Chapter 18 Quiz

Twenty questions: fifteen multiple-choice and five short-answer. Answers and brief explanations are in the collapsed key at the bottom — try the whole set before opening it.

Multiple choice

  1. Before the ACA, the primary instrument that let an individual health underwriter issue a policy while carving out a known chronic condition was the: - A. Medical-loss-ratio rule - B. Pre-existing condition exclusion - C. Risk-adjustment transfer - D. Aggregate stop-loss attachment

  2. Guaranteed issue means that an ACA-compliant individual or small-group insurer must: - A. Charge every applicant exactly the same premium regardless of age or tobacco use - B. Offer coverage to any eligible applicant regardless of health status - C. Spend a minimum share of premium on medical care - D. Cover every claim with no deductible

  3. Under the ACA's adjusted community rating, an individual-market premium MAY lawfully vary on all of the following EXCEPT: - A. Age (within a capped ratio) - B. Tobacco use (within a capped surcharge) - C. The applicant's diabetes diagnosis - D. Geographic rating area

  4. The reason guaranteed issue and community rating must be enacted together is that: - A. Either one alone can be evaded through the lever the other would have closed - B. They are required by the same section of the McCarran-Ferguson Act - C. Community rating is illegal without a federal mandate - D. Guaranteed issue automatically lowers premiums

  5. The ACA left which market largely free to underwrite on the group's own claims experience? - A. The individual marketplace - B. The small-group market - C. The large-group (large-employer) market - D. Medicaid

  6. A carrier can safely experience-rate a 5,000-life employer group but not a single individual chiefly because of: - A. The medical-loss-ratio rule - B. Credibility — the large group's own experience is statistically reliable - C. Guaranteed issue - D. The individual mandate

  7. In a self-funded health plan: - A. The carrier collects a premium and bears the claims risk - B. The employer pays its employees' claims itself and bears the risk, often using a third-party administrator - C. The employees pay claims directly to providers with no plan involvement - D. The federal government reimburses all claims

  8. Specific (individual) stop-loss protects a self-funded employer against: - A. Total group claims exceeding a budget threshold - B. Any one claimant's claims exceeding a per-person threshold - C. A reduction in the medical-loss ratio - D. The loss of its tax exemption

  9. Aggregate stop-loss is conventionally set at roughly: - A. 50% of expected total claims - B. 100% of last year's premium - C. 125% of expected total claims - D. The single largest claim of the prior year

  10. A laser in a stop-loss contract is:

    • A. A discount for a healthy group
    • B. A higher specific deductible applied to a named, already-known high-cost claimant
    • C. A medical-imaging benefit
    • D. A device that lowers the aggregate attachment

  11. A stop-loss contract written on a "12/12" basis covers claims:

    • A. Incurred in the policy year and paid within the same twelve months
    • B. Incurred over twelve years
    • C. Paid in any twelve-month window regardless of when incurred
    • D. Only after the twelfth month of the policy

  12. Risk adjustment in the ACA markets transfers money:

    • A. From the government to every insurer equally
    • B. From plans that enrolled healthier-than-average members to plans that enrolled sicker-than-average members
    • C. From policyholders to providers
    • D. From large groups to small groups

  13. The single carrier incentive that risk adjustment is designed to remove is the incentive to:

    • A. Document diagnoses thoroughly
    • B. Avoid enrolling sick people
    • C. Raise the medical-loss ratio
    • D. Sell stop-loss

  14. Outside a guaranteed-issue window, an insurer selling Medicare Supplement (Medigap) coverage to an individual generally:

    • A. May medically underwrite the applicant
    • B. Must issue with no health questions
    • C. Is barred from selling the product at all
    • D. Must community-rate exactly as the ACA individual market does

  15. The medical-loss-ratio (MLR) rule functions, in the premium-build vocabulary of Chapter 11, as a:

    • A. Floor on the pure premium
    • B. Cap on the expense-and-profit load (a minimum share of premium spent on care)
    • C. Surcharge for tobacco use
    • D. Reinsurance attachment point

Short answer

  1. In two or three sentences, explain why abolishing individual underwriting did not abolish adverse selection, and name two pieces of "scaffolding" the ACA bolted on to hold up the pool.

  2. Distinguish specific from aggregate stop-loss in one sentence each, by naming the failure mode of a small pool that each one defends against.

  3. A 1,000-life group's own claims run \$520 PMPM; the manual rate is \$460 PMPM; credibility is Z = 0.75. Compute the credibility-blended expected claims PMPM and show your arithmetic.

  4. The chapter argues health status differs from a driving record as a rating factor on two counts. Name both.

  5. Complete and explain the chapter's one-sentence thesis: "Underwriting did not disappear after the ACA; it ______." Name two markets where it went.

Answer key (try the questions first) 1. **B** — The pre-existing condition exclusion was the instrument that denied or carved out coverage for a condition the applicant already had; the ACA's central reform is its abolition for compliant plans. (§18.1) 2. **B** — Guaranteed issue = must *offer* coverage to any eligible applicant regardless of health. (Community rating, a separate reform, governs price.) (§18.2) 3. **C** — Health status / a specific diagnosis is on the *forbidden* side of adjusted community rating; age, tobacco, and area are allowed. (§18.2) 4. **A** — Guaranteed issue without community rating can be defeated by pricing the offer impossibly high; community rating without guaranteed issue can be defeated by declining the sick. You need both clamps. (§18.2) 5. **C** — The large-group market remained largely free to experience-rate; the individual and small-group markets are community-rated. (§18.3) 6. **B** — Credibility (Chapter 10): a large group's own experience is reliable signal, not small-sample noise. (§18.3) 7. **B** — Self-funding inverts the insured model: the employer keeps the money, pays claims itself (usually via a TPA), and bears the risk. (§18.4) 8. **B** — Specific stop-loss caps any *one* claimant's cost to the employer. (§18.4) 9. **C** — Aggregate is conventionally ~125% of expected total claims. (§18.4) 10. **B** — A laser raises the specific deductible on a *named*, already-known catastrophic claimant; sound underwriting (the claim isn't fortuitous), but a trap for the employer who doesn't read it. (§18.4) 11. **A** — "12/12" = claims incurred in the policy year *and* paid within those same twelve months — the tightest, cheapest basis. (§18.4) 12. **B** — Risk adjustment moves money from healthy-pool carriers to sick-pool carriers. (§18.6) 13. **B** — It removes the incentive to *avoid* sick enrollees, which is exactly what guaranteed issue requires. (Note that it *creates* a new incentive — thorough diagnosis documentation, answer A — which is not underwriting and draws scrutiny.) (§18.6) 14. **A** — Outside a guaranteed-issue window, Medigap may generally be medically underwritten. (§18.5) 15. **B** — The MLR rule sets a minimum share of premium spent on care, i.e., a cap on the expense-and-profit load. (§18.6) 16. Abolishing underwriting removed the carrier's *defense* against adverse selection while leaving the buyer's incentive to wait-and-select fully intact; without help, the healthy would skip coverage until sick, the pool would worsen, the community rate would rise, and the death spiral would begin. Scaffolding (any two): the coverage incentive/individual mandate, premium subsidies, limited enrollment windows, risk adjustment, the MLR rule, transitional reinsurance. (§18.2, §18.6) 17. *Specific* defends against a single catastrophic claimant (one giant claim piercing a per-person threshold); *aggregate* defends against many moderate claims accumulating past the whole-group budget. (§18.4) 18. Blended = Z × own + (1 − Z) × manual = 0.75 × \$520 + 0.25 × \$460 = \$390 + \$115 = **\$505 PMPM**. (§18.3) 19. (1) Health status is largely *not within the insured's control*; (2) pricing on it does *not reward any behavior the insured could have chosen* — it simply charges the unlucky more for being unlucky. (§18.7) 20. "…it *moved*." It moved to (any two): large-group experience rating, self-funded stop-loss, Medicare Supplement / supplemental products, and the risk-adjustment/MLR machinery that does the job by formula. (§18.2–§18.6)