SEU Sales Governance and Administration Summary

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CHAPTER 6
Sales, Governance,
and Administration
LEARNING OBJECTIVES
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Describe the basic structure of governance and management in payer organizations.
Identify the basic elements of the internal operations of payer organizations:
•• Information technology
•• Marketing and sales, including insurance exchanges
•• Underwriting and premium rate development
•• Eligibility, enrollment, and billing
•• Claims and benefits administration
•• Member services, including appeal rights
•• Statutory accounting and statutory net worth
•• Financial management
Be familiar with the common potential problems and challenges faced by payers, including
those specific to provider-owned or sponsored payer organizations.
Introduction
S
ales, governance, and administration
(SG&A) is a financial term commonly
applied to the various ongoing managerial and operational functions and processes
performed by a payer organization. The meaning of sales includes sales, marketing, and
public relations. The meaning of governance
includes the board of directors and the organization’s officers and managers.* The meaning
of administration broadly applies to the payer’s
processes and operations, including network
and medical management. This is also referred
to as operations.
* More accurately, governance refers to the board of directors, and management to the organization’s officers and managers, and there are distinct differences. But there is no need for that distinction from a purely financial point of view,
which is why the acronym isn’t “SGM&A.”
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Chapter 6 Sales, Governance, and Administration
For insured products, the Affordable Care
Act (ACA) restricts the percentage of premiums collected by a plan that can be used for
SG&A and profit or surplus (for a nonprofit
plan). The medical loss ratio (MLR) limit is
80% or higher for products in the individual
and small group markets, and 85% for the large
group market. In other words, for the individual and small group markets, at least 80% of
the premium must be used to pay benefits for
medical services, and 85% must be used for
benefits in the large group market. Self-funded
plans do not pay premiums and are not subject
to this requirement.
MLR limits therefore mean that all activities and functions performed by a payer to sell
and manage its insured business and for profit
(or surplus contribution for nonprofit plans)
must come out of the remaining 20% or 15%
respectively. The only activities performed by a
payer that do not count against the MLR limitation are for wellness and prevention, and for
quality management (QM). If the MLR is lower
than the limit, the plan must rebate the money
back to the customer. MLR limits are addressed
further in a later section of the chapter.
Administrative services are often seen as a
middleman* and viewed as adding little value.
Indeed, during the mid-1990s, the term middleman was wielded as an insult, with many
providers and consumers alike believing that
administrative services were largely a waste of
money that needlessly interfered with medical
care. Some providers at that time attempted to
take over administrative functions themselves
to cut out the middleman—and nearly all of
those attempts ended in financial disaster.
Any providers that succeeded found that they
had to do all the same administrative functions as any payer did, and their administrative costs were also about the same or higher.
The key point is that even if one considers
administrative services to be a waste of money,
no health plan can operate without them, and
for many processes no regulator would allow a
health plan to operate at all.
Not all administrative or operational functions are discussed here; rather, only the key
functions are included. Examples of important functions not addressed in this chapter
include:
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Human resources
Legal and regulatory support
Compliance
Facility management
Mail room management
Purchasing
Internal distribution
The topics that are covered will not
strictly follow the lettering sequence of
SG&A. Instead it makes more sense to follow
a different order, beginning with the “G” as
we look at the following major administrative
functional areas:
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Governance and management
Information technology (IT)
Marketing, sales, and distribution
Actuarial services
Underwriting and premium rate
development
Eligibility, enrollment, and billing
Claims and benefits administration
Member services and appeals of coverage
denials
Financial management
Once these functions have been described
at a high level, the chapter closes with a discussion of the most common operational
problems that payers, particularly small or
rapidly growing payers, may face. That discussion looks at common problems that can affect
any type of payer, followed by a discussion of
* The author recognizes that an element in the word middleman is gender specific, but it is the commonly used term so
it is used here as well.
Governance and Management
common problems faced by provider-owned
or sponsored payer organizations.
A note of caution about some of the content of this chapter: the ACA has had and continues to have considerable impact on many
of the topics in this chapter, and its greatest
impact is on marketing and sales, actuarial
services, and underwriting. These same areas
have also been subject to political forces that
continues up to (and no doubt past) the time
of publication. For that reason, descriptions
related to the ACA may have changed after
publication, so the reader should always seek
up-to-date information on those topics.
Finally, this is the longest chapter in this
text. The topics covered are essential to the
operations of health insurers and payers, but
there is no denying that most of us also find
discussion of them to be painfully boring. For
that reason, the reader may find it helpful to
review the chapter in sections, not all at once.
Note too that each topic can only be touched
upon, not described with any level of detail or
completeness.
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Governance and
Management
Governance and management are not the
same thing, although they are related. Governance encompasses the overall policies, rules,
goals or mission, and responsibilities for the
direction of the organization and oversight
of the chief executive officer (CEO). But governance is not responsible for the day-to-day
running of the organization, which is the role
of management.
The governance and management of a
payer organization are influenced by its type,
its structure (or that of its parent company),
requirements under state or federal laws, and
many other variables. In some cases, laws and
regulations may only apply to certain product
lines such as health maintenance organizations
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(HMOs) but not to other product lines such as
preferred provider organizations (PPOs) even
though both are offered by the same company.
These variables can affect the governance, and
the functions and responsibilities of key officers and managers as well as some committees,
but at a high level, the overall needs for governance and management are similar among
payer organizations and plan types.
Please note: Any descriptions or statements regarding governance responsibilities in
this section (and chapter) represent an overview of typical industry standard practices and
are for the purposes of learning only, and they
should not be relied upon from a legal standpoint. Reliance can only be placed on the advice
of counsel from a knowledgeable attorney.
Board of Directors
Most, but not all, payers have a board of directors. Numerous factors influence the composition and function of the board, including
various state and federal laws and regulations
affecting board makeup in relation to ownership status, profit versus nonprofit status, and
so forth.
Some health plans do not necessarily have
their own boards. For example, rental PPOs that
do not need a state license; or PPOs, HMOs, or
other types of plans created and operated solely
to serve a single company’s employees. Nevertheless, even some health plans that are not
required to have a board often do have one.
Although most payers have boards of
directors, not all those boards are fully independent. This is especially true for local or
regional payers that are part of large national
companies. For example, HMOs are typically
required by law to have a local board of directors, but it is not uncommon for a company to
use the same corporate officers as the board
for all of its subsidiary HMOs. Although this
type of board meets the required legal function and obligation, control of the actual governance of the HMO is exerted by the parent
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Chapter 6 Sales, Governance, and Administration
company rather than through a direct relationship between the HMO executives and its local
board. These types of boards are not the focus
of this section, however.
unless the providers also share a meaningful
degree of financial risk and expenses.
Board Composition
The function of a payer board of directors is
governance—that is, overseeing the payer’s
activities. Final approval of corporate bylaws
rests with the board. These bylaws determine
the basic structure of authority and responsibility, both that of the plan officers and of the
board itself.
As part of their legal responsibilities,
members of the board typically review certain
reports and sign particular documents. For
example, a board officer may be required to
sign the quarterly financial report submitted to
a state regulatory agency, and the board chairperson may be required to sign any acquisition
documents. Related to this are requirements
for document retention and access.
Because significant liability issues surround the board of directors, each board member must undertake his or her duties with care
and diligence. Plans also usually buy a special
type of insurance to financially protect board
directors and officers from acts of commission
(for something they allegedly did) and omission (for something they allegedly did not do).
In freestanding plans, the board also has
responsibility for hiring the CEO of the plan,
monitoring the CEO’s performance, and determining the CEO’s compensation. Many boards
may oversee the compensation for all senior
executives in the plan.
The composition of the board of directors
varies depending on whether the plan is a forprofit entity, in which case the owners’ or shareholders’ representatives may hold all the seats,
or a nonprofit organization, in which case community representation will be broader and the
board cannot be dominated by any special interest. Some nonprofit health plans are organized
as cooperatives (i.e., a legal entity in which the
members, or enrollees, are as a group in control
of the entity); in this arrangement, the board
members are all members of the plan. The same
is true for the few remaining consumer-owned
and -operated plans created under the ACA,
which are also subject to some other unique
requirements. Mutual insurers are similar in
theory because they are owned by their policy
holders, but their boards more closely resemble
the boards of for-profit companies.
Board members generally should be truly
independent and have no potential conflicts of
interest, or when a potential conflict of interest
arises, recuse themselves (meaning abstaining
from any discussion or vote). Depending on
the situation, local events, company bylaws,
and laws and regulations (for example, the tax
code for nonprofit health plans) may dictate
whether the board members come from outside the health plan and whether health plan
executives hold any board seats.
Provider-sponsored nonprofit plans may
restrict seats held by providers to no more than
20% of the board’s membership for example.
A provider-sponsored for-profit plan board of
directors will usually be composed of participating providers, but they must take special
precautions to avoid antitrust problems. For
example, independent providers on the board
of a provider-owned plan cannot set or influence how or how much providers are paid
Board Responsibilities
Typical Board Committees
Most companies have certain board committees that focus on nonmedical issues relevant
to running a business. Most states also require
HMO boards, and sometimes boards of PPOs,
to assume final responsibility for the plan’s
QM program, even though the board does not
actively participate in running it.
Examples of typical board committees
include the following:
Governance and Management
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Executive Committee: Provided with
board-level decision making authority for
issues that must be addressed before the
full board can meet.
Finance and/or Audit Committee: Responsible for direct oversight of issues relating
to financial statements and relationships
with the outside auditing firm. Reviews
financial statistics, approves budgets,
sets and approves spending authority,
reviews the annual audit, and reviews and
approves outside funding sources.
Compensation Committee: Responsible for
determining the appropriate compensation and incentives to key executives. The
board must also approve and issue stock
options to plan officers, board members,
and large institutional investors.
Quality Management Committee: Responsible for oversight of the QM program of
the plan through regular reports on findings and activities. This board committee,
however, does not participate in the plan’s
internal credentialing, QM, or peer review
committees.
Corporate Compliance Committee: Responsible for oversight of the corporate compliance requirements under the Health
Insurance Portability and Accountability
Act (HIPAA), the ACA, the Sarbanes-Oxley
Act, and Medicare and/or Medicaid requirements for payers with those plans.
Management
Management refers to individuals with the
authority and responsibility to operate the
plan. The roles and titles of the key managers
in any organization will vary depending on the
type of organization, its legal status, its line
of business, its complexity, and whether it is
a freestanding entity or a satellite of another
operation, among other factors. There is little
specific consistency from health plan to health
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plan, but there is relative consistency in the
overall duties described here.
Executive Director/Chief
Executive Officer
Most plans have at least one key manager. Sometimes called an executive director, a CEO, a general manager, or a plan manager, this individual
is usually responsible for the overall operations
of the plan. This is not always the case, however.
Many large national or regional payer companies use vertical reporting, in which managers
of the various functions such as marketing or
network management report to regional managers, not to a plan’s executive director.
In freestanding and in traditional nonprofit payer companies, the CEO is responsible
for all areas. The other officers and key managers report to the CEO, who in turn reports to
the board of directors (or to a regional manager
in the case of national companies). The executive director also has responsibility for general
administrative operations and public relations.
Medical Director/Chief
Medical Officer
Every health insurer and managed care plan
will have a medical director, and often more
than one. Larger plans typically designate a
chief medical officer (CMO*) to whom the
other medical directors report. The medical
director usually has responsibility for QM,
utilization management (UM), and medical
policy. In some plans, a medical director is
also responsible for provider management and
provider recruiting, which may or may not
include provider facilities such as hospitals.
In addition, medical directors are involved in
physician-specific activities such as provider
credentialing, peer review, and benefits coverage denials. Under the ACA and in most states,
a medical director (one who was not involved
* Not to be confused with a chief marketing officer, who also may be referred to as a CMO.
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Chapter 6 Sales, Governance, and Administration
in the initial denial decision) must review
appeals of denials of coverage as well.
responsibility of the CEO, but a COO/president may assume this role as well.
Vice President of Network
Management
Marketing Director/Chief
Marketing Officer
In large health plans and health insurance companies, it is common for provider relations and
network management to be the responsibility of
an officer other than the medical director. This
officer may be a physician, but usually is not.
Larger organizations also separate the management and recruiting of professionals from these
responsibilities in facilities. Network management is responsible for the credentialing of
those providers (see Chapter 3), but a medical
director and a credentialing committee, which
is a type of peer review committee, are typically responsible for any final deliberations or
reviews of provider credentials for professionals. Negotiating and management agreements
with rental networks (Chapter 3) also falls to
this person.
The responsibility for sales and marketing plan
belongs to the marketing director or chief
marketing officer (CMO*). These duties generally include oversight of marketing representatives, advertising, client relations, enrollment
forecasting, and public relations. In most payers, responsibility for marketing is typically
separated from sales.
Finance Director/Chief Financial
Officer
In freestanding plans or large operations it is
common to have a finance director or chief
financial officer (CFO). That individual is generally responsible for all financial and accounting operations, including fiscal reporting,
budget preparation, and internal audit.
Operations Director/Chief
Operating Officer
Large and sometimes moderate-sized payers
often have an operations director or chief operating officer (COO). In very large companies,
this position may carry the title of president.
The person in this position usually oversees
overall operations of the organization, but usually not finance, board and investor relations,
and external relations. Strategy is usually the
Director of Information
Technology Services/Chief
Information Officer
Information technology services (IT, or less
commonly IS) are so complex that all health
plans have an officer dedicated to overseeing
this function. Typical responsibilities of the
director of information services or chief information officer (CIO) include oversight of the
data center (the physical computing equipment
itself), all software and system applications,
personal computer networks, telecommunications, Internet portals, and outsourced services.
In some cases, plans outsource this function to
an independent company.
Chief Underwriting Officer
The chief underwriter is responsible for oversight of actuarial services, which may be provided by in-house actuaries or by external
actuarial firms, and for underwriting and generating premium rates. In some payers, actuarial
services are part of finance, not underwriting.
Corporate Compliance Officer
Health plans have specific corporate compliance requirements under many different laws
* See previous footnote about CMO also sometimes referring to the Chief Medical Officer.
Information Technology
and regulations. Some of these requirements
include appointment of a specific individual
who is responsible for ensuring that the organization is in compliance. One corporate compliance officer may be able to fulfill all these
responsibilities, but larger organizations may
need separate compliance officers for each; for
example, there may be different compliance
officers for financial matters and for oversight
of privacy and security requirements.
Management Committees
The types of operational or corporate committees may vary from one organization to the
next. Some may be standing committees that
meet on a regular basis for specific purposes,
whereas others are ad hoc committees that are
created to meet a specific need and then dissolved. Each functional area of a payer organization is likely to have multiple committees,
and cross-functional team committees are
commonly encountered as well.
In contrast, some committees specifically
related to medical management (described in
Chapters 3 and 5) and to appeals of coverage
denials are similar from plan to plan. The first
four of the following medical management
committees are found in most health plans,
and the remaining two are found in many
plans but are not as common:
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QM committee
Credentialing committee
Peer review committee
Pharmacy and therapeutics committee
Medical advisory committee
Utilization review/care management
committee
Information Technology
The one operational department or function
that affects all other is the payer’s IT system
that includes:
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The computer mainframe hardware, its
environment, and its related devices
Desktop stations, and company personal
computers and devices
Software and supporting systems used on
the devices
Data storage and retrieval systems
Data and telecommunications systems,
including the main “switch,”* and devices
that interface with it both locally and
remotely
Security, privacy, protection from electronic threats, and disaster recovery
In other words, IT provides the hardware
and software to support the organization; to
collect, store, and transmit data; to carry out
operational processes; to analyze data and
information; and to communicate internally
and externally via voice and electronic data
interchange. The IT system is the backbone of
the payer’s operations. Nearly all the activities
performed by a payer depend on computer
hardware and software. If this information
system is not working efficiently and properly,
neither is the payer.
The core of most payers’ IT system is a
mainframe system (sometimes more than one)
used to handle high-volume day-to-day operations such as member enrollment and claims.
Mainframe systems are usually licensed from a
commercial vendor, as is the software used on it,
and they typically contain multiple modules for
performing different functions. Payers also often
license different software modules to perform
specific functions and that are compatible with
the mainframe system. Examples of such types
of separate program modules could include general ledger programs, medical management, and
provider contract and database management.
Some large plans program their own mainframe
systems, and even licensed modules are often
heavily modified to suit plan requirements.
The IT system also includes an internal network that supports electronic communication
* The term “switch” is a charming holdover from when telephone systems were routed through a physical switchboard.
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Chapter 6 Sales, Governance, and Administration
within the organization, Internet and e-commerce capabilities for communication with
the outside world, and telecommunications
systems. In addition, it generally includes private communications systems for business-tobusiness electronic interchange, data storage,
and analysis systems. IT supports all remaining
work-related technology used by the organization, including personal computers and mobile
devices, and all software licensed by the company. The IT department is also responsible for
data security, and for disaster recovery.
While a payer’s ability to conduct business
and communicate with members, providers,
and employers depends on IT, a surprising
amount of paper is still used in the business
of health care, although it continues to be
replaced by electronic forms of information
storage and transmission. The IT function
often manages this stream of data as well using
imaging, optical character recognition, and
off-site physical storage.
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Administrative
Simplification Under
the Health Insurance
Portability and
Accountability Act
Before going on to describe the major administrative and operational functions of a payer
organization, it is worth looking at the impact
of HIPAA. Although HIPAA was initially
drafted as a means of allowing individuals
to keep their health insurance under certain circumstances, its biggest impact has
come from its Administrative Simplification
requirements. HIPAA requires all “covered
entities,” including payers, providers, and their
business associates,* to comply with periodically updated standards in the following areas,
all of which are related to IT and affect many of
the other core payer processes as well:
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Code sets
Electronic transactions
Electronic funds transfers (EFTs)
Identifiers
Privacy
Security
Standardized Code Sets
Standardized code sets were described in
Chapter 4 because they all have a direct impact
on provider payment, though they are not
exclusively used for that purpose. The reader
may want to go back and review that section,
including the mandatory standardized codes
sets listed in Table 4.1 and non-mandatory
standardized code sets listed in Table 4.2.
Transaction Standards
Prior to HIPAA, each payer had its own
requirements for common types of electronic
transactions such as submitting electronic
claims. HIPAA mandated that all covered entities use the same standardized transactions.
The HIPAA requirements apply only to a subset of business transactions; for example, they
do not apply to medical records or communications between providers.
Technical Standards for
Transactions Under HIPAA
HIPAA requires certain specific organizations to maintain and periodically update the
transaction standards. Transactions other than
pharmacy claims are subject to the X12 (sometimes referred to as X12N) standards developed by the American National Standards
* Business associates are companies working for payers or providers that have access to the medical and/or claims data
or any personal information about patients or members. HIPAA’s administrative simplification requirements do not
apply to employer groups or subscribers either.
Administrative Simplification Under the Health Insurance Portability and Accountability Act
Institute (ANSI). For pharmacy claims, the
designated standards are those of the National
Council for Prescription Drug Programs
(NCPDP). The ANSI X12 standard transactions are listed in TABLE 6.1.
Transaction Implementation
Policy Requirements Under
the ACA
Electronic transactions standards are highly
technical, and they support a degree of flexibility regarding how certain data fields are
defined and used. HIPAA set requirements for
the use of electronic transaction standards but
did not specify how those standards were to be
implemented. Payers did all not use the same
approach, which created incompatibilities
and reduced the potential for administrative
savings.
The ACA amended HIPAA to address this
inconsistency and directed the U.S. Department of Health and Human Services (DHHS)
to develop implementation standards and prohibit payers from creating their own. At the
time of this text’s publication, most had been
created, and the rest will likely be instituted
over the years. Like the code sets and transaction standards, implementation standards are
designed to be periodically updated.
Electronic Funds Transfers
HIPAA requires payers to use EFTs if a provider requests it. HIPAA does not require a
provider to accept EFTs however. A payer can
make the use of EFTs a condition of participation in its network, which Medicare does for its
traditional program. The standards for EFTs
are set by the banking industry, not HIPAA.
TABLE 6.1 Electronic Transaction Standards Required Under HIPAA
Type of Transaction
ANSI X12 Transaction Standard
Eligibility for health plan benefits
270—Request
271—Response
Health claim status
276—Request
277—Response
Electronic funds transfer and remittance advice
835
Health claims or equivalent encounter information;
includes coordination of benefits (COB) information
837p—Professional
837i—Institutional
837d—Dental
Health plan enrollment/disenrollment
834
Health plan premium payments
820
Referral certification/authorization
278—Request and Response
Health claims attachments
275
Data from Federal Register for 45 CFR Part 162.
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Chapter 6 Sales, Governance, and Administration
National Identifiers
HIPAA mandates the use of standardized
identifiers. For providers, it is called the
National Provider Identifier (NPI). The NPI
replaced other provider identifiers used by
private payers, Medicare and Medicaid. Some
provider identifiers were not affected though,
such as the taxpayer identifying number, state-­
issued medical or provider license numbers,
and the Drug Enforcement Administration
(DEA) number for providers who prescribe
or administer prescription drugs. The existing
employer identification number (EIN) that is
used for tax purposes is used to meet HIPAA’s
employer identifier requirement.
The NPI is a 10-digit number that is
unique and never ending, meaning that once
assigned an NPI, the provider will use that
identifier for all transactions. This works
reasonably well for hospitals and facilities,
though health systems can have different
NPI numbers for different units. For physicians however, their assigned NPI may not
always be the one used to bill for professional
services. For example, a physician may practice on some days for a clinic that bills under
its own NPI, and on other days work for a
group that bills under the group’s NPI. There
are many other possible ways that physician
services may be billed that affect what NPI
is used.
HIPAA also required the use of a health
plan identifier (HPID) that is to apply to
health plans of all types with one exception: If
a health plan is a controlled subsidiary health
plan, meaning that it is fully controlled by
another health plan, then would not need to
have its own HPID. However, in 2014 HHS
postponed the implementation of the HPID,
and as of the time of publication it had still not
gone into effect. It is not known when, if ever,
it will be implemented.
* Current at the time of publication.
Privacy and Security
Requirements
The privacy and security requirements under
HIPAA are complex. States may establish
stricter standards than those in HIPAA,
but not less strict. These requirements are
described here at a very high level, and further information from DHHS about HIPAA
and its requirements for privacy and security
can be found by navigating from the HIPAA
landing page at: https://www.hhs.gov/hipaa
/index.html.*
Protected Health Information
Central to the privacy and security regulations
is the concept of protected health information
(PHI). PHI is individually identifiable health
information that is transmitted or maintained
in electronic media or in any other form or
medium. In other words, all electronic, paper,
and oral information is covered. PHI includes
all information that is created or received by
a covered entity about an individual and that
individual’s physical or mental health or condition or the health care he or she receives.
PHI is individually identifiable because it
includes the individual’s name or some other
information that can be used to identify the
individual, such as an address or Social Security number. The definition of PHI is intended
to be quite broad and includes most of the
information used in managing health benefits
plans, including information that is only indirectly related.
Consumers’ Control over Their
Health Information (Privacy)
Patients have the right to understand and
control how their health information is used.
The regulations that apply to HIPAA privacy
Marketing and Sales of Commercial Products and Services
require covered entities to educate patients
about their rights, provide patients with access
to their own medical records and means to
obtain copies of those records, and similar
protections. Consumers do not have the right,
however, to alter or delete health information
created by a covered entity.
Limits on Medical Record Use
and Release
With few exceptions, PHI can be used for
healthcare purposes only, including health
benefits management. Only the minimum
necessary information should be disclosed,
although that requirement does not apply to
the transfer of medical records used for medical treatment or review. The main exceptions
to the requirement that PHI be used only for
healthcare purposes are some defined and
limited marketing, fund-raising, and outreach
activities by provider organizations; an individual may also choose to opt out of any such use.
Examples of routine use of PHI that
would apply to all covered entities are the use
of this information for payment, treatment,
and healthcare operations. For example, a hospital must use PHI to both provide care and
bill a payer for that care, and a payer must have
enough information to accurately process the
claim. PHI is used for nearly all major administrative processes, as well as for provider payment, UM, case management (CM), disease
management, QM, and similar activities.
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Security Requirements for
Physical and Electronic Data
Even though the HIPAA privacy provisions
generally require covered entities to ensure
the confidentiality of PHI by appropriately
securing it, HIPAA has separate security
requirements for electronic PHI, including
e-mail. Fax, telephone, and paper records are
generally not considered electronic PHI unless
they are recorded and stored electronically,
although these records are still subject to the
privacy requirements. Eighteen different standards cover an even larger number of security
rules and specifications related to PHI. These
complex standards and rules are well beyond
the scope of this text but may be found using
the URL previously provided.
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Analytics and
Informatics
Most payers have a department dedicated to
using data and information for analytic purposes. This function, often referred to as informatics, may have very specific areas of focus
such as medical costs, sales and marketing
data, detection of claims fraud, and the like. It
may also be more generalized, such as creating
ad hoc operational reports for managers on an
as needed basis. Regardless, informatics continues to be increasingly important for payers
to succeed in today’s market.
Other Administrative
Requirements Related to Privacy
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HIPAA’s privacy provisions also have other
administrative requirements, including establishing policies and procedures to protect
privacy, designating a privacy official to be
responsible for maintaining privacy, workforce training, and having a way for patients
or members to file complaints about potential
HIPAA violations.
Health plans must market to a wide variety
of potential customers, from administrative
services for large self-funded employer group
plans, to insured products for small groups
Marketing and Sales of
Commercial Products
and Services
170
Chapter 6 Sales, Governance, and Administration
and individuals. The approach to marketing
and sales differs, at least somewhat, for each
different type of customer. Many plans participate in Medicare and Medicaid, which
have their own stringent rules as discussed in
Chapter 7, so those markets are not discussed
in this chapter. Payers also typically market
and sell other products and services such as
group life, disability, and dental insurance, but
those are not addressed in this chapter either.
The ACA has had a major impact on
certain aspects of how payers market and sell
their products. Many ACA requirements are
confined to insured products, but some apply
to all types of health benefits plans. The federal
Centers for Medicare and Medicaid Services
(CMS) maintains a website with links to additional information about marketing and sales
under the ACA at: http://www.cms.gov/cciio.*
Summary of Benefits
and Coverage
The ACA requires all health plans, including
self-funded plans, to provide existing and potential enrollees with access to a standardized summary of benefits and coverage (SBC), also called
a summary of coverage (SOC). Similar but separate provisions apply to Medicare Advantage
(MA) and private managed Medicaid plans.
The ACA further requires the SBC to adhere to
a uniform and common format that defines the
exact information that must be provided so consumers can compare plan benefits among and
between carriers. The SBC does not replace the
far more detailed evidence of coverage (EOC),
sometimes called a certificate of coverage or certificate of insurance, that all health plans must
make available to covered individuals.
SBCs must provide information in easyto-understand language, including a descri­
ption of coverage, cost sharing, exceptions,
limitations on coverage, network access, and
the like. It must explain how to renew coverage, include a glossary of common terms, and
* Current at the time of publication.
explain where to go to find out more. It must
provide standardized examples to illustrate
coverage for some common conditions; for
example, birth and delivery, care for diabetes,
and emergency care for a broken bone.
Marketing
Although the two functions are closely related
to each other, marketing differs from sales.
Marketing generally refers to the various activities that support the sales effort and promote
the plan in the marketplace, but it usually does
not include actual sales. The marketing function in payer organizations typically includes
responsibilities such as:
■■
■■
■■
■■
■■
■■
Brand management
External communications and public
relations
Advertising
Market research
Lead generation
Sales campaign support
Sales
Sales refer to the processes of selling the plan’s
products and services to business and/or individuals. It is the concrete means of adding or
retaining employer group customers and their
employees, and individual members. The sales
process differs to some degree by the type of
product and by market segments and distribution channels. Sales personnel employed by
the plan usually specialize in one type of market segment or distribution channel.
Market Segments
The ACA defines distinct market segments,
though its definition of a small employer
group was amended in 2016. The market segments under the ACA are:
■■
Individual: Health insurance purchased
individually, not through a group.
Marketing and Sales of Commercial Products and Services
■■
■■
Small employer group: An employer
that has 1–50 full-time employees,* but
the ACA allows states to elect to extend
the definition of a small employer to
100.
Large employer group: An employer that
has 51 or more full-time employees on
average.
Though not recognized by the ACA, some
payers use four, not three levels, by including
a mid-sized group market segment applying
to groups with more than 50 employees but
fewer than 300 or so employees (this can vary
from 200 up to 500) and define the large group
market as applying to employer groups larger
than that. They distinguish this additional
type of market segment because the distribution channels often differ for mid-sized and
large groups, as discussed next. More importantly, while large groups usually self-insure,
mid-sized groups may purchase insured coverage and the ACA’s rules for premium rates
do not affect insured products other than
individual and small group. Self-funded midsized groups are typically included in the large
group market.
Distribution and Distribution
Channels
The term distribution refers to how payers’
products and services are sold, and the term
distribution channel refers to the way the
payer accesses the different types of market
segments. Distribution channels may overlap,
and sometimes more than one form of distribution may be used in the same market segment. Sales personnel employed by the payer
may work with different market segments and
distribution channels, as well as direct selling.
TABLE 6.2 lists the most common types of distribution channels.
171
Individual and Small Business
Health Options Program Health
Insurance Exchanges Under the
Affordable Care Act
Before discussing the insurance exchanges, or
marketplaces as the federal government refers
to them, recall from this chapter’s Introduction that political forces have had the greatest impact on this part of the ACA, and that
descriptions here should be verified or updated
from current sources as necessary.
The ACA created two similar but distinct distribution channels: health insurance
exchanges for use by individuals and the Small
Business Health Options Program (SHOP)
health insurance exchanges for use by small
employer groups. Both are at the state level,
and both provide access to purchase coverage during an annual Fall open enrollment
period.
As will soon be apparent, exchanges are
more than distribution channels, but they are
included in this section because their primary
function is as a means for purchasing coverage.
No individual or small business is required to
use an exchange except when receiving a tax
credit or subsidy (both are explained in this
section), and no payer is required to offer coverage through an exchange.
Under the ACA, each state was to create its own health insurance exchanges, but
many states did not. Some states did operate
their exchanges but used the federal platform,
while the federal government completely runs
it in other states. As for SHOP exchanges, at
the time of publication, only 33 states ever
had them, and the role of the SHOP exchange
was substantially reduced by CMS beginning
2018. Small group employers not already using
the federal SHOP exchange may only enroll
in SHOP insurance—and receive tax credits as noted a bit later—through an insurance
* The ACA also defines a full-time as an employee working at least 30 hours per week or 130 hours per month.
172
Chapter 6 Sales, Governance, and Administration
TABLE 6.2 Distribution Channels by Market Segment
Distribution
Channel
Individual Market
Small Employer
Group Market
Large Employer
Group Market
Individual health
insurance exchange
Yes
No
No
Small business health
options program
(SHOP) exchange,
if present*
No
Yes
No
Private health
insurance exchange
No
Yes
Sometimes for
employee coverage
options among
pre-selected plans
Direct through web
Yes
Yes
No
Direct mail
Yes
Yes
No
Tele-sales
Yes
Yes
No
Retail stores
Yes, but uncommon
Yes, but uncommon
No
Brokers and agents
Yes
Yes
Yes, but less common
than in small group
market
Benefits consultants
No
Rarely
Yes
Payer-employed sales
personnel
Yes, but uncommon
Yes, sometimes with
a broker
Yes, but usually with
a consultant
*Not all states have a SHOP exchange, and the federal SHOP exchange is now closed to new business and has limited remaining functions.
company or through a SHOP-registered agent
or broker, though employers already using the
federal SHOP exchange can continue to do so.
The ACA provides for two types of slidingscale or graduated financial support for qualified individuals and families with incomes
between 100% and 400% of the federal poverty level, or between 138% and 400% in states
that expanded Medicaid coverage up to 138%.
Other requirements besides low income must
also be met; for example, not having access to
employer-based coverage or to government
coverage such as Medicare, Medicaid, or TRICARE; making timely premium payments;
and not being claimed as a dependent by
another person. Individuals and families that
qualify for support can only receive it for coverage obtained through the exchange.
Marketing and Sales of Commercial Products and Services
One of the types of financial support is a tax
credit that subsidizes the premium cost based
on the “Silver” plan, referring to the ACA’s Silver
level of benefits (see Chapter 2). The other type
of financial support is through cost-­sharing
reductions (CSRs) that reduce the amount of
out-of-pocket cost-sharing (also described in
Chapter 2) that eligible individuals and families
would otherwise pay when receiving medical
care. To receive this extra savings, which is different from the tax credits described above, individuals or families must be enrolled in a Silver plan.
The cost of CSR support is absorbed by the
participating health plan, which is supposed to
then be reimbursed by the federal government.
Following the failure to “repeal and replace”
the ACA (see Chapter 1) in 2017 the administration stopped funding the cost of the CSR
program, though plans in the exchange were
and are still required to provide it. Plans that
remained in exchanges therefore raised premiums even higher to cover the cost of the CSR
subsidy, on top of having increased premiums to offset the increase in adverse selection
resulting from the elimination of the individual coverage mandate (see Chapter 2).* For eligible individuals and families however, this did
not significantly raise their out-of-pocket cost
of coverage because the tax-credit premium
subsidies remain intact. Those who purchased
coverage through an exchange but were not
eligible for financial support had to pay the full
cost, so many of them opted to obtain coverage
outside the exchange or dropped it altogether.
Like individual premium support tax credits, some small group employers may be eligible
to claim the Small Business Health Care Tax
Credit. To receive it, the employer must have
fewer than 25 full time employees, pay them a
relatively low wage, pick up at least half of the
cost of coverage, and must purchase coverage
through a SHOP exchange (if they are already
purchasing through a SHOP exchange), or a
173
SHOP-registered agent or broker. No employer
is required to provide coverage to employees
who are not full time.
An insurer that chooses to participate
in an exchange must offer at least one Goldlevel and one Silver-level benefits plan for each
exchange product it offers. It is not required to
offer Platinum or Bronze plans, although many
offer bronze levels too. They are not required
to offer the same exchange-based product outside of the exchange, but if they do, they must
charge the same premium rates for it.
Participating payers may offer different
products through the exchange than they do
outside of it, and they usually do. Exchangebased products are often HMOs with narrower, meaning smaller, networks than a payer
uses for it non-exchange products, though
non-HMO products may be offered as well.
The insurance exchanges have many functions and requirements under the ACA, one of
the most important being determining initial
or annually redetermining eligibility for subsidies or for coverage under Medicaid. Some
functions have not been enforced or congress
cut funding to carry them out. Some are being
carried out, some have now been delegated to
payers participating in the exchange, and some
have quietly been shelved. TABLE 6.3 shows a
partial list of some of functions found in the
ACA applicable to both individual and (while
they continue to operate) SHOP exchanges,
and to individual coverage exchanges only.
To meet many of the ACA’s requirements,
an insurance exchange must also have twoway information exchanges not only with
CMS, but with the following entities:
■■
■■
The U.S. Department of Homeland Security, for validation of citizenship
The U.S. Department of the Treasury, for
reporting of coverage and verification of
eligibility for premium subsidies
* Recall from Chapter 2 that after Congress eliminated the individual mandate as of 2019, a few states imposed an individual mandate of their own.
174
Chapter 6 Sales, Governance, and Administration
TABLE 6.3 Partial List of Additional Exchange Functions Originally in the ACA
Both Individual and SHOP Exchanges
■■
■■
■■
■■
■■
■■
Certifying, recertifying, and decertifying
qualified health plans (QHPs) offering
coverage through the exchange.
Assigning ratings to each plan offered
through the exchange on the basis of relative
quality and price.2
Providing consumer information through the
SBC for each QHP’s offerings.
Operating an Internet site and toll-free
telephone hotline offering comparative
information on QHPs and allowing
consumers and small businesses to apply
for and purchase coverage if eligible.
Determining eligibility for the coverage
through the exchange.
Determining eligibility for premium subsidies
or tax credits.
Facilitating enrollment in those programs,
by directing consumers to a health plan’s
website for enrollment or by enabling
enrollment on the exchange.
Individual Coverage Exchanges Only
■■
■■
■■
■■
Determining exemptions from requirements
that individuals carry health insurance, and
granting approvals of these exemptions
to individuals related to hardship or other
criteria.1
Determining eligibility for coverage outside
of the normal enrollment period.
Creating an electronic calculator to allow
consumers to assess the cost of coverage
after application of any advance premium tax
credits and cost-sharing reductions.
Managing a navigator program to assist
consumers in making choices about their
healthcare insurance options and accessing
their new healthcare coverage.3
Data from PART 2 Consumer Choices and Insurance Competition Through Health Benefit Exchanges; SEC. 1311 [42 U.S.C. 13031] of the Patient
Protection and Affordable Care Act.
No longer applicable with the elimination of the individual mandate as of 2019.
Pilot program at time of publication. Health plan rating program to be similar to Medicare Stars program (see Chapter 7).
3
Funding cut, and not performed by all states.
1
2
■■
■■
State Medicaid agencies, for determination of eligibility for Medicaid coverage,
including facilitating enrollment
Health insurers and HMOs participating in the exchanges for a wide variety of
transactions
The exchanges had a very rocky start,
mostly because the newly programmed IT systems were overwhelmed. Those IT problems
were successfully addressed after the first year
or so, but exchanges have continued to face
challenges, primarily because of the high cost
of coverage. Premium increases in exchangebased coverage were expected to be higher than
average because of adverse selection, meaning
attracting individuals with significantly higher
than average risks for medical costs. To address
that, the ACA included payer protections
through “the three r’s” meaning risk adjustment (also called risk payment transfers), reinsurance, and risk-corridors.
Reinsurance was underfunded and quickly
ran out of money. Congress cut funding for
risk corridors when political control changed
in the House, so the federal government could
not pay what it already owed, resulting in payer
losses. Reinsurance and risk corridors were
temporary measures and have expired. Risk
transfer payments are a permanent feature of
the ACA in which payers enrolling members
through an exchange with lower average risk
Marketing and Sales of Commercial Products and Services
must transfer (via the federal government)
some premium to those payers with higher
average risk. The actual fund transfer was temporarily halted in 2018, but has resumed as of
the time of publication.
Initially there were multiple payers participating in exchanges, but by 2015 the number
of plans offering products through exchanges
was small. Beginning in 2017 some plans reentered and there were some new entrants too,
and most locales had at least one participating
payer. Even with the turmoil, the number of
people who obtain coverage through exchanges
has remained stable, despite a change that shortened the length of open enrollment. Premium
increases have been high, especially in the Silver
Plan where well over three quarters of those with
coverage receive some level of subsidization.
Private Health Insurance
Exchanges
Private health insurance exchanges are not the
same as the exchanges under the ACA. Private
exchanges are private commercial web-based
marketplaces operated by payers or by benefits consulting firms. They focus primarily on
small- to mid-sized employer groups, though
some large employers are using them too, but
they do not offer individual coverage. Many
also offer non-health benefits products such as
life or disability insurance.
Private health exchanges are both a form
of a digital distribution channel and a means
of providing more services to employers and
their employees. They are self-service sites that
replace at least some traditional sales approaches
and, therefore, can lower sales costs. Private
exchanges can also generate revenue to the company sponsoring the private exchange by using
captive, meaning directly employed, agents and
brokers that are paid through sales commissions.
Some private exchanges may provide overall benefits administration services to smaller
employers for less than it would cost the
employers to do it themselves. Payer companies
that offer private exchanges often use them to
175
allow the employees from a group of customers to choose from various coverage options
offered by the payer rather than imposing a single type of benefit plan—something most large
employers have been doing for many years.
Web Sales
All or nearly all payers and health plans have
web-based portals. Many portals include
direct purchase of coverage for eligible individuals or small businesses, although they
require individuals to go through an exchange
first to determine eligibility for coverage subsidies through an exchange or for Medicaid
coverage. Online brokers may also run webbased sales portals, and plans often provide
web-based sales tools to brokers to be used in
selling to consumers.
Direct Mail
Direct mail to consumers and/or small businesses was once a common sales tool, but it has
been supplemented or replaced by electronic
media, at least in the commercial market. But it
is still heavily used for MA (Chapter 7), in markets where a single employer has a very large
number of employees, and with government
employees. In all instances, most direct mail
is sent during or just before open enrollment
periods. State insurance exchanges also used it
during open enrollment, but that fell off when
Congress eliminated funding. A mailing may
be informational only, directing the individual
or business owner to another channel, or it may
provide an application form that can be mailed
or faxed in.
Tele-Sales
Tele-sales are common in the Medicare market during the Fall open enrollment period
when individual beneficiaries can choose to
be covered by an MA plan and/or a Part D
prescription drug plan, keep traditional Medicare coverage, with or without also buying a
176
Chapter 6 Sales, Governance, and Administration
Medicare Supplemental Coverage (Medi-Gap)
policy. Tele-sales are occasionally used in the
small group market. They were initially used
during open enrollment for individual insurance exchanges, but that is now uncommon.
Most tele-sales calls are pre-recorded
robocalls made by computers over inexpen­
sive Voice-Over-Internet-Protocol connections, using predictive dialing that calls when
most people will be at home, such as dinner time. Anybody who does not hang up
is directed to press a key or say a word such
as “yes” to talk to a live sales representative.
Some tele-sales calls are made by living people
located where labor costs are low, using the
same technology but working from a script.
means a percentage of the premiums paid by
the employer or individual that bought coverage through the broker. That meant that as
healthcare cost inflation drove premiums up,
the amount paid to brokers rose at the same
rate. Plans could not or did not vary premiums
depending on whether a broker was involved. In
response to the MLR limits created by the ACA,
some plans now pay brokers through a flat
commission payment, meaning a fixed dollar
amount. Percentage of premium commissions
is still used, however, and where the individual
and small group markets are quite competitive,
commissions are higher. Broker commissions
for MA products are set by the federal government and discussed in Chapter 7.
Retail Stores
Benefits Consultants
Sometimes health plans set up stores or storefronts that enable walk-in, in-person purchasing of health insurance. Sales associates in
the retail store consultatively engage the consumers and guide them through the purchase
process. This avenue is not a commonly used
distribution channel, but when it is used, other
channels (e.g., web, direct mail, tele-sales) and
media (print, radio, and television) are leveraged to stimulate traffic to the retail store.
Benefits consultants focus on larger, selffunded employers. Consultants are paid by the
employer, not the payer, and their payments
usually take the form of fixed fees unrelated to
the amount of premium, not by commissions.
Benefits consultants help employers to negotiate administrative agreements with payers,
obtain reinsurance, and often manage nonmedical benefits. In many cases, benefits consulting
firms may manage all aspects of all employee
benefits programs for a large employer, though
usually not payroll.
Brokers and Agents
Brokers and agents are major distribution channels in the individual, and the small and midsized employer group markets. Most products
sold by brokers are insured, but some occasionally sell reinsurance and TPA services to selffunded business too.
Brokers must be licensed by the state in
which they work, and they must be appointed or
certified by an insurer or HMO before being able
to sell any of the plan’s products. Some brokers
may also sell products offered in an exchange
but must be certified to do so. Special certification is required for brokers to sell MA products.
Brokers and agents are paid a commission by the health plan. In the past, this usually
Sales Personnel Employed
by the Payer
Payers employ sales personnel who work in a
variety of capacities. They often specialize or
focus on specific types of sales, such as direct
sales to small- and mid-sized employer groups,
sales to individuals, working mostly with brokers, or working with benefits consultants. States
require employed sales personnel to be licensed
to sell insured products, and special certifications are required to sell Medicare products.
Sales in the large group market usually
involve two types of sales. The first sale is to the
employer group. But large employers typically
Actuarial Services, Underwriting, and Premium Rate Development
contract with more than one payer to provide
their employees with choices in benefits plans
and costs, and this means a second sale. The
second sale refers to selling to each individual
employee—that is, persuading the employee
to choose one payer over another. Some large
companies restrict how a payer handles this
contact with employees during the employer’s
open enrollment period—for example, by controlling the types of information a payer can
make available to employees, or by limiting the
locations and allowed time for sales presentations to employees and dependents.
Seasonality
Finally, there is seasonality to marketing and
sales. Most sales occur in the Fall for an effective date of January 1, which is the case for all
individual business. But most groups also have
open enrollment in the Fall, and it is common
for well over half of a payer’s marketing and
sales activity to take place then. The remaining
sales often have another, smaller surge in the
Spring, with the rest being spread out over the
course of the year.
▸▸
Actuarial Services,
Underwriting, and
Premium Rate
Development
A fundamental requirement for any payer is
to know what to charge in premiums for its
insured products. Because of the MLR limits,
overcharging results in having to pay rebates
to individual and small group market customers, and undercharging means having to deal
with premium payments that are insufficient
to cover costs for a full year—known as a “premium deficiency” in the industry—without
ever being able to recover the losses. It is the
responsibility of the related but distinct actuarial and underwriting functions to, among
177
other responsibilities, calculate what the premiums need to be each year for each product
to cover costs and produce a positive margin
or surplus while remaining competitive.
Actuarial Services
The most important things that actuaries in the
payer sector do are to estimate current medical
claim liabilities and future medical expenses
by building on past and current experiences.
The estimates of future medical expenses are
influenced by the design of the benefits plan,
changes in laws such as benefits mandates,
provider payment rates and types of payment,
assumptions about utilization trends, and so
forth. The result is an actuarial model in which
these factors are used to estimate the average
amount of money required to cover medical
costs on a per-member per-month (PMPM)
basis. Actuarial models and projections are
used as a basis for developing premium rates,
but the actual premiums will differ from those
base numbers.
Actuaries are often also responsible for
performing ongoing estimates of how much
money a plan needs to reserve to cover
expected costs that are known and unknown
(more on this later in the chapter), though this
may be performed by financial managers on a
day-to-day basis. Small- and mid-sized payers
typically engage external actuarial firms rather
than hire staff actuaries when actuarial services are needed for operational or financial
management purposes. Regardless of the presence of staff actuaries, states require a certified
opinion by an independent actuarial firm just
as they do the opinion of an external certified accounting firm as part of a health plan’s
annual audit, and most large accounting attestation firms have both types of professionals.
Underwriting and Premium
Rate Development
To calculate the premiums that will be charged,
underwriters begin with the amount the
178
Chapter 6 Sales, Governance, and Administration
actuaries calculate. This may include a determination of the levels of risk for groups and
products. Certain requirements of the ACA
have a large impact on risk affecting premium
rate development for the individual and group
markets, including:
■■
■■
■■
■■
Guaranteed issue and renewability
MLR limitations
Restrictions on age banding
Whether the payer offers any products on
a health insurance exchange
These will be briefly described shortly.
Other factors affecting premium rates include
cost-sharing and product design, policy or
contract size, community rating requirements
by the state, and, under the ACA, and mandated benefits.
The ACA has far fewer requirements
affecting large groups, so underwriters use
experience that is much less affected by the
provisions noted above. Self-funded, also
called self-insured, groups do not pay premiums, but payers may still calculate imputed
rates, meaning what the premium rate would
be if the group was insured, that the employer
can use for its own purposes. This will also be
addressed further in the section.
Guaranteed Issue and
Renewability
All insurers and HMOs are required under the
ACA to provide guaranteed issue and renewability, meaning that no group or individual
may be denied coverage through an available
plan. Renewability means that any person or
group that is currently covered will be able to
renew coverage if premiums have been paid
and no fraud has been committed, though
coverage terms may vary from year to year.
Guaranteed issue means a policy will be issued
as long as they apply during the annual open
enrollment period (which usually takes place
once per year), or within 60 days of a qualifying event (also called a life event or a special event) described later in the chapter, have
not failed to pay their premiums, and have not
committed fraud.
Guaranteed issue results in a higher level
of financial risk to insurers and HMOs because
sicker people are more likely to want and need
coverage than are healthier people, and payers
may not exclude them from coverage unless
the payer sells no individual products where
a person resides. Because health insurance is
expensive, sick people will pay for it if they
can, but healthy people may choose to take
their chances, especially after the individual
mandate was eliminated.
When sick people opt in while healthy
people opt out, the risk pool of covered individuals has adverse selection, meaning it is sicker
than average, and underwriters must factor
that in when calculating premiums. As costs
rise because of the higher than average health
needs of the pool of people covered, costs rise
faster than average as well, which can drive even
more healthier people from the risk pool, a process referred to as the “insurance death spiral,”
meaning eventually costs might become so high
that no amount of premiums can cover it and
the plan fails.*
Medical Loss Ratio Limitations
The ACA placed limits on the MLR, meaning
the percentage of premium dollars spent on
clinical services and quality improvement, and
must rebate the difference if the percentage of
premium spent on clinical services and quality
is less than 85% for plans in the large group
market and less than 80% for plans in the
individual and small group markets. MA and
private managed Medicaid plans must comply
with the 85% limit.
* A payer can withstand having a product or plan with adverse risk and losses if its overall product portfolio has a net
positive margin.
Actuarial Services, Underwriting, and Premium Rate Development
The MLR limit does not apply to selffunded groups because they pay only administrative fees, not premiums. A few other types
of coverage such as so-called “mini-med”
plans with very limited benefits, student health
plans, and overseas coverage have different
formulas for calculating the MLR.
In the individual and small group markets,
the rebates are paid out evenly to each covered
individual or small employer group, in proportion to how much they paid in premiums. In
the large group market, rebates are paid on a
company-specific basis, meaning they are paid
only to companies for which the MLR was less
than 85%. Rebates do not necessarily need to
be paid directly, they can be used to offset premium costs for the next year.
The MLR limitation operates in one direction only; if a plan experiences a higher than
expected MLR, meaning it spends more on
benefits than it anticipated, it cannot recover
the difference. The MLR requirement also
does not allow a payer to use a group’s overall
medical costs if it is providing coverage for an
employer with locations in more than one state;
instead, the MLRs are calculated exclusively on
a state-by-state basis. In other words, if a single
large group employer has an MLR of 75% in one
state but an MLR of 92% in an adjoining state,
the insurer must rebate 10% of the premiums
for the first state and is not allowed to apply that
rebate to losses experienced in the second state.
The MLR cannot be averaged over time, either;
separate calculations are made for each year.
Underwriters must take MLR requirements into account. However, because plans
must pay rebates but cannot recover any losses,
underwriters are particularly careful to not calculate rates that are too low because low rates
will incur unrecoverable losses for an entire
year. On the other hand, as medical costs grow,
so too do the whole dollars that a percentage of
premium represents.
Age Banding or Age Brackets
Age banding means charging different premiums to people based on their age, or to groups
179
based on average age. This is done because on
average, older people incur higher costs for
health care than do younger people. The ACA
allows age banding but limits it to no more
than 3:1, meaning that older people can only
be charged rates that are no more than three
times higher than younger people. Underwriters must project the number of people
in each age bracket as part of calculating
premiums.
Age banding restrictions lower costs for
older people, making coverage more affordable, but raises it for younger people. This
can lead younger (and presumably healthier)
people to not buy coverage, which results in
adverse selection. To counteract this to a small
degree, the ACA allows for individuals below
the age of 30 to buy a “catastrophic” health
plan with very high cost-sharing.
Smoking Surcharge and
Premium Credits for
Participation in a Qualified
Wellness Program
Under the ACA, smokers may be required to
pay a 50% surcharge on top of their premium.
The ACA also allows employers to offer a premium credit for participation in a qualified
wellness program (or a reasonable alternative). There are several conditions a wellness
program must meet to qualify, and members
must be allowed the option to participate
each year.
There are two types of wellness programs
that may be used for this credit: Activity-only
and outcome-based. Activity-only requires
participation in an activity but there is no specific outcome. Outcome-based requires the
participant to achieve a specific goal such as
losing weight. The maximum premium credit
that may be applied for a wellness program
other than smoking cessation is 30%, though
most employers use more modest amounts.
The credit that may apply to smoking cessation is 50%, which offsets the premium penalty
imposed on smokers.
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Chapter 6 Sales, Governance, and Administration
Cost-Sharing and Product
Design
different combinations of subscribers and
dependents such as:
Single coverage only
Two adults only
One adult plus one or more children
Two adults plus one or more children
Benefits design and cost sharing for each product in each market segment or large group is
another factor in premium calculations. As the
amount of cost-sharing goes up, premium rates
go down. This occurs for two reasons. The first
and most obvious reason is that any amount
paid by individuals in cost sharing is not paid
by the plan. The second reason is that as the
amount of cost sharing rises, people tend to use
fewer medical services or are more willing to
choose less costly alternatives, which is called
behavioral shift, as discussed in Chapter 5.
Cost-sharing is a major and common element of benefit design, but there are also difference by product type. HMOs usually have lower
utilization than PPOs or other products and may
have better provider payment terms as well. To
the extent an HMO uses provider risk-sharing,
that too offsets cost increases to some degree.
But HMOs also provide richer benefits and less
cost-sharing, which can offset less utilization.
■■
Policy or Contract Size
Regulatory Rate Approval
The next element to be applied is the mix of
adults and children, referred to as policy or
contract size. In this case, the contract is the
insurance policy, not the contract with an
employer group. The monthly rate charged
to a single individual is always higher than
the PMPM actuarial base cost, and monthly
family rates are lower than what they would
be if each person were charged the same base
amount. The reason for this difference is that
the average medical costs for children are far
lower than they are for adults.
For this same reason, premium rates are
often calculated for different mixes of adults
and children. For example, underwriters may
calculate different rates for single coverage
versus family coverage, or different rates for
The ACA requires state review and approval
of community rates in the individual and
small group markets, and for plans to justify
increases. However, the ACA does not give
the federal government any direct control in
most cases, and states vary in how they conduct their review and approval processes,
with some states forcing payers to lower rate
increases even when it will result in a substantial loss, while other states rarely intervene. In
all cases, the responsibility of a state’s insurance department is to protect consumers, and
that includes regulations to avoid having a
health insurer exit the market resulting in no
available coverage for consumers, or incurring
such losses as to place it in danger of survival.*
A few states do not have what CMS considers
■■
■■
■■
Community Rating
The ACA requires insurers and HMOs to use
community rating in the individual and small
group markets, and for any products they sell
through the exchange. Payers usually keep the
risk pools separate so that community rates for
the individual market will differ from those in
the small group market. States may combine
them if they want to do so. Community rating
means that premium rates cannot be different for people or small groups that are sicker
or healthier than average. Instead, the overall
average forms the basis of the rates. The exceptions to this are age banding, rate increases
related to smoking, and wellness-related premium credits that were described earlier.
* To illustrate this, when the administration refused to pay participating plans for the cost of the CSRs as described
earlier in the chapter, many state insurance departments worked quickly with exchange plans to incorporate that cost
into upcoming Silver Plan rates where the CSRs were used.
Eligibility
to be an effective rate review process, in which
case the responsibility does fall to CMS.
Experience Rating in the MidSized and Large Group Markets
Experience rating may be used for fully insured
employer groups with more than 50 employees, meaning the rates reflect the actual medical cost experience of an employer group. As a
practical matter, how much experience affects
rates is related to how many employees are in
the group, because the smaller the group, the
larger the impact of random chance. But in
general, if a large group has had high medical
expenses in the past, it will be charged a higher
premium than a group whose medical costs
have been low. MLR limits still apply.
Underwriters calculating experience
rates try to differentiate between trends and
just plain bad luck. For example, a group may
have high expenses in a year because of a single very high cost case, referred to as a shock
claim, that is not ongoing. Conversely, another
group’s high expenses may be due to ongoing factors—for example, a group such as the
National Association of Asbestos-­Smoking
Snack Food Enthusiasts.* The first group’s
prior year’s high expenses were caused by bad
luck and do not indicate that its expenses will
remain high, whereas the high expenses of the
second group are likely to continue, at least for
the few remaining years they may live.
Determination of Premium
Equivalent or Imputed Premium
Rates for Self-Funded Employer
Groups
Self-funded employer groups are not insured
by a health insurer or HMO, although they
typically do purchase reinsurance. Nevertheless, even a self-insured employer needs to have
rates calculated so that the employer knows the
* Thankfully this is not a real group.
181
likely future cost of employee health benefits
and can determine how much the employees
must contribute through payroll deductions.
These are not true premium rates, but rather
are typically referred to as a premium equivalent or imputed premiums. The calculations
are often done by the underwriters of a payer
contracted to administer the benefits plan, or
they may be performed by an actuarial firm or
the employer’s benefits consultants. In either
case, the methods used are similar to those
described for experience-rated large groups.
▸▸
Eligibility
Chapter 2 introduced the concept of eligibility
for coverage, and how there are different types
of eligibility, and it has been included in other
sections of the chapter, but it’s time to pull it
together, at least for coverage in the commercial market. Eligibility for Medicare and Medicaid plans is addressed separately in Chapter 7.
There are three broad categories of eligibility
for coverage in the commercial market:
■■
■■
■■
Eligibility for coverage through an
employer-sponsored group benefits plan
Eligibility for individual coverage
Eligibility for coverage based on qualified
events, sometimes called life events or
special events
Eligibility for Coverage Through
an Employer-Sponsored Group
Benefits Plan
Employers are not compelled to offer group
health benefits, so employment by itself does
not necessarily mean an employee will have
health insurance. However, the ACA created penalties for employers with 50 or more
employees if they do not offer coverage, though
there are many situations in which penalties
would not be applied, and penalty costs are
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Chapter 6 Sales, Governance, and Administration
generally lower than are coverage costs. The
ACA also created tax-credit incentives for
qualified small group employers if they offer
coverage. In any case, most large employers
offer health benefits coverage to their employees, and many smaller employers offer coverage
as well. If an employer does offer this benefit,
coverage cannot discriminate between people
based on such factors as income, position in
the company, or health status.
Nothing compels an employee to take up
the employer-offered coverage. The individual mandate certainly created an incentive to
take it but was eliminated as of 2019 as noted
earlier. Some employees who do not take up
coverage go without, but some don’t need it
because they are covered under a working
spouse’s health plan.
In the large group market, employers typically have an annual open enrollment period
if they offer more than one plan, which large
employer groups almost always do. The annual
open enrollment period is the only time when
employees can change plans except in the case
of a qualifying event. New employees must
enroll within a specific time period after coming on board, typically 30 days, or they lose eligibility until the next open enrollment period.
In some cases, a waiting period applies before a
new employee is eligible to join the employer’s
plan, but the ACA limits any waiting period to
no more than 90 days. In the small group market, small groups are eligible to purchase coverage through the SHOP exchange (if they are
already purchasing through a SHOP exchange);
a SHOP-registered agent, or broker; or through
guaranteed issue benefits plans during the same
open enrollment period in the fall of each year
that applies to the individual market.
Eligibility for Individual Coverage
Eligibility for individual coverage applies to
coverage for individuals and families that do
not have access to coverage from other sources
and meet other requirements such as timely
payment of premiums and not being claimed
as a dependent by somebody else. Eligibility in
this case means the ability to purchase coverage
through the health insurance exchanges operating in their states, through a qualified broker,
or from any qualified carrier offering individual
policies.
Eligibility for Coverage Based
on Qualifying Events
A person of family may qualify for coverage
outside of an open enrollment period based on
changes that occur in an individual’s life, which
are called qualifying events or sometimes life
events. Qualifying events are defined in several
federal laws including the Consolidated Omnibus Budget Reconciliation Act (COBRA), the
federal Employee Retirement Income Security
Act (ERISA), HIPAA, and the ACA. State laws
and regulations can also affect eligibility from a
qualifying event and may provide greater protections than federal laws, but not less. When a
qualifying event occurs, an individual or that
individual’s dependents qualify for coverage
but must act within a defined time period, usually 60 days from the event. If they fail to do so,
then they lose eligibility for coverage outside of
the regular open enrollment period.
There is more than one type of eligibility associated with various qualifying events.
Examples include:
■■
■■
■■
■■
■■
■■
■■
Changes to existing employer-based
coverage
Extension of employer-based coverage
Subsidized coverage through an exchange
Non-subsidized coverage through an
exchange
Coverage under Medicaid
Coverage under Medicare
Other events and options.
One example to illustrate this is COBRA,
in which people who lose their employer-based
group coverage due to a qualifying event are
usually able to extend that coverage for up
to 18 months (or 36 months in some cases).
The individual must pay the full premium
Enrollment and Billing
183
TABLE 6.4 Examples of Qualifying Events
Type of Event
Examples
Job change
■■
■■
Loss of health
coverage
■■
■■
■■
Changes in
household
■■
■■
■■
Changes in
residence
■■
■■
■■
■■
Other
■■
■■
■■
■■
■■
■■
■■
Become eligible for coverage through new employer
Become eligible for coverage through exchange if new employer does
not offer coverage or employment is part-time only
Losing existing health coverage, including job based, individual, and
student plans
Losing eligibility for Medicare, Medicaid, or CHIP
Turning 26 and losing coverage through a parent’s plan
Getting married or divorced
Having a baby or adopting a child
Death in the family
Moving to a different ZIP code or county
A student moving to or from the place they attend school
A seasonal worker moving to or from the place they both live and work
Moving to or from a shelter or other transitional housing
Changes in income that affect the coverage for which one qualifies
Gaining membership in a federally recognized tribe or status as an Alaska
Native Claims Settlement Act Corporation shareholder
Becoming a U.S. citizen
Leaving incarceration (jail or prison)
AmeriCorps members starting or ending their service
Experiencing a Marketplace enrollment or plan information display error
Getting a favorable coverage appeal decision
Data from Healthcare.gov at https://www.healthcare.gov/coverage-outside-open-enrollment/special-enrollment-period/
plus 2%, and any failure to pay results in loss
of coverage and loss of eligibility for COBRA
continuation. The cost of coverage under a
COBRA extension is often less than coverage
through an exchange unless the individual or
family qualifies for financial support. Once eligibility for coverage under COBRA runs out,
coverage may be extended under HIPAA—
although there is no longer any need for that
option—or coverage may be obtained through
an exchange.
Other examples to illustrate this include
the birth or adoption of a new child or dependent, in which case the new dependent can be
added to existing coverage within the allowable time frame. Marriage or divorce is similar
except one adds coverage and the other results
in eligibility for coverage extension under
COBRA.
TABLE 6.4 provides some examples of most
of the common types of qualifying events.
▸▸
Enrollment and Billing
Enrollment means creating a record in the
payer’s transactional processing system that an
individual is enrolled and eligible for benefits
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Chapter 6 Sales, Governance, and Administration
coverage, now or in the future; and linking that
record to a specific type of plan, a specific benefits schedule, and a specific network of contracted providers. It is the basis for many of the
other transactions that take place in a payer
organization, including claims processing,
member services, and medical management.
Billing is how the payer itself is paid. For
insured or at-risk commercial businesses, bills
are generated for premiums. For self-funded
accounts, bills are generated for administrative
fees only. Some large employers self-bill and
periodically reconcile with the payer. Billing
is also a dynamic process, with interactions
affecting billing, payment, reconciliations, and
enrollment changes occurring daily, not just
during open enrollment periods.
Eligibility, enrollment, and billing in the
commercial market differs for group coverage
and for commercial individual coverage. The
ACA also—theoretically at least—enabled a
new avenue for enrollment and billing through
the health insurance exchanges for individuals
and small employer groups, but it has not been
implemented.
Enrollment
Enrollment is a dynamic process, with changes
being made every day and seasonal surges in
enrollment occurring during open enrollment
periods in all markets. Benefits plan changes for
existing members require changes in the enrollment system on an ongoing basis; for example,
changes from qualifying events, new hires,
or leaving employment that results either in a
COBRA benefits extension or in simply disenrolling that individual or family from coverage.
Sources of Enrollment Data
Enrollment in employer-based group plans
begins with the employer. In most cases, the
employer is responsible for providing the payer
with accurate and timely data on the employees
and dependents covered under its plan as well
as identifying those individuals who are no
longer covered. This includes new employees
as well as those employees who gain, extend,
or lose coverage through qualifying events.
The enrollment information may be transmitted through paper forms, computer tape
cassettes, non-volatile digital storage containers, optical media, batched electronic transmissions, or input directly by the employer’s
personnel department into the payer’s system. In some cases, employees apply or make
changes through a dedicated web portal.
Enrollment in individual coverage may
also occur through direct interaction between
an individual or employer and an insurer or
HMO, in which case the data and information
come through the plan’s website or through data
entered on a paper form. Agents and brokers
may also assist but cannot fill out enrollment
forms on somebody’s behalf. Individuals must
first go through the process to determine if they
are eligible for subsidies as described earlier.
Enrollment Errors
Enrollment errors can be caused by both internal and external factors and can affect operations throughout a payer organization. Errors
add to administrative costs because resolving them often takes manual work. Errors in
enrollment can result in payment of claims for
someone who is no longer covered or denial of
payment for someone who is covered, incorrect
capitation payments, more calls to member services from angry members, provider verification of coverage problems (described shortly)
and so forth.
Internal errors in enrollment are often
the result of enrollment backlogs that occur
during heavy enrollment periods, particularly
from the fall through the end of January, when
the largest number of open enrollment periods
take place. In addition, they can result from
paper enrollment forms being incorrectly read
by the optical recognition system and not corrected manually.
Errors in enrollment can occur for a variety of external reasons as well. In the group
Claims and Benefits Administration
market, an employer may transmit inaccurate
or late data about who has been hired or is no
longer employed, which employees changed
from one plan option to another, changes
based on qualifying events, and the like. Larger
employer groups may also use more than one
database for human resources, and those data
do not always match up accurately. In the
individual market, enrollment errors can also
occur when people enter incorrect or inaccurate information.
Provider Use of Enrollment
Information to Verify Coverage
It is important to know that the payer is not
the only party that depends on accurate enrollment data, providers depend on it too. The
most common use of enrollment and eligibility data by providers is verifying that a patient
is covered at the time of service. For instance,
a hospital will want to confirm that a patient
is covered under a health plan so that it can
properly bill for its services. If it is not possible for the hospital to verify eligibility (or if
the patient is using an ID card for coverage
that has lapsed), the facility will make other
payment arrangements with the patient. The
same may be said for other companies or
organizations that are involved in managing
benefits; for example, pharmacy benefits managers. Verification of eligibility also typically
provides information about applicable member cost-sharing or other potential coverage
limitations.
Provider eligibility verification is increasingly handled through automated self-service
means. Examples of these types of self-service
include secure lookup functions via the Internet,
secure direct communications between the payer’s and provider’s respective IT systems, secure
dedicated apps, interactive voice response via
the telephone, and use of swipe-card or radio
frequency identification technology (sometimes
working with established credit card issuers) at
the time of service.
185
Billing
For both insured and self-funded accounts,
payment is made before the coverage period
begins. Coverage ends if payments are not
received, although both employers and
individuals have a grace period for reinstatement, meaning the amount of time that
past due premiums must be paid in full or
eligibility and coverage are retroactively
terminated.
Payers bill employers for premiums or
administrative fees based on enrolled members and the specific services being provided.
For individual coverage, they send bills directly
to the individual policy holders, and they typically require individuals to allow for direct
billing of a checking or credit card account. As
would be expected, billing errors often mirror
enrollment errors.
▸▸
Claims and Benefits
Administration
The claims department is responsible for
ensuring that, except for applicable member
cost-sharing, the network providers are paid
directly for the medical goods and services
they provide to members, and that members who have paid providers out-of-pocket
receive the reimbursement to which they are
entitled. Even when providers are capitated,
the claims department typically still processes
encounters, usually through claims submitted
by capitated providers that are counted for
purposes of data capture only (these are often
called null claims). The complexity of medical
claims and benefits administration is almost
universally underestimated by those not familiar with health plan operations. Moreover, it
is affected by almost every other function in
a payer organization. In this section we will
take a very high-level look at some of the basic
elements of the claims and benefits administration process.
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Chapter 6 Sales, Governance, and Administration
Claims Capture
The first function performed by the claims
department is to capture the claim, which
means entering a received claim into the claims
processing system. All claims are accounted
for regardless of how they are received and are
assigned unique identifiers. Without logging
and entry, claims would be impossible to track.
Each major step in the claims process results in
an electronic indicator or flag that follows the
claim through the system along with its unique
identifier.
Claims may come in from a variety of
sources, but most commonly arrive through
HIPAA-standardized electronic transactions. Claims may also arrive through the
U.S. mail, fax, secure e-mail, electronic imaging, and self-entry via the web. They usually
come directly from the providers, but when
a member receives non-emergency care from
a nonparticipating provider and pays for it
at the time of service, the member submits a
copy of the claim to the payer. Paper claims
are scanned using optical character recognition programs that convert them into the
standard electronic format. Scanning errors
are typically reviewed by personnel (often
overseas, working from secure “dumb” terminals) who view an image of the document and correct any obvious problems such
as handwriting that the program cannot
recognize.
Claims Screening
Captured claims are first screened electronically to ensure that they contain the necessary
data and information. Claims that contain
all required data are called clean claims and
are usually processed quickly. Claims that do
not are rejected and returned to the submitter. Scanned claims with missing or incorrect information that could not be corrected
by visual inspection are rejected during the
review process mentioned above.
Conversion into a Standardized
Electronic Record
Claims are converted into electronic records
within the payer’s processing system for purposes of processing. Some systems use the
HIPAA standardized electronic transaction as
the basis of the record, but others must convert
it into a completely different record format
that is a legacy of how their IT system worked
before HIPAA. But in any case, a standard
claims transaction format should contain various fields required to properly adjudicate the
claim, even if some of the fields are only completed during the steps described next.
Basic Benefits Administration
After capturing and converting the claim, the
claims system must then go through a series
of steps before it either goes through final
adjudication (basic benefits administration),
or it proceeds on to additional steps before
being adjudicated. For clean claims, basic
benefits administration is almost always auto-­
adjudicated, meaning the processing is fully
automated with no human intervention.
Well over 80% of all claims are auto-­
adjudicated on their first pass through the
claims system. The rate is higher for claims
originally received electronically and lower for
paper claims. The reason for this difference is
that even after they pass initial screening and are
converted to an electronic format, paper claims
are more likely to contain other types of errors
that do not show up until they are processed.
Determining Coverage
One of the first steps in the basic process is to
check the enrollment system to see if the member was covered at the time he or she received
medical care. If the member is or was covered,
the claim proceeds to the next step. If the
member was not covered on the date of service, the claim is denied at that point and the
Claims and Benefits Administration
member and provider are so notified. Rejection for non-coverage is not uncommon.
Determining Benefits Level
at the Time of Service
If the member was covered at the time of service, the claims system must then determine
which level of benefits to apply. For example,
the coverage levels typically differ in POS
plans and PPOs for elective in-network care
versus out-of-network care, and there are
many variations of other types of cost-sharing.
Some benefits may be covered in one type of
plan but not in another.
Benefit plan designs change over time and
members may change the type of plan in which
they are enrolled, so the system must determine exactly which coverage was in effect on
the date of service. For example, the copayment
for a visit to a specialist may have been $30 in
December but increased to $40 in January.
The claims system must also determine
whether the member has fully or partially met
his or her deductible. If not, the claims system
applies the appropriate amount against the
deductible. The same concept applies to the
maximum out-of-pocket costs that an individual or family must pay each year, which the
claims system must track because cost sharing
stops once that maximum is reached.
Determination of Required
Authorization
The system must determine if the medical good
or service requires authorization or precertification. If so, it looks for a record that such preapproval was obtained, which typically exists
in a separate medical management system or
module. If there is no such record, the claims
system must determine if the service was elective or an emergency: Emergency services are
covered at the in-network level, whereas there
is less coverage, or no coverage in some cases,
187
for non-authorized elective services. This can
occasionally be a difficult determination to program into a claims system, and some of these
claims may instead be pended to obtain additional information (described shortly). Another
example is disallowment of a duplicate claim.
Applying the Correct Provider
Payment at the Time of Service
Once a claim is determined to be covered to
any extent, the claims system must determine
the correct amount to pay (or apply against cost
sharing) for each submitted claim, based on its
diagnostic and procedure codes, and payment
schedule applicable to a specific provider at the
time of service. Payment terms and amounts
often vary between different types of products
(e.g., HMO and PPO products offered by the
same payer), payment amounts may change
each year for the same type of product or may
change entirely from year to year. Payment
amounts also often differ by network requirements such as a special fee schedule negotiated
by a large medical group or hospital system. In
fact, the claims system must be able to handle
all of the different payment methods described
in Chapter 4 if they are used by the payer.
Payment may include disallowment of
some part of a claim, meaning some charges
are disallowed and a participating provider
may not bill for them. Many providers of all
types unbundle their claims, meaning they
include charges under billing codes for services
that are supposed to be paid through one payment. For example, an outpatient facility may
include separate charges for gauze dressings,
sutures, and other supplies; and a hospital with
employed physicians may tack on a facility fee
for routine office visits, something that the
basic office visit fee is supposed to include. The
system must determine when unbundled or
add-on charges are inappropriate and not payable, and when they must be covered. Another
example is disallowment of a duplicate claim.
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Chapter 6 Sales, Governance, and Administration
Application of Routine Medical
Payment Policies
Routine medical payment policies are rules
for using clinical information to make commonplace claims payment determinations.
For example, one common medical payment
policy is to pay an assistant surgeon no more
than 50% of the fee that the primary surgeon
receives. Another common policy is to pay for
only one abdominal surgical procedure even
if a surgeon bills for multiple procedures performed at the same time. Most routine medical policies are fully integrated into the basic
claims adjudication system and are applied on
an automated basis.
Management of Pended Claims
and Adjustments
Up to this point, everything except claims capture involving paper claims is nearly always
automated, involving very little, if any human
intervention. That is not the case for most
pended claims or adjustments. The cost to
payers for fully automated claims processing is
quite low on a per-claim basis, but high when
plan personnel must be involved. For that reason, payers strive to see that as many claims
as possible are auto-adjudicated and free of
errors. But it is not possible to auto-adjudicate
100% of received claims.
A claim is usually pended by the claims
system, which means that it is neither paid
nor denied, but rather put on hold so further
information can be obtained. When a claim
is pended, the claims department must have
a system in place to make sure that the claim
does not wind up in limbo. The department
needs to track each pended claim and make
sure that timely action is taken on those claims.
A claim might be pended for any number of reasons. For example, there may be a
diagnosis-procedure mismatch, which means
just what it sounds like. In such a discrepancy…
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