C A L I F O R N I A A S S O C I A T I O N O F H E A L T H P L A N S2 8 T H A N N U A L C O N F E R E N C E

O C T O B E R 2 2 , 2 0 1 3

MEDI-CAL RATE-SETTING: SOUNDING OFF ON ACTUARIAL

SOUNDNESS

TOPICS TODAY

• Actuarial Soundness• Definition• Controversy• Relevance• Solutions

This presentation is intended solely for educational purposes and presents information of a general nature. It is not intended to guide or determine any specific individual situation and persons should consult qualified professionals before taking specific actions. The views expressed in this presentation are those of the presenter, and not those of their employer.

DEFINITION (1) (2)

actuary [ak′cho̅o̅ er′ē] An insurance company professional trained in mathematics and statistics who calculates premiums, dividends, pensions, reserves, employee benefits, and risks.

(1) http://www.actuary.org/files/Actuarial_Soundness_Special_Report_5.10.12.pdf(2) www.yourdictionary.com

DEFINITION (1) (2)

actuary [ak′cho̅o̅ er′ē] An insurance company professional trained in mathematics and statistics who calculates premiums, dividends, pensions, reserves, employee benefits, and risks.

sound [so̵und] based on truth or valid reasoning; accurate, reliable, judicious, sensible; agreeing with established views or beliefs; showing common sense and good judgment

(1) http://www.actuary.org/files/Actuarial_Soundness_Special_Report_5.10.12.pdf(2) www.yourdictionary.com

REGULATION DEFINITION

42 CFR 438.6(c) defines “actuarially sound capitation rates” as capitation rates that:

– have been developed in accordance with generally accepted actuarial principles and practices;

– are appropriate for the populations to be covered and the services to be furnished under the contract; and

– have been certified as meeting the requirements of the regulation by actuaries who meet the qualification standards established by the American Academy of Actuaries and follow the practice standards established by the Actuarial Standards Board.

WORKING DEFINITION

2005 AAA Practice Note Definition (emphasis added):Medicaid benefit plan premium rates are “actuarially sound” if, for business in the state for which the certification is being prepared and for the period covered by the certification, projected premiums, including expected reinsurance and governmental stoploss cash flows, governmental risk adjustment cash flows, and investment income, provide for all reasonable, appropriate and attainable costs, including health benefits, health benefit settlement expenses, marketing and administrative expenses, any state-mandated assessments and taxes, and the cost of capital.

DEFINE BY HOW NOT DEFINED

How is Actuarially Sound not defined?:• Rates that yield expected profit margin in aggregate.• Rate needed such that all plans make appropriate profit.• Rate such that certain % of plans make minimum profit.• Rate such that at least one plan make minimum profit.• Rate increases must be greater than 0%.• Rate increases must be at or above trend.

ARE WE STILL TALKING ABOUT THE DEFINITION?

• CMS Checklist does not say what assumptions should be.• Checklist focuses on describing base year data, adjustments

to base year data, rate categories, describing smoothing and other adjustments (stoploss, reinsurance, risk sharing, incentives).

• Seal of approval (actuarial certification)• Focus on reasonableness of data, process in which

data is adjusted, and other considerations.• Does not discuss how “attainable cost” component is

achieved.

WHERE IS THE CONTROVERSY?

State actuaries are hired by State which may

introduce a potential conflict of interest in

performing their certifications.

Many technical difficulties in setting

appropriate assumptions.

Limited transparency in process.

In the past, CMS has accepted actuarial certifications without

review for compliance with Medicaid actuarial soundness requirements.

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ACTUARIAL STANDARDS OF PRACTICE - ASOPS

• Actuaries have Code of Professional Conduct and Actuarial Standards of Practice• ASOP #1: Intro to ASOPs

• Binding, but not the only resource;• Intended to provide guidance for dealing with commonly

encountered situations;• Are principles-based and do not attempt to dictate every step

and decision in an actuarial assignment. Generally, ASOPs are not narrowly prescriptive and neither dictate a single approach nor mandate a particular outcome.

• 2.3 Actuarial Soundness—The phrase “actuarial soundness” has different meanings in different contexts and might be dictated or imposed by an outside entity. In rendering actuarial services, if the actuary identifies the process or result as “actuarially sound,” the actuary should define the meaning of “actuarially sound” in that context.

ASOPS

• Actuaries have Code of Professional Conduct and Actuarial Standards of Practice• ASOP #1: Intro to ASOPs

• Binding, but not the only resource• Intended to provide guidance for dealing with commonly

encountered situations• Are principles-based and do not attempt to dictate every step

and decision in an actuarial assignment. Generally, ASOPs are not narrowly prescriptive and neither dictate a single approach nor mandate a particular outcome.

• 2.3 Actuarial Soundness—The phrase “actuarial soundness” has different meanings in different contexts and might be dictated or imposed by an outside entity. In rendering actuarial services, if the actuary identifies the process or result as “actuarially sound,” the actuary should define the meaning of “actuarially sound” in that context.

ASOPS

• Other Relevant ASOPs for Medi-Cal Rate Setting• #5 – Incurred Health and Disability Claims• #8 – Regulatory Filings for Health Plan Entities• #12 – Risk Classification• #23 – Data Quality• #41 – Actuarial Communication• #45 – The Use of Health Status Based Risk Adjustment

Methodologies

• Significant judgment often used

AND WE NEED TO PLAY NICE

• Actuaries with the same information can come to different conclusions• AAA Standard of practice:

“Differences of opinion among actuaries may arise, particularly in choices of assumptions and methods. Discussions of such differences between an Actuary and another actuary, or in observations made by an Actuary to a Principal on the work of another actuary, should be conducted objectively and with courtesy and respect.

SO CAN WE ALL AGREE ON SOMETHING?

• “Budgetary concerns should not influence assumptions –PERIOD.”

• “Actuaries should not work toward a target”• “High managed care factors plus low administrative expenses is

not actuarially sound”• “Situations implying budget is driving – Arbitrary “efficiency

adjustment factors” used in rate setting.

- SOA June 2010 Health Meeting, presented by Mercer Gov’t Human Services Consulting, Wakely Consulting Group, and WellCare Health Plan

- (SOA slide deck disclaimer: “Opinions and views expressed during the presentation are those of the presenters and not necessarily those of the companies for which the presenters work for.”)

CHANGES ARE COMING

• Increased scrutiny from CMS• 2010 GAO report – CMS not doing enough

• CMS implement mechanism to track state compliance

• CMS clarify requirements and documentation for reviewers

• CMS make use of information on data quality

• June 11, 2013 SOA Meeting – CMS Perspective• More skin in the game influencing their approach• “Past practice of accepting actuarial certification

is changing”• “…intends to ‘look under the hood’ of rate setting

documentation”• Will “create database of rate-setting information”• Will “identify ‘high-risk’ payment practices

CHANGES ARE COMING

• ASOP for “Actuarial Soundness for Medicaid Rates” • Draft for comment available December 2013• BINDING• Key issues discussed:

• Scope• Medicaid and / or CHIP• Applicability to MCO actuaries or limitation to 42 CFR 438.6(c)

• Definition of actuarially sound• components to include in the capitation rate development• single rate vs. capitation rate range

• Inclusion of profit, investment income, underwriting gain• Incentives and Withholds• Retroactive rate changes

WHAT CAN PLANS DO TODAY?

• Bring On Your Data• Thoughtful research or analysis

• Experience vs. Benchmarks• Durational (multi-year) studies• Continue to improve encounter and data collection

• With valid findings, an actuary would be hard pressed to not review the data

• Avoid shotgun approch• Focus on credible findings and avoid laundry list of small items

and focus on big picture• When plans simultaneously experiencing poor outcome,

joint effort research may be effective• This is effective if the state reviews it (e.g., SPD) • Adult Expansion positive forward step

MORE SOLUTIONS…

• Open the Black Box• Not just the process – let’s see the

calculations!!• Make rate setting documentation

public• How was base data tested for being

appropriate?• How are managed care savings

determined to be “attainable”?• Was maturity of market considered?• In line with admin?

• It’s a double-edge - do plans want their outcomes more public?

SUMMARY

• Improvements are needed• Plans can play active role• New programs enhance need to better the system

SOURCES OF INFORMATION

• CMS Checklist• http://www.colorado.gov/cs/Satellite?blobcol=urldata&blo

bheader=application%2Fpdf&blobkey=id&blobtable=MungoBlobs&blobwhere=1229570545276&ssbinary=true

• Note that this is not an official site for CMS, rather it is the CO Department of Health Services).

• AAA Practice Note• http://www.actuary.org/pdf/practnotes/health_medicaid_

05.pdf• GAO Report

• http://www.gao.gov/new.items/d10810.pdf• AAA Standards of Practice

• http://www.actuarialstandardsboard.org/asops.asp

CONTRACTUAL RELATIONSHIP BETWEEN MEDI-CAL PLANS AND DHCS

“Mornin’ Sam. Mornin’ Ralph.”

DHCS RATE-SETTING

Sheep = profits/surplus

Beware of traps

DHCS AND THE PLANS DISCUSS THEIR DIFFERENCES REASONABLY AND AMICABLY

Work groups

Rate-setting meetings

Settling litigation

PLANS RECEIVE RATES FROM DHCS

Unreasonable assumptions

Aggressive managed care savings on new, high-risk populations

GOAL IS TRUE PARTNERSHIP

Greater transparency

More input

Regain trust

Profit/Surplus is OK (win/win)

BUT …

LITIGATION TOOL BELT

Notice of Dispute (NOD)

Action in state and/or federal court

Support of other Medi-Cal litigation through amicus curiaeparticipation

NOTICE OF DISPUTE

Notice of Dispute = contractual method for resolving disputes

Unlike other contractual dispute methods like arbitration

Case is presented to administrative law judge (ALJ) who is employee of DHCS

NOTICE OF DISPUTE

The ALJ decision is only considered “Proposed” decision – if ALJ rules in favor of plan, it goes to the Chief ALJ for acceptance or rejection

If rejected, possible “do-over” or Chief ALJ writes own decision

Heads I win, tails you lose!

NOTICE OF DISPUTE

In most instances, ALJ rules in favor of DHCS

Plans may seek judicial review of the final decision in superior court

Judicial review is limited to the administrative record developed before the ALJ

Arguments must be based on the administrative record

LEGAL ARGUMENTS

Breach of contract

• Need to demonstrate that the rates calculated by DHCS are not actuarially sound

• Contract does not define actuarial soundness and does not contain the methodology that must be followed but cites federal and state regulations

• How do we define actuarial soundness ? Federal law (42 C.F.R. section 438.6) State law (22 C.C.R. section 53101.1)Actuarial literature

FEDERAL LAW

Federal Regulation: 42 C.F.R. § 438.6

Sets forth the specific elements the state must apply in setting actuarially sound rates including:

“(i) Base utilization and cost data that are derived from the Medicaid population, ...

(ii) Adjustments made to smooth data and adjustments to account for factors such as medical trend inflation, incomplete data, ... administration …, and utilization;…” (Emphasis added.)

STATE LAW

State Regulations: 22 C.C.R. §§ 53101.1, 53869

Contract cites 22 C.C.R. § 53869, which requires “actuarial methods.”

22 C.C.R. § 53101.1 states that “Actuarial method means any reasonable and adequate method of determining prospective per capita rates … including:a. Experience data to determine the expected costs of services …b. Experience data to determine the expected utilization of each service and other requirements … by the aid category, age and sex of the Medi-Cal members.c. Projected inflation in the costs of the services ...d. Costs of any new services or requirements ...” (Emphasis added.)

ACTUARIAL LITERATURE

2005 Medicaid Practice Note

“Actuarially sound rates … are normally independent of budget issues unless benefits or populations change.

In times of economic downturn, state budgets may exert pressure on rates that must be certified as ‘actuarially sound.’This pressure can build as program expenditures are capped, yet ‘actuarially sound’ rates are usually independently determined. In rate-setting, there is normally a range of reasonable assumptions. Budgetary constraints may influence the selection of certain assumptions toward the low end of the range. However, the actuary would usually be prudent to select assumptions that are individually reasonable and appropriate when deriving the final premium rates.” (Emphasis added.)

PROVIDER LITIGATION

Managed Pharmacy Care v. Sebelius (AB 97)

• Line of cases before AB 97: Useful analog where the use of the budget in managed care rate-setting was obvious because For FFS rates, DHCS was required to consider cost data

rather than state budgetary needs; ANDFor managed care rates, actuarial soundness requires

consideration of “reasonable, appropriate and attainable costs…” rather than states budgetary needs (2005 Medicaid Practice Note).

PROVIDER LITIGATION

Managed Pharmacy Care v. Sebelius (AB 97)

• Ninth Circuit reversed the old line of cases so the analog is no longer available.

• Section 30(A) (“efficiency, economy, and quality of care”) different from actuarial soundness.

• Section 30(A) requires a result.

• Actuarial soundness requires a process.

DIRECT COURT ACTION

Types of action• Writ of Mandamus• Injunction• Declaratory Relief

Circumstances calling for action• Arbitrary rate cuts imposed by

statute (“actuarial equivalent”)• Failure to follow law (federal or

state)• Misinterpreting law (federal or

state)

AMICUS CURIAE

• “Friend of the Court”

• Provider litigation (e.g., AB 97 case)

• Advocate group litigation (e.g., CBAS case)

• A “Voice” in the process