© 2017 National Association of Insurance Commissioners 1

Conference Call

HEALTH RISK-BASED CAPITAL (E) WORKING GROUP

Thursday, February 9, 2017 12:00 noon ET / 11:00 a.m. CT / 10:00 a.m. MT / 9:00 a.m. PT

8:00 a.m. Alaska / 6:00 a.m. Hawaii

ROLL CALL

Patrick McNaughton, Chair Washington Richard Hinkel, Vice Chair Wisconsin Steve Ostlund Alabama Carolyn Morgan/Lisa Parker Florida Chris Buchanan Kansas Kristi Bohn Minnesota Annette James Nevada Stephen Wiest New York Kim Rankin Pennsylvania Mike Boerner/Aaron Hodges Texas

AGENDA 1. Discuss the Supplemental Medicare Part D Factor Proposal (2016-16-CA)—Patrick

McNaughton (WA)

Attachment One

2. Discuss Stop Loss Factor Proposal (2016-17-CA)—Patrick McNaughton (WA) AHIP Comment Letter—Bill Weller

Attachment Two Attachment Three

3. Discuss Medicaid Pass-Through Payment—Patrick McNaughton (WA)

4. Any Other Matters Brought Before the Working Group

5. Adjournment

W:\QA\RBC\HRBC\2017\Calls and Meetings\02_09_17 HRBC Call\Agenda HRBC 02_09_17.docx

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2016 National Association of Insurance Commissioners

Capital Adequacy (E) Task Force RBC Proposal Form

[ x ] Capital Adequacy (E) Task Force [ x ] Health RBC (E) Working Group [ ] Life RBC (E) Working Group

[ ] Catastrophe Risk (E) Subgroup [ ] Investment RBC (E) Working Group [ ] SMI RBC (E) Subgroup [ ] C3 Phase II/ AG43 (E/A) Subgroup [ ] P/C RBC (E) Working Group [ ] Stress Testing (E) Subgroup

DATE: 11-16-16

CONTACT PERSON: Crystal Brown

TELEPHONE: 816-783-8146

EMAIL ADDRESS: cbrown@naic.org

ON BEHALF OF: Health RBC (E) Working Group

NAME: Patrick McNaughton

TITLE: Chief Financial Examiner/Chair

AFFILIATION: WA Office of Insurance Commissioner

ADDRESS: PO Box 40255

Olympia, WA 98504-0255

FOR NAIC USE ONLY

Agenda Item # 2016-16-CA

Year 2017

DISPOSITION

[ ] ADOPTED ________________

[ ] REJECTED

[ ] DEFERRED TO

[ ] REFERRED TO OTHER NAIC GROUP

[ x ] EXPOSED 01/13/2017

[ ] OTHER (SPECIFY)

IDENTIFICATION OF SOURCE AND FORM(S)/INSTRUCTIONS TO BE CHANGED

[ x ] Health RBC Blanks [ x ] Property/Casualty RBC Blanks [ x ] Life RBC Instructions

[ x ] Fraternal RBC Blanks [ x ] Health RBC Instructions [ x ] Property/Casualty RBC Instructions [ x ] Life RBC Blanks [ x ] Fraternal RBC Instructions [ ] OTHER ______________

DESCRIPTION OF CHANGE(S) Add a reference to the “Supplemental Benefits within Stand-Alone Medicare Part D Coverage” line for “(Claims Incurred)” and update the factor to 0.500. Update the Instructions to reference that the factor will be applied to claims incurred vs. premiums.

REASON OR JUSTIFICATION FOR CHANGE ** The American Academy of Actuaries submitted a report to the Health Risk-Based Capital (E) Working Group with a recommendation to update the Supplemental Benefits within Stand-Alone Medicare Part D Coverage line to reflect the “Claims Incurred” and to increase the factor to 0.500.

Additional Staff Comments: The Property/Casualty, Life and Fraternal Formulas have previously the followed the same treatment as the health formula for this line of business. It is recommended that after the Working Group reviews and exposes the proposal, that a recommendation letter be sent to the Capital Adequacy (E) Task Force consider this proposal for those other formulas also. 12-11-16 cgb The Working Group agreed to expose the proposal for a 30 day comment period with modifications to the instructions to insert the word “incurred” in front of the word “claims.” Comments are due back on 1-13-17. 02-03-17 cgb No comments were received for this proposal. ______________________________________________________________________________________________ ** This section must be completed on all forms. Revised 11-2013

Attachment One

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OTHER UNDERWRITING RISK – L(19) THROUGH L(42) XR014–XR016

Detail Eliminated To Conserve Space Line (22.1) Supplemental Benefits within Stand-Alone Medicare Part D Coverage. A separate risk factor has been established to recognize the different risk (as described in Appendix 2) for the additional premium collected from incurred claims associated with the beneficiaries for these supplemental drug benefits.

Detail Eliminated To Conserve Space

APPENDIX 2 – COMMONLY USED TERMS FOR MEDICARE PART D COVERAGE The U.S. Centers for Medicare and Medicaid Services (CMS) oversees the Medicare Part D prescription drug coverage, including both coverage provided through a stand-alone Prescription Drug Plan (PDP) and coverage provided as part of a Medicare Advantage plan. CMS ascribes a specific meaning to most of the following terms, and the RBC formulas have adopted that terminology to reduce the potential for misinterpretation. Other terms have been defined below in order to facilitate the appropriate application of the RBC formula.

Detail Eliminated To Conserve Space

Supplemental Benefits – Benefits in excess of the Standard Coverage. These benefits typically will cover some portion of the deductible, the co-payments, or the “coverage gap” between the initial coverage limit and the out-of-pocket threshold. Supplemental Benefits are part of an enrollee’s Part D coverage, so they are not placed in the “Other” category in the RBC formula. However they are not subject to either the Reinsurance Payment or the Risk Corridor Payment Adjustment, so they receive less favorable RBC treatment than the Standard Coverage.

Detail Eliminated To Conserve Space

Attachment One

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(1) (2)Annual Statement Source Amount Factor RBC Requirement

Other Underwriting Risk(19) Business with Rate Guarantees Between 15-36 Months - Direct Premium Earned Gen Int Pt 2 9.21 $0 0.024(20) Business with Rate Guarantees Over 36 Months - Direct Premium Earned Gen Int Pt 2 9.22 $0 0.064(21) FEHBP and TRICARE Claims Incurred UI, Pt 2, Col 6, Line 12.4 $0 0.020(22) Stop Loss and Minimum Premium Company Records 0.250

(22.1) Supplemental Benefits within Stand-Alone Medicare Part D Coverage (Claims Incurred) Company Records 0.500(22.2) Total Other Underwriting Risk Sum of lines (19) through (22.1)

Disability Income Premium(23) Noncancellable Disability Income - Individual Morbidity Company Records

(23.1) First $50 Million Earned Premium of L(23) 0.350(23.2) Over $50 Million Earned Premium of L(23) 0.150

(23.3) Total Noncancellable Disability Income - Individual Morbidity L(23.1) + L(23.2)

(24) Other Disability Income - Individual Morbidity Company Records

(24.1)

Earned Premium in L(24) [up to $50 million less Premium in L(23.1)] 0.250(24.2) Earned Premium in L(24) not included in L(24.1) 0.070(24.3) Total Other Disability Income - Individual Morbidity L(24.1) + L(24.2)

(25) Disability Income - Credit Monthly Balance Plans Company Records (25.1) First $50 Million Earned Premium of L(25) 0.200(25.2) Over $50 Million Earned Premium of L(25) 0.030(25.3) Total Disability Income - Credit Morbidity L(25.1) + L(25.2)

(26) Disability Income - Group Long-term Company Records (26.1) Earned Premium in L(26) [up to $50 million less Premium in L(25.1)] 0.150(26.2) Earned Premium in L(26) not included in L(26.1) 0.030(26.3) Total Disability Income - Group Long-term L(26.1) + L(26.2)

(27) Disability Income - Credit Single Premium with Additional Reserves Company Records (27.1) Additional Reserves for Credit Disability Plans Company Records (27.2) Additional Reserves for Credit Disability Plans, prior year Company Records (27.3) Sub-total Disability Income - Credit Single Prem w/Addl Reserves L(27) - L(27.1) + L(27.2) (27.4) Earned Premium in L(27.3) [up to $50 million less Premium in lines (25.1)+(26.1)] 0.100(27.5) Earned Premium in L(27.3) not included in L(27.4) 0.030(27.6) Total Disability Income - Credit Single Premium with Additional Reserves L(27.4) + L(27.5)

(28) Disability Income - Credit Single Premium without Additional Reserves Company Records (28.1) Earned Prem in L(28) [up to $50 million less Prem in Lines (25.1)+(26.1)+(27.4)] 0.150(28.2) Earned Premium in L(28) not included in L(28.1) 0.030(28.3) Total Disability Income - Credit Single Premium without Additional Reserves L(28.1) + L(28.2)

(29) Disability Income - Group Short-term Company Records (29.1) Earned Prem in L(29) [up to $50 million less Prem in lines (25.1)+(26.1)+(27.4)+(28.1)] 0.050(29.2) Earned Premium in L(29) not included in L(29.1) 0.030(29.3) Total Disability Income - Group Short-term L(29.1) + L(29.2)

Denotes items that must be manually entered on filing software.

Attachment One

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2016 National Association of Insurance Commissioners

Capital Adequacy (E) Task Force RBC Proposal Form

[ x ] Capital Adequacy (E) Task Force [ x ] Health RBC (E) Working Group [ ] Life RBC (E) Working Group

[ ] Catastrophe Risk (E) Subgroup [ ] Investment RBC (E) Working Group [ ] SMI RBC (E) Subgroup [ ] C3 Phase II/ AG43 (E/A) Subgroup [ ] P/C RBC (E) Working Group [ ] Stress Testing (E) Subgroup

DATE: 11-16-16

CONTACT PERSON: Crystal Brown

TELEPHONE: 816-783-8146

EMAIL ADDRESS: cbrown@naic.org

ON BEHALF OF: Health RBC (E) Working Group

NAME: Patrick McNaughton

TITLE: Chief Financial Examiner/Chair

AFFILIATION: WA Office of Insurance Commissioner

ADDRESS: PO Box 40255

Olympia, WA 98504-0255

FOR NAIC USE ONLY

Agenda Item # 2016-17-CA

Year 2017

DISPOSITION

[ ] ADOPTED ________________

[ ] REJECTED

[ ] DEFERRED TO

[ ] REFERRED TO OTHER NAIC GROUP

[ x ] EXPOSED 01/13/2017

[ ] OTHER (SPECIFY)

IDENTIFICATION OF SOURCE AND FORM(S)/INSTRUCTIONS TO BE CHANGED

[ x ] Health RBC Blanks [ x ] Property/Casualty RBC Blanks [ x ] Life RBC Instructions

[ x ] Fraternal RBC Blanks [ x ] Health RBC Instructions [ x ] Property/Casualty RBC Instructions [ x ] Life RBC Blanks [ x ] Fraternal RBC Instructions [ ] OTHER ______________

DESCRIPTION OF CHANGE(S) Add a tiered factor approach to Line 22 on page XR014 with a footnote to apply a factor of 35 percent to the first $25,000,000 in stop loss premium and apply a factor of 25 percent to the remaining premium in excess of $25,000,000. Update the Instructions to add a reference to the tiered approach of applying the factors.

REASON OR JUSTIFICATION FOR CHANGE ** The American Academy of Actuaries submitted a report to the Health Risk-Based Capital (E) Working Group with a recommendation to update the Stop Loss and Minimum Premium line (Line 22) to reflect a tiered approach to apply a factor of 35 percent to the first $25,000,000 in premiums and apply a factor of 25 percent to the remaining stop loss premium in excess of $25,000,000.

Additional Staff Comments: The Property/Casualty, Life and Fraternal Formulas have previously the followed the same treatment as the health formula for this line of business. It is recommended that after the Working Group reviews and exposes the proposal, that a recommendation letter be sent to the Capital Adequacy (E) Task Force consider this proposal for those other formulas also. 12-11-16 cgb The Working Group agreed to expose the Stop Loss report and proposal for a 30-day comment period ending on 1-13-17. 02-03-17 cgb A comment letter was received from AHIP on 1-27-17. ______________________________________________________________________________________________ ** This section must be completed on all forms. Revised 11-2013

Attachment Two

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OTHER UNDERWRITING RISK – L(19) THROUGH L(42) XR014–XR016

In addition to the general risk of fluctuations in the claims experience, there is an additional risk generated when reporting entities guarantee rates for extended periods beyond one year. If rate guarantees are extended between 15 and 36 months from policy inception, a factor of 0.024 is applied against the direct premiums earned for those guaranteed policies. Where a rate guaranty extends beyond 36 months, the factor is increased to 0.064. This calculation only applies to those lines of accident and health business, which include a medical trend risk, (i.e., Comprehensive Medical, Medicare Supplement, Dental/Vision, Stand-Alone Medicare Part D Coverage, Supplemental benefits within Medicare Part D Coverage, Stop-Loss, and Minimum Premium). Premiums entered should be earned premium for the current calendar year period and not for the entire period of the rate guarantees. Premium amounts should be shown net of reinsurance only when the reinsurance ceded premium is also subject to the same rate guarantee. A separate risk factor has been established to recognize the reduced risk associated with safeguards built into the Federal Employees Health Benefit Program (FEHBP) created under Section 8909(f)(1) of Title 5 of the United States Code and TRICARE business. Claims incurred are multiplied by two percent to determine total underwriting RBC on this business. A separate risk factor, consistent with the factor used in the Life RBC formula,The American Academy of Actuaries submitted a report to the Health Risk-Based Capital Working Group in 2016 to apply a tiered risk factor approach is applied to the Stop-Loss Premium. The premiums for this coverage should not be included within Comprehensive Medical. It is not expected that the transfer of risk through the various managed care credits will reduce the risk of stop-loss coverage. and this product Medical Stop Loss exhibits a much higher variability than Comprehensive Medical., so a higher RBC factor of 25 percent is appliedA factor of 35 percent will be applied to the first $25,000,000 in premium and a factor of 25 percent will be applied to the premium in excess of $25,000,000.

Detail Eliminated To Conserve Space

Attachment Two

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(1) (2)Annual Statement Source Amount Factor RBC Requirement

Other Underwriting Risk(19) Business with Rate Guarantees Between 15-36 Months - Direct Premium Earned Gen Int Pt 2 9.21 $0 0.024(20) Business with Rate Guarantees Over 36 Months - Direct Premium Earned Gen Int Pt 2 9.22 $0 0.064(21) FEHBP and TRICARE Claims Incurred UI, Pt 2, Col 6, Line 12.4 $0 0.020(22) Stop Loss and Minimum Premium Company Records * $0

(22.1) Supplemental Benefits within Stand-Alone Medicare Part D Coverage Company Records 0.350(22.2) Total Other Underwriting Risk Sum of lines (19) through (22.1)

Disability Income Premium(23) Noncancellable Disability Income - Individual Morbidity Company Records

(23.1) First $50 Million Earned Premium of L(23) 0.350(23.2) Over $50 Million Earned Premium of L(23) 0.150

(23.3) Total Noncancellable Disability Income - Individual Morbidity L(23.1) + L(23.2)

(24) Other Disability Income - Individual Morbidity Company Records (24.1) Earned Premium in L(24) [up to $50 million less Premium in L(23.1)] 0.250(24.2) Earned Premium in L(24) not included in L(24.1) 0.070(24.3) Total Other Disability Income - Individual Morbidity L(24.1) + L(24.2)

(25) Disability Income - Credit Monthly Balance Plans Company Records (25.1) First $50 Million Earned Premium of L(25) 0.200(25.2) Over $50 Million Earned Premium of L(25) 0.030(25.3) Total Disability Income - Credit Morbidity L(25.1) + L(25.2)

(26) Disability Income - Group Long-term Company Records (26.1) Earned Premium in L(26) [up to $50 million less Premium in L(25.1)] 0.150(26.2) Earned Premium in L(26) not included in L(26.1) 0.030(26.3) Total Disability Income - Group Long-term L(26.1) + L(26.2)

(27) Disability Income - Credit Single Premium with Additional Reserves Company Records (27.1) Additional Reserves for Credit Disability Plans Company Records (27.2) Additional Reserves for Credit Disability Plans, prior year Company Records (27.3) Sub-total Disability Income - Credit Single Prem w/Addl Reserves L(27) - L(27.1) + L(27.2) (27.4) Earned Premium in L(27.3) [up to $50 million less Premium in lines (25.1)+(26.1)] 0.100(27.5) Earned Premium in L(27.3) not included in L(27.4) 0.030(27.6) Total Disability Income - Credit Single Premium with Additional Reserves L(27.4) + L(27.5)

(28) Disability Income - Credit Single Premium without Additional Reserves Company Records (28.1) Earned Prem in L(28) [up to $50 million less Prem in Lines (25.1)+(26.1)+(27.4)] 0.150(28.2) Earned Premium in L(28) not included in L(28.1) 0.030(28.3) Total Disability Income - Credit Single Premium without Additional Reserves L(28.1) + L(28.2)

(29) Disability Income - Group Short-term Company Records (29.1) Earned Prem in L(29) [up to $50 million less Prem in lines (25.1)+(26.1)+(27.4)+(28.1)] 0.050(29.2) Earned Premium in L(29) not included in L(29.1) 0.030(29.3) Total Disability Income - Group Short-term L(29.1) + L(29.2)

Denotes items that must be manually entered on filing software. ∗ A factor of .350 will be applied to the first $25,000,000 in Column (1), Line (22) and a factor of .250 will be applied to the remaining premium in excess of $25,000,000.

Attachment Two

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January 26, 2017

Mr. Patrick McNaughton Chair, Health Risk-Based Capital Working Group National Association of Insurance Commissioners 2301 McGee Street, Suite 800 Kansas City, Missouri 64108-2662

Re: Comments on Exposure of Academy of Actuaries Stop-Loss Proposal

Dear Mr. McNaughton:

America’s Health Insurance Plans (AHIP) appreciates the opportunity to provide these comments on the December 2016 exposure on stop-loss factors (2016-17-CA). We also appreciate the work done by the Academy of Actuaries that is the basis for the proposal.

The proposed stop-loss factors are an increase from the existing factors for the first $25,000,000 of premium. In reviewing the Academy’s work, it appears that there are two parts to their recommendation for this increase. The first is based on an analysis of stop-loss experience and the frequency with which specific levels of additional monies would be required to fully fund a year’s claims and expenses (i.e. a risk specific failure rate). This approach has been used for many aspects of the HRBC formula, but the frequency has generally been in the 5% to 10% range for each individual risk. This is consistent with past development of RBC factors with an expectation that when all the exposures are combined, the frequency of failure at the company level will be less than 1%.

The Academy report describes the number of data points as “CY” and notes that there were 146 in their study. With no RBC factor, there would have been 31failures (21% failure rate). The proposed use of factors of 30% up to $25million and 20% above that would reduce the number of study failures to 3 or 2% which is well below the normal 5-10% range.

The second part of the Academy’s proposal is an “add-on” to reflect changes in the underlying risk that exist today but not in the experience used. We do not oppose such an add-on but believe that, without any evidence as to a correct level, a 3% value is more appropriate.

Based on the evidence from the Academy’s report that the failure rate decreases as the block size increases, we support the use of a tiered approach to new factors. We do not oppose a slight increase for the lowest tier, but believe that tier should be from $0 to $10,000,000. The table at the top of page 6 of the report shows that the failure rate with a factor of 30% to $10million and 10% on the excess would be 3.4% (5 out of 146).

Attachment Three

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AHIP Comments on HRBCWG Stop Loss Risk Charge Proposal January 26, 2017 Page 2 For amounts in excess of $10million, it may be unwise to adopt a factor as low as 10% given the current factor is 25%. Including the add-on from the second part, we recommend the alternative factors for stop-loss of: 33% for premiums amounts up to $10,000,000 25% for premium amounts from $10,000,000 to $25,000,000 and 13% for premium amounts in excess of $25,000,000. We would be happy to address any questions the Working Group has with these comments. Sincerely, William C. Weller Actuarial Consultant to AHIP c/c: Crystal Brown, NAIC Candy Gallaher, AHIP

Attachment Three

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