Government Human Services Consulting

Final Trend Estimates and CY07 Rates

Tim Doyle, FSA, MAAA Brad RhodesJeff Smith

July 28, 2006

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Outline of Presentation

A. Rate Impact

B. Rate-Setting Methodology

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A. Rate Impact

Recall from the June 22, 2006 presentation that Trend = Rate Increase

Aggregate rate increase/decrease is due to– Medical inflation (trend)

– Benefit program changes

– Demographic mix changes (enrollment distribution across rate cells)

– Other (e.g., rebasing)

Overall revenue increase/decrease is additionally due to– Total enrollment changes

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A. Rate Impact (continued)

Program-wide CY07 PMPM increase of 5.2 percent over mid-year CY06 rates based on March member months simulations

MCO-specific PMPM increases to be distributed after the presentation today

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B: Rate-Setting Methodology

1. CY04 adjusted HFMR base as starting point

2. Program changes

3. Medical trends

4. Administrative and profit load

5. Relational modeling

6. Regional factors

7. Low birth weight babies

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B.1: CY04 Adjusted HFMR Base as Starting Point

MCOs submitted CY04 HFMRs adjusted for– C&G and L&E reviews

– Non-State Plan services Removal of adult dental

– FQHC pricing

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B.2: Program Changes

Physician fee schedule– Increase to specified codes effective July 1, 2005 and July 1,

2006

– Impacts physician PMPM by 16 percent

Pharmacy copay– $3 copay for all brand drugs not on the preferred drug list, $1

copay for all generic drugs for adults. Pregnant women, children, and family planning drugs are excluded from copays

Increase in dental fees for restorative services– $0.52 million increase

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B.2: Program Changes (continued)

TPL– $1.5 million removed from total expenses

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B.3: Medical Trends

Preliminary trend ranges presented on June 22, 2006

Final trend estimates presented in this section

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Trend Methodology

Data analysis– Analyze MCO-reported financial and encounter data

– Analyze HSCRC hospital data

Trend estimation– Past trends: Assessed based on the historical data

– Future trends: Assessed with past trends as baseline compared to other benchmarks

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Inpatient Hospital Unit Cost Trends: HSCRC Component

Year Rate Update

FY05 4.81%

FY06 5.01%

FY07 3.56%

FY08* 3.91%

*Forecast

HSCRC rate updates

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Inpatient Trend Considerations

CY04–CY05 (also 3 months of CY06) trend estimates based on program-specific data

CY05–CY07 trend forecasts driven by HSCRC rate updates

Trends estimates incorporate HSCRC DRG day limit and GME discount impact

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Inpatient Hospital PMPM Annual Trend by COA and Year

F&C Disabled SOBRA AIDS HIVDelivery/

BirthTotal

CY04/05 5.4% 4.9% 5.4% 5.4% 5.1% 4.6% 5.0%

CY05/06 8.8% 8.2% 8.8% 8.3% 8.1% 6.7% 7.9%

CY06/07 7.7% 7.2% 7.7% 7.3% 7.2% 6.2% 7.0%

Total 7.3% 6.8% 7.3% 7.0% 6.8% 5.8% 6.6%

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Outpatient Hospital Unit Cost Trends: HSCRC Component

*Forecast

Year Rate Update

FY05 3.78%

FY06 3.98%

FY07 3.56%

FY08* 3.22%

HSCRC rate updates

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Outpatient Trend Considerations

CY04–CY05 (also 3 months of CY06) trend estimates based on program-specific data

CY05–CY07 trend forecasts driven by HSCRC rate updates

Trends estimates incorporate GME discount impact

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F&C Disabled SOBRA AIDS HIVDelivery/

BirthTotal

CY04/05 8.0% 8.2% 8.0% 8.5% 8.5% 8.0% 8.1%

CY05/06 12.1% 13.3% 12.1% 12.1% 12.1% 12.1% 12.5%

CY06/07 11.4% 12.6% 11.4% 11.4% 11.4% 11.4% 11.8%

Total 10.5% 11.4% 10.5% 10.7% 10.7% 10.5% 10.8%

Outpatient Hospital PMPM Annual Trend by COA and Year

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Pharmacy Trend Considerations

CY04–CY05 (also 3 months of CY06) trend estimates based on MCO-specific data

CY05–CY07 trend forecasts based on pharmacy industry research

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F&C Disabled SOBRA AIDS HIVDelivery/

BirthTotal

CY04/05 5.5% 6.1% 5.5% 7.6% 7.6% 5.5% 6.1%

CY05/06 7.6% 8.4% 7.6% 9.9% 9.9% 7.6% 8.3%

CY06/07 7.6% 8.4% 7.6% 9.9% 9.9% 7.6% 8.3%

Total 6.9% 7.6% 6.9% 9.1% 9.1% 6.9% 7.6%

Pharmacy PMPM Annual Trend by COA and Year

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Physician Trend Considerations

CY04–CY05 (also 3 months of CY06) trend estimates based on MCO-specific data

CY05–CY07 trend forecasts based on above baseline and industry research

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Physician PMPM Annual Trend by COA by Year

F&C Disabled SOBRA AIDS HIVDelivery/

BirthTotal

CY04/05 3.2% 3.0% 3.3% 4.0% 4.0% 3.0% 3.2%

CY05/06 5.0% 4.7% 5.0% 5.9% 5.9% 5.0% 4.9%

CY06/07 5.0% 4.7% 5.0% 5.9% 5.9% 5.0% 4.9%

Total 4.4% 4.2% 4.4% 5.3% 5.3% 4.3% 4.4%

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Summary of Average Annual Trends by COA and COS(CY04–CY07)

F&CDisabled

SOBRA AIDS HIV

Delivery/ Birth

Total

Inpatient Hospital 7.3% 6.8% 7.3% 7.0% 6.8% 5.8% 6.6%

Outpatient 10.5% 11.4% 10.5% 10.7% 10.7% 10.5% 10.8%

Physician 4.4% 4.2% 4.4% 5.3% 5.3% 4.3% 4.4%

Dental 6.7% 5.4% 6.7% 5.4% 5.4% 0.0% 6.7%

Pharmacy 6.9% 7.6% 6.9% 9.1% 9.1% 6.9% 7.6%

All Other* -1.0% -0.6% -1.0% -0.6% -0.5% -1.0% -0.8%

Total 6.7% 6.8% 7.2% 7.5% 7.7% 5.6% 6.6%

*Reflects -9.3% trend for CY04/05 and 3.8% trend for both CY05/06 and CY06/07.

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F&CDisabled

SOBRA AIDS HIV

Delivery/ Birth

Total

CY04/05 4.4% 4.3% 5.0% 5.3% 5.5% 4.3% 4.4%

CY05/06 8.0% 8.3% 8.5% 8.8% 9.0% 6.5% 8.0%

CY06/07 7.7% 7.8% 8.1% 8.3% 8.6% 6.0% 7.5%

Total 6.7% 6.8% 7.2% 7.5% 7.7% 5.6% 6.6%

Summary of Consolidated COS Annual Trend by COA and Year

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B.4: Administrative and Profit Load

From the audited CY04 HFMR base cost, grouped separately by F&C and Disabled– Medical management costs

– Administrative costs

Administrative trends– Medical management (at CPI +): 3.76 percent

– Administrative costs (at CPI): 2.80 percent

Additional items– Underwriting Gain: 1.5 percent of medical expense

– Reinsurance Administration Costs: $2.4 million added to base

– Risk/Contingency Margin: 0.4 percent of medical expense

State policy decision: loading capped at CY06 level of 12.6 percent

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Administrative and Profit Load Allocation

Premium Tax: 2.3 percent of medical expense Overall, loading over medical portion of CY07 rates is 14.9 percent

– Medical management, underwriting gains, risk/contingency margin, reinsurance administration, and premium tax as variable loading (proportionally to medical component of rate)

– Administrative costs as fixed loading Variable by F&C and Disabled Variable by rate cell groupings

– Administration costs for RACs 75 percent fixed and 25 percent variable

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B.5: Relational Modeling

Standard actuarial step

For smoothing

To reflect improved RAC assignment due to better encounter data and RAC relativities

To incorporate aging of RAC cohorts

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B.6: Regional Factors

City versus Rest of State (ROS) regional factors based on the regional analysis presentation on June 22, 2006

Results in City/ROS differential of 23 percent for demographic rate cells and 14 percent for RACs– Last year the differential was 27 percent for demographic rate

cells and 17 percent for RACs

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B.7: Low Birth Weight Babies

UMBC analysis applied to newborn/delivery kick payment and < 1 F&C

Adjusted to recognize 90 percent of differential in base cost analysis

Adjusted for differential trend