Chapter 18 Exercises

Work these the way a benefits underwriter works a renewal: first ask which market am I in — does the law want my judgment or has it replaced it?, then ask what is the adverse-selection threat here, and what contains it? Items marked with a dagger (†) have worked solutions in Appendix: Answers to Selected Exercises; the rest are for discussion or self-test. Section references like (§18.4) point you back to the relevant part of the chapter.

A. Recall and definitions

  1. † Define guaranteed issue and community rating, and state in one sentence why the ACA had to enact both together rather than one without the other. (§18.2)
  2. What is a pre-existing condition exclusion, and what honest anti-selection purpose did it serve before the ACA abolished it for compliant plans? (§18.1)
  3. List the four moves a pre-ACA individual health underwriter could make on an applicant with a serious chronic condition. (§18.1)
  4. † Distinguish specific stop-loss from aggregate stop-loss. Which failure mode of a small, self-funded pool does each one defend against? (§18.4)
  5. Define stop-loss insurance and explain why it is sold to the employer and not to the employees. (§18.4)
  6. What is risk adjustment, and what single carrier incentive does it remove? (§18.6)
  7. Name the factors an ACA adjusted-community-rated premium may vary on, and three it may not. (§18.2)
  8. † Explain what the medical-loss-ratio (MLR) rule caps, using the premium build-up vocabulary of Chapter 11. (§18.6)
  9. In one sentence each, distinguish a fully insured plan from a self-funded plan in terms of who bears the risk. (§18.4)

B. The adverse-selection logic

  1. † The chapter argues that abolishing underwriting does not abolish adverse selection. Explain the mechanism, then list the four pieces of ACA "scaffolding" erected to hold up a pool that can no longer underwrite itself. (§18.2)
  2. A friend says: "The ACA solved adverse selection." Correct them precisely. What did the ACA actually do to adverse selection, and who now manages it? (§18.2, §18.6)
  3. Explain why a large employer group is naturally closer to a representative pool than the individual market is. Why does this justify treating the two markets differently? (§18.3)
  4. † Walk through, step by step, what would happen to a guaranteed-issue, community-rated individual market if the enrollment windows were abolished and people could buy coverage the afternoon they were diagnosed and drop it the afternoon they recovered. Name the Chapter 1 concept. (§18.2)

C. Underwrite this submission

  1. † Underwrite the stop-loss. A 600-life self-funded employer applies for stop-loss. Its claims have run about \$520 per member per month (PMPM) and trend looks stable. The census discloses one employee midway through treatment for a condition expected to cost roughly \$1,400,000 over the policy year. (a) Would you set a specific attachment, an aggregate attachment, or both, and why? (b) What would you do about the known \$1,400,000 claimant — and what is that technique called? (c) Name one thing you must put in plain language in the quote so the employer is not surprised at claim time. (§18.4)
  2. A 45-life employer asks to be experience-rated on its own claims because "we had a great year." Explain, using the right Chapter 10 concept, why you would decline to fully experience-rate this group and what you would do instead. (§18.3, Ch. 10)
  3. † Which market? For each applicant, state whether the law generally permits medical underwriting or forbids it, and name the governing rule: (a) a 30-year-old buying an individual ACA marketplace plan; (b) a 68-year-old applying for a Medigap plan eight years after first eligibility, in good health; (c) a 2,000-life employer renewing its insured group medical plan; (d) a 40-year-old buying an individual critical-illness policy. (§18.2, §18.3, §18.5)
  4. A 1,200-life group's own claims experience is \$500 PMPM; the manual rate for its class and area is \$440 PMPM; you assign credibility Z = 0.65. Compute the credibility-blended expected claims PMPM, and say in one sentence why you did not simply use the group's own \$500. (§18.3)

D. Price this risk

  1. † Build the blend. A group's own experience is \$610 PMPM; the book/manual rate is \$540 PMPM; credibility is Z = 0.80. (a) Compute the blended expected claims PMPM. (b) If the carrier adds a 12% load over expected claims for administration, margin, and large-claim pooling, what is the indicated premium PMPM? (c) Why does the carrier blend toward the manual rate at all instead of charging the group's own number? (§18.3, Ch. 10–11)
  2. An aggregate stop-loss attachment is conventionally set at about 125% of expected total claims. A 600-life group has expected annual claims of (illustratively) \$3,600,000. (a) At what total-claims level does aggregate stop-loss begin to pay? (b) In plain terms, what kind of bad year does this protect the employer against — and what kind does it not? (§18.4)
  3. † A self-funded employer is choosing between a \$150,000 and a \$300,000 specific attachment. In plain language (no real numbers needed), explain the trade-off: what happens to the stop-loss premium, and what happens to the employer's retained risk, as the attachment rises? When does a very low attachment defeat the purpose of self-funding? (§18.4)

E. Find the red flag

  1. † Read the renewal. A self-funded employer's stop-loss renewal arrives. The specific attachment is still listed as \$200,000 "per covered person," but buried in the schedule is a line setting one named employee's attachment at \$1,000,000. (a) What is this device called? (b) Is it improper underwriting? (c) What is the danger to the employer, and what could the employer have bought to prevent it? (§18.4)
  2. A stop-loss contract is written on a "12/12" basis. The employer switched to this carrier from a prior stop-loss carrier mid-year. What coverage gap should you, the broker, immediately worry about, and what two coverage features address it? (§18.4)
  3. † A health insurer in a risk-adjusted market suddenly devotes large resources to "improving diagnosis coding completeness" across its enrolled population. Explain why this is a rational response to risk adjustment, why it is not the same as underwriting judgment, and why it draws regulatory scrutiny. (§18.6)
  4. An individual-market plan quietly designs its drug formulary and provider network to be unattractive to people with expensive chronic conditions. Which ACA goal is this maneuver attacking, and which §18.6 mechanism is supposed to remove the incentive for it? (§18.2, §18.6)

F. Memos and communication

  1. † Write the recommendation. In one short paragraph to the CFO of a healthy 250-life employer, recommend either remaining fully insured or moving to self-funding with stop-loss. State the single biggest upside, the single biggest risk, and the two stop-loss features you would require. Keep it plain enough for a non-insurance executive. (§18.4)
  2. Draft three sentences you would say to a small-business owner (35 employees) who is angry that they "can't get experience-rated like the big companies." Explain the adverse-selection and credibility reasons honestly, without condescension. (§18.2, §18.3)
  3. Write a two-sentence plain-language disclosure for a self-funded employer's quote, explaining a laser on a known high-cost claimant so there is no surprise at claim time. (§18.4)

G. Ethics and the fairness tension

  1. † The chapter calls health "the hardest case" for the actuarial-fairness-vs-social-fairness tension. State the strongest version of each side — actuarial fairness and social fairness — in two or three sentences each, without tipping your hand toward either. (§18.7)
  2. Pre-ACA medical underwriting was, by the narrow logic of risk selection, good underwriting. Explain how a profitable, actuarially sound selection system can simultaneously be a social failure. (§18.1, §18.7)
  3. The chapter argues health status differs from a driving record as a rating factor on two counts. Name both, and explain why they made society treat health underwriting differently from auto underwriting — even though health is, if anything, the stronger predictor of its own claims. (§18.7)
  4. Is it unfair discrimination (in the Chapter 4 sense) for an insurer to medically underwrite a Medigap applicant outside their guaranteed-issue window? Explain why or why not, and where the genuine ethical debate actually lies. (§18.5, §18.7, Ch. 4)

H. The Underwriting File and synthesis

  1. † The Harbor Steel health adjacency. Harbor Steel has about 180 employees. (a) Is its group medical coverage, if insured, community-rated or large-group experience-rated, and why? (b) Why is self-funding with stop-loss a real option a competent benefits broker would put on the table for a firm this size? (c) State, in one sentence, why none of this changes the property/casualty underwriting decision your desk is building. (§18.3, §18.4, The Underwriting File)
  2. Connect three chapters: explain how the self-insured retention idea (Chapter 12), the excess-of- loss reinsurance idea (Chapter 27, previewed), and stop-loss (this chapter) are the same structural idea wearing three different names. (§18.4, Ch. 12)
  3. A colleague claims "the ACA abolished medical underwriting, so there's no career left in health underwriting." Using at least three markets from this chapter, refute the claim. (§18.3, §18.4, §18.5)
  4. † Synthesize the whole chapter in a short paragraph around one sentence: "Underwriting did not disappear after the ACA; it moved." Where did it move, and what stayed behind in the individual market to do its old job? (§18.2–§18.6)