2015 Unified Rate Review Template

Part III Actuarial Memorandum

Company Legal Name:
State:
HIOS Issuer ID:
Market:
Effective Date:

Coventry Health Care of Missouri (CHC-MO)

Missouri
77660
Small Group HMO Rate Filing
01/01/2015 through 12/31/2015

1. Scope and Purpose:

The purpose of this actuarial memorandum is to support the development of the Part I Unified Rate
Review Template. CHC-MO intends to use the following rate development for small group business
within its Missouri service area effective 1/1/2015 through 12/31/2015 for the products listed in Exhibit A.
This memorandum is not intended to be used for any other purpose.
2. Summary of Changes
A. Proposed Rate Increases
Not applicable. This is the initial offering of this product.
B. Reasons for Rate Increase
Not applicable. This is the initial offering of this product.
3. Experience Period Data
A. Experience Period
As CHC-MO did not have any HMO membership in 2013, there is no base period experience for
Worksheet 1.
B. Earned Premium
As CHC-MO did not have any HMO membership in 2013, there is no base period premium for
Worksheet 1.
C. Allowed Incurred Claims
CHC-MO did not have any small group HMO membership in 2013. The following sections discuss
the claims and adjustment factors used to develop the credibility manual.
The following table reports incurred
claims used in the credibility manual:

Page F-1

Coventry Claim System

External Vendor Claim System
IBNR
Total

Allowed
$ 83.6M
$ 22.6M
$ 1.0M
$107.1M

Incurred
$ 66.1M
$ 16.9M
$ 0.8M
$ 83.8M

Allowed and incurred claims come directly from the CHL-MO claim records for hospital and physician
services. Capitated benefits use the capitation rate for incurred claims and the allowed claims are
calculated as the incurred claims plus estimated cost sharing.
Incurred claims are developed through the process of estimating the incurred but not paid (IBNP)
reserves using aggregate block of business paid claims. Paid claims are adjusted using the IBNP
completion factors. More specifically, historical claim payment patterns are used to predict the
ultimate incurred claims for each date-of-service month. The IBNP is estimated using actuarial
principles and assumptions which consider historical claim submission and adjudication patterns, unit
cost and utilization trends, claim inventory levels, changes in membership and product mix,
seasonality, and other relevant factors including a review of large claims. This same process is used
to develop IBNP estimates for allowed claims.
As noted above, the experience period reflects three months of paid claim run-off to reduce the
impact of IBNP estimates in the most recent incurred month. As a result, the IBNP reserves account
for approximately 0.9% of the experience period incurred claims.
4. Benefit Categories
Claim tagging is used to fit all fee-for-service medical claims into four categories: Hospital Inpatient,
Hospital Outpatient, Physician Services, and Other Medical. Other medical services include
ambulance services, home health, durable medical equipment, and prosthetics. The utilization for
these services are counted by service type and rolled up into one utilization number for the total
category. Inpatient utilization is counted as days; outpatient and other medical utilization is counted
as services; physician utilization is counted as services; and pharmacy is counted as prescriptions.
Capitated services are paid on a per member per month (PMPM) basis and have no utilization values
attached.
5. Projection Factors
A. Change in the Morbidity of the Population Insured
Effective January 1, 2014, all policies issued in the individual and small group market are subject to
new rating rules, including guaranteed issue and no medical underwriting. In addition, subsidies will
be available to many individuals and families who are currently uninsured. The change in the
morbidity of the future insured population relative to the current population in the experience period is
based on changes in underwriting and rating factors, as well as expected sources of market
expansion (including Medicare, Medicaid, individual insurance, small group employer insurance, large
group employer insurance, and the high risk pool).

In addition, under Missouri state law, small groups will have the opportunity to elect to retain existing
coverage instead of purchasing ACA-compliant coverage. It is expected that groups who elect to
retain existing coverage have appreciably lower rates than those being offered through this filing on

Page F-2

comparable products, due to favorable underwriting. Therefore, Coventry has adjusted the expected
morbidity of the ACA-compliant Single Risk Pool to compensate for this impact.
B. Changes in Benefits
Compared to the 2013 experience, the filed products include additional benefits to comply with
Missouri Essential Health Benefits (EHBs) according to the benchmark plan. The benefit changes
from those reflected in the credibility manual experience that have an impact on rates include the
following:

Expansion of Biofeedback coverage

Changes to private duty nursing coverage
Hearing aid coverage
Expansion of pediatric vision benefits covered
Coverage of services at Residential Treatment Centers
Pediatric Dental benefits

The estimated net allowed impact of these changes relative to the current individual base period
experience is
or approximately
of claims cost.
The impact on utilization trend due to changes in benefits is described below under trend factors.
C. Changes in Demographics
The manual experience data was normalized for projected changes in the 2015 age gender mix using
Coventry demographic factors. The manual data was normalized for rating area comparing the
current and projected member distributions by county using our company-specific market defined
rating area factors.
D. Other Adjustments
The expected mix of business for 2015 was projected and used to determine a projected market
average rate. The effect of the change in mix of business due to differences in benefits,
demographics, area, and network is shown in the Other adjustment column. An anticipated
increase in the utilization and average cost of Hepatitis C treatments is expected to increase
pharmacy costs
.
E. Trend Factors
Allowed medical trend includes known and anticipated changes in provider contract rates, severity
and medical technology impacts, and expected changes in utilization. The impact of benefit
leveraging is accounted for separately in the projected paid-to-allowed ratio. The change in projected
utilization trend due to changes in benefits is also considered.
Pharmacy trend considers the impact of patent expirations, new drugs, other general market share
shifts, and overall utilization trend. Changes to the current network are included in the Other Trend.
We project an average annual allowed claim trend of 8.5% from the experience to the pricing period.

6. Credibility/Manual Rate
A. Manual rate

Page F-3

B. Credibility
As noted in the Manual Rate section, the manual rate is developed using the
experience
. The manual is considered
fully credible.
Given CHC-MO does not currently have any small group HMO experience in Missouri, the manual
rate was given 100% credibility.
7. Paid to Allowed
The projected paid to allowed ratio in the projection is based on the projection of members by benefit
plan on Worksheet 2. Assuming the migration in Section 14, the paid-to-allowed ratio is approximately
82% in the 2015 projection.
8. Risk Adjustment and Reinsurance
A. Projected Risk Adjustment PMPM
Since the products were developed to be an attractive option across the entire spectrum of risk, the
risk adjustment PMPM, net of risk adjustment user fees, is expected to
.
B. Projected ACA Reinsurance Recoveries (Net of Reinsurance Premium)
The ACA Reinsurance program does not distribute funds to Small Group plans but only collects the
program contribution. This contribution of $3.67 PMPM has been reflected in Section III of Worksheet
1.
9. Non-Benefit Expenses and Profit and Risk
A. Administrative Expense Load
The methodology used to determine the appropriate administrative expense PMPM for this product
line involved forecasting 2015 administrative expenses and membership nationally. Administrative
expenses were based on historical expense levels and the changes expected with the requirements
of PPACA.
The projected administrative expense
premium load does not vary by product.

. The percent of

Cost containment programs and quality improvement activities represent 1.3% of premium.
B. Commissions

C. Profit and Risk Margin

D. Taxes and Fees

Taxes and fees include only the amounts eligible to be subtracted from premiums for the purposes of
calculating MLR rebates. They are as follows:

Page F-4

Insurer Tax
Exchange User Fees
PCORI Tax
State Premium Tax
Federal Income Tax
The reinsurance charge of $3.67 PMPM is not included in the amounts listed above despite its
treatment as a claim in the MLR calculations.
This filing assumes no on-exchange membership so the assumed exchange user fee is 0%.
10. Projected Loss Ratio
Under the current pricing assumption, the average MLR, as defined by PPACA, is projected to be
.
11. Single Risk Pool
In compliance with 45 CFR part 156, 156.80(d), CHC-MO proposes a market-wide index rate,
universal to all covered lives and modified only by those Permitted Plan-Level Adjustments described
in 45 CFR part 156, 156.80(d)(2), and described in detail herein.
12. Index Rate
A. Experience Period Index Rate
CHC-MO does not have any experience period data and therefore a value of $0 was entered on
Worksheet 1.
B. Projection Period Index Rate
The index rate reflects the projected mix of business by plan. The AV pricing values for each plan are
set based on the actuarial value and cost-sharing design of the plan, the impact of induced utilization,
and the plans provider network, delivery system characteristics, and utilization management
practices. Rates do not differ for any characteristic other than those allowable under the regulations
as described in 45 CFR Part 156, 156.80(d)(2). No variation in administrative costs is considered
for plans within a product.
Small Group Market Trend Adjustments: The following table illustrates the quarterly trend factors, the
resulting index rate for effective dates during each calendar quarter, the projected membership
distribution by effective date, and the weighted-average index rate.

Effective Dates

Membership

Trend Factor

Index Rate

1Q 2015

25%

$458.76

2Q 2015

25%

1.020

468.22

3Q 2015

25%

1.042

477.86

4Q 2015

25%

1.063

487.71

Combined

100%

1.031

473.14

13. Market-Adjusted Index Rate

Page F-5

The Market Adjusted Index Rate reflects the Projected Period Index Rate adjusted for the expected
Risk Adjustment impact and payment of the Reinsurance Program Fee.
14. Plan-Adjusted Index Rates
The Plan Adjusted Index Rates are developed using plan-specific adjustments to the Market Adjusted
Index Rate. The following briefly describes how each set of adjustments was determined.
A. Actuarial Value and Cost Sharing
We used
models
to estimate the impact of
different cost sharing designs. We also reviewed the projected experience and the projected
membership by plan to estimate an overall paid-to-allowed ratio. The result of these analyses was
plan specific cost sharing adjustments that were applied to reflect the impact of the different levels of
cost sharing on the use of medical services. These adjustments
have been normalized to result in an aggregate
factor of 1.0 when applied to the projected 2015 membership.
B. Provider Network, Delivery System, and Utilization Management
Network adjustments were applied to reflect the estimated impact of differences in the network size,
efficiency, and provider contract terms. We worked with our contracting area and other subject
matter experts to review the impact of these differences and estimated the expected impact on
allowed claims.
C. Benefits in addition to EHBs
The products discussed in this filing provide coverage for only those benefits defined as Essential
Health Benefits (EHB). These products do not provide coverage for non-EHBs.
D. Non-Tobacco Adjustment

E. Catastrophic Plan Eligibility

Not applicable. CHC-MO is not offering Catastrophic plans as part of this filing.
F. Distribution and Administrative Costs
Adjustments were made for projected administrative costs and profit margin. These are discussed
above in the Non-Benefit Expenses and Profit & Risk section, and exclude the Reinsurance
Contribution, Risk Adjustment User Fee, and Exchange User Fee, which are reflected elsewhere.
These expense and profit assumptions do not vary by plan.
15. Plan-Adjusted Index Rates Calibration
A. Age Curve Calibration
The age factors are based on the HHS Default Standard Age curve.
We projected an average age factor for the 2015 membership of
. We determined a calibration
factor of
by determining the average age factor (using the HHS standard age curve) for the
projected enrollment by age and taking its reciprocal. The average age factor is a member-weighted

Page F-6

average;
.
B. Geographic Factor Calibration
For this rate filing, we have relied on our currently filed Small Group rating area factors, modified
based on information received from our Network Management team which indicated the expected
savings associated with improved unit cost arrangements with contracted facilities and providers
within each applicable rating area.
Exhibit G displays the projected membership by area and the projected average area factor of
The Geographic Factor Calibration is the reciprocal,
.

C. Trend Factor Calibration

CHC-MO intends to increase rates quarterly by a factor equal to the claim trend described in this filing
(8.5% annual), with the assumption of uniform membership throughout the year. Therefore, the Trend
Factor calibration factor was calculated to be 1.031. Dividing a Plan Adjusted Index Rate by this
factor results in the Calibrated Plan Adjusted Index Rate, equal to the basis for rates used in the first
quarter of 2015.
16. Consumer-Adjusted Premium Rate Development
Rates are determined using the prescribed member build-up approach. In the event that a family
includes more than three dependents under age 21, only the three oldest dependents will be
considered in determining the familys premium. Additional dependents (non-billable members) will
not be included in the rate calculation.
The premium for each billable member is calculated as:
Calibrated Plan Adjusted Index Rate * Age Factor * Area Factor

17. AV Metal Values

The AV Metal Values on Worksheet 2 were based on the AV calculator. There were adjustments
made to reflect benefit features not handled by the AV calculator. Attached is the certification required
by 45 CFR Part 156, 156.135.
Adjustments made to plan design entry within the AV Calculator (Certification Option 1)

Page F-7

Different pharmacy copays for preferred pharmacies, non-preferred pharmacies and mail
order. Copays entered into the AV calculator as a weighted average of the copays across
pharmacy types.
Tier 1A (preferred generics). Subclass of generic drugs for which we collect a lower copay
than other generics. Copays entered into AV calculator for generic drugs as a weighted
average of preferred generics and other Tier 1 drugs.
Tiers 4 and 5 (preferred and non-preferred specialty drugs). Pharmacy coinsurance for
specialty drugs entered into AV calculator as a weighted average of Tiers 4 and 5.
Outpatient Facility sub-categories. The Outpatient Facility benefit is made up of two subcategories; OP surgical hospital and OP surgical freestanding. The average effective
coinsurance using the weightings of the internal sub-categories was entered.

Calculations made outside the AV Calculator for plan design impact (Certification Option 2)

Different cost-sharing for X-Ray and lab services by place of service. Used Coventry data to
calculate the percent of these services that are performed by place of service and adjusted
overall member cost-share to account for that difference. An out-of-model adjustment was
made to the AV calculation to account for this plan design feature.

18. AV Pricing Values

The Actuarial Calculator produces Actuarial Values (AVs) that reflect the portion of costs that will be
paid by the carrier versus the member, on average. The AV Pricing Value includes the following
allowable, plan level adjustments to the index rate

Paid to allowed ratio for the plan

Plan Specific Network Discounts
Administrative Costs
Commission / Distribution Costs
Additional Plan Benefits Above the EHBs

The utilization adjustments discussed in Section 13.A. were applied to reflect expected differences in
utilization due to metal tier and plan design.
19. Membership Projections
Membership projections are based on historical experience, enrollment in ACA-compliant plans
through May 2014, and our expectations for future sales as additional members move to these plans
from grandfathered and transitional plans.
20. Terminated Products
All products with existing membership in 2013 will be retired in 2014. In compliance with Missouri
state law, existing groups may elect to retain these plans or purchase an ACA-compliant plan. New
small groups must choose an ACA-compliant plan.
The HIOS Products that were discontinued at the end of 2013 are:
77660MO001
21. Plan type
The plan types in the drop down boxes on Worksheet 2 adequately identify the products in the
projection period.

Page F-8

22. Warning Alerts

.
23. Reliance On Others
While I have reviewed the reasonableness of the assumptions in support of both the preparation of
the Part I Unified Rate Review Template and the assumptions in support of the rate development
applicable to the products discussed in this filing, I relied on the expertise of the following noted
individuals, along with work products produced at their direction, for the following items:

24. Actuarial Certification:

I,
, am an actuary of Aetna, of which CHC-MO is a wholly owned subsidiary. I am
a member of the American Academy of Actuaries and I meet the Academy qualification standards for
rendering opinions of this type.
I hereby certify in my opinion, that:
This filing is in conformity with all applicable Actuarial Standards of Practice, including, but not limited
to:
ASOP No. 5, Incurred Health and Disability Claims
ASOP No. 8, Regulatory Filings for Health Plan Entities
ASOP No. 12, Risk Classification
ASOP No. 23, Data Quality
ASOP No. 25, Credibility Procedures Applicable to Accident and Health, Group Term Life, and
Property/Casualty Coverages
ASOP No. 26, Compliance with Statutory and Regulatory Requirements for the Actuarial
Certification of Small Employer Health Benefit Plans
ASOP No. 41, Actuarial Communications.

The projected index rate is:

a. In compliance with all applicable State and Federal Statutes and Regulations (45
CFR 156.80(d)(1))
b. Developed in compliance with the applicable Actuarial Standards of Practice
c. Reasonable in relation to the benefits provided and the population anticipated to be
covered
d. Neither excessive nor deficient

The index rate and only the allowable modifiers as described in 45 CFR 156.80(d)(1) and 45
CFR 156.80(d)(2) were used to generate plan level rates.

Page F-9

The percent of total premium that represents essential health benefits included in Worksheet
2, Sections III and IV were calculated in accordance with actuarial standards of practice.

Qualification The Part 1 Unified Rate Review Template does not demonstrate the process used by
CHC-MO to develop rates. Rather it represents information required by Federal regulation to be
provided in support of the review of rate increases, for certification of qualified health plans and for
certification that the index rate is developed in accordance with federal regulation and used
consistently and only adjusted by the allowable modifiers.

___________________________

___________________
(Date)

Page F-10