go toquestion

6.

cost center

type of cost













lines of business

function

6. In order to analyze costs for internal management purposes, the Banner health plan uses functional cost analysis. One characteristic of this method of cost analysis is that it

Go toquestion

7.

enables Banner's top management to analyze costs as they apply to workflow rather than to organizational structures

assumes that activities, not products, generate costs

cannot be used when Banner makes pricing and staffing decisions

identifies units of activity, calculates the costs of performing each unit of activity, and then assigns the cost of each unit of activity to Banner's products or lines of business

7. The Titanium health plan's product has a unit price of $120 PMPM and a unit variable cost of $80 PMPM. Titanium has $100,000 in fixed costs per month. This information indicates that, for its product, Titanium's

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unit contribution margin is $80

unit contribution margin is $200

break-even point is 500 members

break-even point is 2,500 members

>---------- End of the Test ----------<

1 A2 C3 A4 B5 B6 A7 D






Reading 13C: The Budgeting Process

Distinguish among top-down budgeting, bottom-up budgeting, and zero-based budgeting Distinguish among static budgets and flexible budgets, short-term budgets and long-term budgets, and rolling

budgets and period budgets Itemize the various components of a master budget



1. The Landau health plan will switch from using top-down budgeting to using bottom-up budgeting. One potential advantage to Landau of making this switch is that, compared to top-down budgeting, bottom-up budgeting is more likely to

Go toquestion

2.

require little time or labor to complete

enable Landau to incorporate key changes in regulatory requirements on a timely basis

reflect top management's intentions for Landau

reflect the realities of day-to-day operations

2. One typical characteristic of zero-based budgeting (ZBB) is that this budgeting approach

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3.

treats each activity as though it is a new project under consideration

applies only to income budgets

is the least time-consuming of all of the budgeting approaches

requires the input of top-level employees only

3. In the following paragraph, a sentence contains two pairs of words enclosed in parentheses. Determine which word in each pair correctly completes the sentence. Then select the answer choice containing the two words that you have selected.

Budgeting approaches can be classified as static or flexible budgets, or as rolling or period budgets. A health plan most likely would use a (static / flexible) budget when a budget's objective is to reduce or limit expenses, and the health plan most likely would use a (rolling / period) budget if it would like to continually maintain projections for a certain time period into the future.

Go toquestion

4.

static / rolling

static / period

flexible / rolling










flexible / period

4. Companies typically produce three types of budgets: operational budgets, cash budgets, and capital budgets. The following statements are about operational budgets. Select the answer choice containing the correct statement.

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Top

Expense budgets, a type of operational budget, typically describe fixed expenses rather than variable expenses. Operational budgets can only show information by department or by line of business. Operational budgets begin with a forecast of sales revenue and investment income. Revenue budgets, a type of operational budget, indicate the amount of income from operations that a company received from the previous budget period

>---------- End of the Test ----------<1 D2 A3 A4 C



Assignment 14: Cash Management and Capitol Budgeting

Reading 14A: Cash Management

Discuss the fundamentals of cash inflows and cash outflows for a health plan

Analyze a health plan's cash budget using the health plan's cash receipts and cash disbursements



1. The following statement(s) can correctly be made about a health plan's cash receipts and cash disbursements budgets:

A. To predict both the timing and the amount of its cash receipts, a health plan constructs the cash receipts budget using data from its sales forecast and investment forecasts.

B. A health plan uses a cash disbursements budget in order to establish the amount, but not the timing, of all of its cash disbursements.

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2.

Both A and B

A only

B only

Neither A nor B

2. A financial analyst wants to learn the following information about the Forest health plan for a given financial period:

A. Forest's beginning-of-period cash balance B. Forest's minimum cash balance C. The cash needs of Forest during the period D. Forest's end-of-period cash balance

From Forest's cash budget, the analyst most likely can obtain information about

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A, B, C, and D

A, B, and C only

A and D only

B and C only

>---------- End of the Test ----------<1 B2 A






Reading 14B: Capital Budgeting

Describe the purpose of capital budgeting Identify the characteristics of the payback method, the discounted payback method, the net present value method,

and the internal rate of return method with respect to a health plan's capital budgeting decisions Describe factors that affect a health plan's capital budgeting decisions Explain the function of sensitivity analysis in capital budgeting



1. The process of converting the present value of a specified amount of money to its future value is known as

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2.

capital budgeting

compounding

capital rationing

discounting

2. In order to print all of its forms in-house, the Prism health plan is considering the purchase of 10 new printers at a total cost of $30,000. Prism estimates that the proposed printers have a useful life of 5 years. Under its current system, Prism spends $10,000 a year to have forms printed by a local printing company. Assume that Prism selects a 15% discount rate based on its weighted-average costs of capital. The cash inflows for each year, discounted to their present value, are shown in the following chart:

Year CashInflow

DiscountedCash Inflow

RunningTotal

1 $10,000 $ 8,695 $ 8,695

2 10,000 7,561 16,256

3 10,000 6,575 22,831

4 10,000 5,717 28,548

5 10,000 4,972 33,520

33,520

Prism will use both the payback method and the discounted payback method to analyze the worthiness of this potential capital investment. Prism's decision rule is to accept all proposed capital projects that have payback periods of four years or less. After analyzing this information, Prism would accept this proposed capital project under

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3.

both the payback method and the discounted payback method

the payback method but not the discounted payback method

the discounted payback method but not the payback method







neither the payback method nor the discounted payback method

3. In order to print all of its forms in-house, the Prism health plan is considering the purchase of 10 new printers at a total cost of $30,000. Prism estimates that the proposed printers have a useful life of 5 years. Under its current system, Prism spends $10,000 a year to have forms printed by a local printing company. Assume that Prism selects a 15% discount rate based on its weighted-average costs of capital. The cash inflows for each year, discounted to their present value, are shown in the following chart:

Year CashInflow

DiscountedCash Inflow

RunningTotal

1 $10,000 $ 8,695 $ 8,695

2 10,000 7,561 16,256

3 10,000 6,575 22,831

4 10,000 5,717 28,548

5 10,000 4,972 33,520

33,520

Prism will use both the payback method and the discounted payback method to analyze the worthiness of this potential capital investment. Prism's decision rule is to accept all proposed capital projects that have payback periods of four years or less. Now assume that Prism decides to use the net present value (NPV) method to evaluate this potential investment's worthiness and that Prism will accept the project if the project's NPV is greater than $4,000. Using the NPV method, Prism would correctly conclude that this project should be

Go toquestion

4.

rejected because its NPV is $3,520

accepted because its NPV is $5,028



4. The following statements are about a health plan's capital budgeting process. Select the answer choice containing the correct statement.

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Under sensitivity analysis, a health plan ranks all capital project proposals according to expected rates of return and accepts only those proposals with the highest rankings.

A project that has a profitability index of 0.0 has an NPV of zero.

An underlying assumption of capital budgeting is that a health plan should keep its investing decisions separate from its financing decisions. Under the internal rate of return (IRR) method, if a project's IRR is less than a health plan's weighted average cost of capital (WACC), then the project's benefits should exceed its costs and the health plan should accept the project.

>---------- End of the Test ----------<






1 B2 B3 A4 C

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