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- Elias Makere, FSA, MAAA
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ASOP 5
(INCURRED HEALTH AND DISABILITY CLAIMS)
SECTION 3
(ANALYSIS OF ISSUES AND RECOMMENDED PRACTICES)
Section 3
Analysis of Issues and Recommended Practices
ASOP 5 | §3.1 | INTRODUCTION
ASOP 5 | §3.2 | CONSIDERATIONS FOR ESTIMATING INCURRED CLAIMS
In determining which items to include in the estimation of incurred claims, the actuary should consider items including but not necessarily limited to those described below, and may rely on others as described in sections 3.6 and 3.7.
3.2.1 Health Benefit Plan Provisions and Business Practices
The actuary should consider the health benefit plan provisions and related business practices, including special group contract holder requirements and provider arrangements, which in the actuary’s judgment may materially affect the cost, frequency, and severity of claims. These include, for example, elimination periods, deductibles, preexisting conditions limitations, maximum allowances, and managed-care restrictions.The actuary should make a reasonable effort to understand any changes in plan provisions or business practices made since the last estimate of incurred claims. The actuary should consider how such changes are likely to affect the estimation of claim costs and claim liabilities.
3.2.2 Economic and Other External Influences
The actuary should consider items such as changes in price levels, unemployment levels, medical practice, managed care contracts, cost shifting, provider fee schedule changes, medical procedures, epidemics or catastrophic events, and elective claims processed in recessionary periods or prior to contract termination.3.2.3 Behavior of Claimants
The actuary should consider reasonably available information regarding claimant behavior, such as pent-up demand for new benefits, or impending benefit changes, which may impact incurred claims.3.2.4 Organizational Claims Administration
The actuary should consider items that may affect claims administration practices, such as staffing levels, variable claim processing and investigation time (for example, for complicated claims or claims submitted on paper), computer system changes or downtime, seasonal backlogs of claims submitted, increased electronic submission of claims by providers, governmental influences, and cash flow considerations. The actuary should also be aware that the administration practices of external contracted parties (for example, pharmacy benefit managers and third party administrators) can affect the unpaid claims liability. The actuary should make reasonable efforts to obtain information from appropriate personnel and evaluate whether there have been material changes in operational practices that impact the incurred claim estimate and, if so, make appropriate adjustments.3.2.5 Claim Seasonality
The actuary should understand how seasonality may impact the estimation of incurred claims and make appropriate adjustments. Claim seasonality may be exhibited in the pattern of claims incurral and submission, or in the manner that costs actually emerge within the health benefit plan provisions, such as plans with high deductibles.3.2.6 Credibility
The actuary should consider how the credibility of the data affects the development of incurred claim estimates and refer to ASOP No. 25, Credibility Procedures, for further guidance.3.2.7 Risk Characteristics and Organizational Practices by Block of Business
The actuary should consider how marketing, underwriting, and other business practices can influence the types of risks accepted, and how the pattern of growth or contraction and relative maturity of a block of business can influence incurred claims.3.2.8 Legislative Requirements
The actuary should consider relevant legislative and regulatory changes as they pertain to the estimation of incurred claims. For example, governmental mandates can influence the provision of new benefits; risk characteristics; rating, reserving, and underwriting practices; methods used to estimate incurred claims; or claims processing practices.3.2.9 Carve-Outs
The actuary should consider the pertinent benefits, payment arrangements, and separate reporting of those benefits subject to carve-outs in incurred claims estimates.3.2.10 Special Considerations for Long-Term Products
The actuary should consider the variety of benefits available in long-term products, such as lump-sum, fixed, or variable payments for services; provisions such as cost of living adjustments and inflation protection; payment differences based on institutional or home-based care; social insurance integration; and the criteria for benefit eligibility.ASOP 5 | §3.3 | ANALYSIS OF INCURRED CLAIMS
3.3.1 Unpaid Claims Liability
Using incurral and processing dates as appropriate, the actuary should estimate unpaid claims liabilities for claims incurred as of the valuation date.a. Purpose or Use of the Unpaid Claim Estimate
The actuary should identify the intended purpose or use of the unpaid claim estimate. Potential purposes or uses of unpaid claim estimates include, but are not limited to, establishing liability estimates for external financial reporting, internal management reporting, and various special purpose uses such as appraisal work and scenario analyses. Where multiple purposes or uses are intended, the actuary should consider the potential conflicts arising from those multiple purposes and uses and should consider adjustments to accommodate the multiple purposes to the extent that, in the actuary’s professional judgment, it is appropriate and practical to make such adjustments.b. Plan Provisions
The actuary should review the relevant plan provisions to determine if they create obligations for services or payments after the valuation date (for example, medical benefits that extend beyond the contract period, or long-term disabilities). The actuary should determine if these obligations are part of the current or future period’s liability, or if these obligations make up a separate reserve.c. Data and Reporting
The actuary should consider the relevant reporting systems for processed claims, exposure units, and premium rates, and the various dating methods the systems use (for example, loss recognition, service rendered, reporting, or payment status). The actuary should use professional judgment in estimating the extent to which an adjustment to the reported data is needed, based on the dating methodology.d. Provision for Adverse Deviation
Recognizing that the estimation of liabilities for incurred but unpaid health and disability claims involves an estimate of the true obligations that will emerge, the actuary should consider what explicit provision for adverse deviation, if any, might be appropriately included. If a provision for adverse deviation is included, the unpaid claims liability should be appropriate, in the actuary’s judgment, for the intended use. For example, in certain situations, a provision for moderately adverse deviation may be appropriate. In other situations, the appropriate provision for adverse deviation may vary as the level of uncertainty varies, for example, based on credibility of the data or stability of payment patterns.e. Time Value of Money
The actuary should consider if the time value of money will have a material effect in the estimation of incurred claims. The use of any interest discounts depends on the purpose for which incurred claims are being estimated and should reflect any applicable accounting standards.f. Consistency of Assumptions and Methodology
The actuary should use assumptions and methodology consistent with those used for estimating related liabilities and reserves, such as claim settlement expense reserves, unless it would be inappropriate to do so.3.3.2 Categories of Incurred Claims
The actuary should consider separate estimation of incurred claims for each category that may exhibit different lag patterns, costs per exposure unit, trends, or exposure unit growth rates. If separate estimation is performed, the actuary should define categories of incurred claims in a manner that is appropriate to the available data and to estimation method(s) being used. Categories may be defined broadly, such as fee-for-service claims paid to health care providers, capitation payments to providers, or disability income paid to insureds. Categories might be further refined to more accurately analyze or project costs and utilization data, for example, by method of payment (such as electronic vs. manual), type of contract, type of service, geographic area, premium rating method, demographic factors, distribution method, and provider risk-sharing arrangements.3.3.3 Reinsurance Arrangements
The actuary should consider the effect of reinsurance arrangements in estimating the incurred claims. In particular, the actuary should consider the effect of different lag patterns due to the extended reporting or recovery periods often associated with certain types of reinsurance.3.3.4 Large Claims
The actuary should consider the effect of large claims, as defined by the actuary using professional judgment. Specifically, large claims can distort claim payment patterns or historical per-unit claim levels that the actuary considers when estimating incurred claims. The actuary should understand how large claims, if any, impact the particular method being employed to estimate incurred claims and make appropriate adjustments. For example, incurred claim estimates may be overstated if completion factors are applied to processed claims levels that include an unusually high number or amount of large claims.3.3.5 Coordination of Benefits (COB), Subrogation, and Government Programs
The actuary should make a reasonable effort to understand the relevant organizational practices and regulatory requirements related to COB, subrogation, and government programs (state or federal). The actuary should consider how these items are reflected in the data (for example, negative claims or income) and make appropriate adjustments for COB, subrogation, and payments or recoveries resulting from government programs.3.3.6 Provider Contractual Arrangements
The actuary should consider the relevant contractual arrangements with providers and any changes in such arrangements. These arrangements can affect trends, claim cost levels, and claims processing. The actuary should consider any relevant variation in these arrangements by region or product, and any provider contractual arrangements that do not provide for reimbursement through the claim payment process. Some examples of these latter arrangements include the following:b. amounts initially withheld from provider payments, which may later become payable based upon contractually defined experience outcomes;
c. reimbursement of services based on the expected cost for an episode of care, in which more services are at risk than would normally be the case for a given fee-for-service event;
d. bonuses or other contractual incentive payments based on financial results or achievement of contractually defined quality metrics; and
e. stop-loss contracts which limit the provider’s risk for certain high cost, infrequent services.
Certain contractual arrangements may also result in amounts due from providers (for example, risk sharing receivables, pharmacy rebates) based on financial results or other experience metrics. The actuary should consider the impact of unpaid medical costs resulting from failed providers bearing a material portion of the risk or losses incurred by providers deemed to be related parties.
ASOP 5 | §3.4 | METHODS USED FOR ESTIMATING INCURRED CLAIMS
Because no single method is necessarily better in all cases, the actuary should consider the use of more than one method to assess the reasonableness of results. The actuary should evaluate the method(s) chosen and the results obtained in light of the purpose, constraints, and scope of the assignment. The actuary should consider the reasonableness of the assumptions underlying each method used, and should consider the sensitivity of the incurred claim estimates to the use of reasonable alternative assumptions. The actuary should also consider the effect of trends both in previous periods and the current period for estimating incurred claims. The actuary should choose the outcome that, in the actuary’s professional judgment, is the most reasonable provision for incurred claims, whether from a single method or a combination of several methods. Sections 3.4.1–3.4.3 below discuss some of the more common methods for estimating incurred claims.
3.4.1 Development Method
This method is appropriate and widely used for shortterm benefits with claims subject to processing and payment (i.e. not capitation) and may also be appropriate for claims associated with long-term products. The actuary should consider using metrics to assess the reasonableness of results for periods where historical development patterns are less credible. For example, the actuary might evaluate the ratio of estimated incurred claims to earned premiums or exposure units for reasonableness.3.4.2 Projection Methods
Projection methods may be used to estimate incurred claims when the incidence of claims or volume of available data is limited or not sufficiently credible for other estimation methods, to supplement the development method for the most recent incurral months, or as a reasonableness check for other estimation methods. This method starts with the development of a historical claim metric (for example, cost per claim, cost per member per month, loss ratio) and then multiplies this value times the appropriate base for the period being estimated (for example, claim volume, member exposure units, earned premium, respectively.) The actuary may adjust the historical claim metric when appropriate, for example as a result of trend. The actuary may use utilization metrics (for example, authorized days per thousand members) to improve the projected cost levels for recent months, and to adjust for the impact of catastrophic claims. The actuary may also consider using risk adjustment techniques or other indicators such as pharmacy claims to help project shifts in the morbidity of the block.3.4.3 Tabular Method
The tabular method is generally used for long-term products for which a reported claim event triggers an expected series of payments. This method applies factors to items such as individual claims, waived rates, or other volume measures based on previous experience in order to estimate the unpaid claims liability for known claims. The factors are based on items such as the age and gender of the insured, elimination period, cause of claim, length of disablement on the valuation date, and remaining benefit period, as appropriate to the coverage.When using the tabular method, the actuary should take into account specified benefit changes throughout the lifetime of the claim and the assumptions used to develop the factors, and should select the appropriate factors to estimate the unpaid claims liability given the risk characteristics of the policy.
The actuary should recognize the specific impacts that recovery, mortality, and government offsets may have on tabular factors.
The tabular method is not appropriate by itself for estimating unreported claims.
When the tabular method is used, the actuary should consider whether an additional adjustment is necessary to reflect unreported incurred claims.
Greater availability of data and advances in computing power have resulted in alternative approaches that the actuary may consider to estimate incurred claims. These include (but are not necessarily limited to) regression, time series, and other statistical and econometric models, as well as different approaches to categorizing and aggregating data (for example, summarizing by weekly data cells or estimating the cost of reported claims separately from incurred but not reported claims.)
ASOP 5 | §3.5 | FOLLOW-UP STUDIES
b. perform studies in the aggregate or for pertinent blocks of business; and
c. utilize the results, if appropriate, in estimating incurred claims.
ASOP 5 | §3.6 | RELIANCE ON DATA OR OTHER INFORMATION SUPPLIED BY OTHERS
ASOP 5 | §3.7 | RELIANCE ON ASSUMPTIONS AND METHODS SELECTED BY OTHERS
ASOP 5 | §3.8 | DOCUMENTATION
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