Actuarial Standard of Practice No. 8
Regulatory Filings for Health Benefits, Accident and Health Insurance, and Entities Providing Health Benefits
STANDARD OF PRACTICE
TO: Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in Regulatory Filings for Health Benefits, Accident and Health Insurance, and Entities Providing Health Benefits
FROM: Actuarial Standards Board (ASB)
SUBJ: Actuarial Standard of Practice (ASOP) No. 8
This document is a final version of a revision of ASOP No. 8, now titled Regulatory Filings for Health Benefits, Accident and Health Insurance, and Entities Providing Health Benefits.
The new federal Affordable Care Act (ACA), current publicity concerning health insurance premium rate increases, and state activity in the rate increase review sponsored by federal grants have resulted in very high visibility on this actuarial activity. Due to the significant number of changes in the rate filing and rate review process due to the ACA, the American Academy of Actuaries’ Health Practice Council requested that the ASB revise ASOP No. 8, Regulatory Filings for Health Plan Entities. The ASB reviewed the request and agreed that the current ASOP No. 8 should be expanded to provide additional guidance. The ASB authorized a task force of the Health Committee to draft a revised version of this standard.To gather input on the direction of the scope, a discussion draft was released in January 2013 before an exposure draft of the revision was issued in June 2013.
This revision to ASOP No. 8 provides guidance to actuaries who prepare or review regulatory filings under state and federal requirements for filing health insurance premium rate increases. It also provides further guidance to actuaries reviewing regulatory filings. Furthermore, ASOP No. 8 was revised to add guidance on the preparation and review of health insurance rate filings for medical lines of business that are required by state or federal regulations.
Many health regulatory filings under ACA will become due summer 2014. Although the effective date for this standard is September 1, 2014, as noted in ASOP No. 1, Introductory Actuarial Standard of Practice, section 3.1.7, this standard is now a part of the actuarial literature and may provide useful information to actuaries preparing filings prior to its effective date.
The exposure draft of this revised ASOP was issued in June 2013 with a comment deadline of October 15, 2013. The task force carefully considered the six comment letters received and made changes to the language in several sections in response. For a summary of the substantive issues contained in the exposure draft comment letters and the task force’s responses, please see Appendix 2.
The most significant change from the exposure draft was the deletion of section 3.8, Recognition of Plan Provisions, as it was duplicative of other guidance in the ASOP. Additional changes were made to clarify language throughout the ASOP. The ASB voted in March 2014 to adopt this standard.
Task Force on Regulatory Filings
Donna Novak, Chairperson
Karen Bender Katherine Musler
Raymond Brouillette Michael E. Nordstrom
John C. Caruso James O’Conner
April Choi Julia T. Philips
Richard H. Diamond Jay C. Ripps
Julia M. Lyng David A. Shea, Jr.
Craig A. Magnuson R. Neil Vance
Brett Steven Miller
Health Committee of the ASB
Nancy F. Nelson, Chairperson
David Axene Cynthia Miller
Robert G. Cosway Donna Novak
Shannon Keller Ross A. Winkelman
Actuarial Standards Board
Patricia E. Matson, Chairperson
Michael S. Abroe Thomas D. Levy
Christopher S. Carlson Robert G. Meilander
Maryellen J. Coggins James J. Murphy
Beth E. Fitzgerald James F. Verlautz
The ASB establishes and improves standards of actuarial practice. These ASOPs identify what the actuary should consider, document, and disclose when performing an actuarial assignment. The ASB’s goal is to set standards for appropriate practice for the U.S.
Section 1. Purpose, Scope, Cross References, and Effective Date
This actuarial standard of practice (ASOP) provides guidance to actuaries when performing professional services with respect to preparing or reviewing required regulatory filings related to rates or financial projections for health plan benefits, health insurance, and entities providing health benefits.
This standard applies to actuaries when performing professional services with respect to preparing or reviewing health filings, as defined in section 2.5, required by and made to state insurance departments, state health departments, the federal government (including those required by the Affordable Care Act), and other regulatory bodies.This includes reviewing actuaries when called upon to testify or review filings on behalf of consumers. Where specified,the guidance in this standard applies only to filing actuaries. Where not specified, the guidance applies to both filing actuaries and reviewing actuaries, as defined in section 2.
Health filings require projection of future contingent events and can be categorized into two broad categories: rate or benefit filings and financial projection filings. Some of these filings are made on behalf of health plan entities, such as filings made in conjunction with applications for licensure. Other filings are required for health benefit plans provided by health plan entities, such as filings for approval of rates. Such filings may be required for new and existing health plan entities, for new health benefit plans, and for revisions to existing health benefit plans.
The filings covered by this standard do not include filings to certify compliance with rating methods and other actuarial practices applicable to carriers for small employer health benefit plans (see ASOP No.26, Compliance with Statutory and Regulatory Requirements for the Actuarial Certification of Small Employer Health Benefit Plans); statements of actuarial opinion relating to statutory financial statements of health plan entities (see ASOP No. 22, Statements of Opinion Based on Asset Adequacy Analysis by Actuaries for Life and Health Insurers, and ASOP No. 28, Compliance with Statutory Statement of Actuarial Opinion Requirements for Hospital, Medical, and Dental Service or Indemnity Corporations, and for Health Maintenance Organizations); financial projections subject to ASOP No. 6, Measuring Retiree Group Benefits Obligations and Determining Retiree Group Benefits Program Periodic Costs or Actuarially Determined Contributions; filings related to benefits provided by casualty insurance policies; and filings that are solely experience reports and do not require projection of future contingent events.
If the actuary departs from the guidance set forth in this standard in order to comply with applicable law (statutes, regulations, and other legally binding authority), or for any other reason the actuary deems appropriate, the actuary should refer to section 4.
1.3 Cross References
When this standard refers to the provisions of other documents, the reference includes the referenced documents as they maybe amended or restated in the future, and any success or to them, by whatever name called. If any amended or restated document differs materially from the originally referenced document, the actuary should consider the guidance in this standard to the extent it is applicable and appropriate.
1.4 Effective Date
This standard will be effective for any actuarial work product covered by this standard’s scope issued on or after September 1, 2014.
Section 2. Definitions
The terms below are defined for use in this actuarial standard of practice.
2.1 Discount Rate
The rate used to discount projected cash flow to determine their present value.
2.2 Filing Actuary
An actuary who prepares, supervises the preparation of, or peer reviews a health filing on behalf of a health plan entity. This includes actuaries employed by the health plan entity and consulting actuaries. This does not include a “reviewing actuary,” as defined in section 2.9.
2.3 Financial Projection
A projection of covered lives, premiums, claims, expenses, capital and surplus, or other financial quantities that may be required by applicable law.
2.4 Health Benefit Plan
A contract or other financial arrangement providing hospital, medical, prescription drug, dental, vision, disability income, accidental death and dismemberment, long-term care, or other health-related benefits, whether on a reimbursement, indemnity, service benefit, or other basis, irrespective of the type of health plan entity that provides the benefits.
2.5 Health Filing
A required regulatory filing for health benefits, accident and health insurance, and entities providing health benefits, which requires projection of future contingent events, for rates or benefits, or financial projections.
Rate or benefit filings include, but are not limited to, the following:
a. filings of manual rates, rating factors, or underwriting manuals;
b. filings of rating methodology, such as experience rating formulas and factors;
c. statements of actuarial soundness or rate adequacy, as may be defined by the regulatory body, for future rating periods;
d. certification of benefit values, such as actuarial value or actuarial equivalence, for example, as required by the Affordable Care Act; and
e. other filings of a similar nature as may be required by a regulatory body.
Financial projection filings include, but are not limited to, any filings in which the financial projections are a stand-alone requirement, such as those for licensure requirements, or are a requirement of a broader filing, such as a rate filing or projections of future capital and surplus or other regulatory benchmark requirements.
2.6 Health Plan Entity
An insurance company, health maintenance organization, hospital or medical service organization, self-insured health benefit plan sponsor, governmental health benefit plan sponsor, or any other health benefit plan sponsor from which health filings are required.
2.7 Rate of Investment Return
Investment income earned on funds held over time, expressed as a percentage of those funds.
2.8 Regulatory Benchmark
A measurement that may be used by the regulatory authority in evaluating a health filing. Possible benchmarks may include loss ratios, capital ratios, or actuarial values.
2.9 Reviewing Actuary
An actuary who is responsible for reviewing a health filing on behalf of a government agency or consumers. This includes actuaries employed by the government agency and consulting actuaries engaged to review a health filing on behalf of the government agency or consumers.
2.10 Time Value of Money
The principle that an amount of money available at an earlier point in time has different usefulness and value than the same amount of money has at a later point in time.
Section 3. Analysis of Issues and Recommended Practices
Many jurisdictions require health filings that demonstrate compliance with applicable law, which may vary considerably as to the requirements and procedures for these filings. In many cases, such law may be silent as to the assumptions and methodology to be used, thus giving the actuary discretion to exercise professional judgment in preparing and reviewing the filings.
3.2 Purpose of Filing
When preparing a filing, the filing actuary should include in the filing a statement of its purpose, identifying the applicable law with which it is intended to comply. For example, the filing actuary might state, “The purposes of this rate filing are to document the rates and to demonstrate that the anticipated loss ratio of this product with those rates meets the minimum requirements of Section XX of the statutes of [name of state]. This filing may not be appropriate for other purposes.”
3.3 Applicable Law
When an actuary prepares or reviews a regulatory filing, the actuary should have knowledge and understanding of applicable law. If the actuary believes applicable law is silent or ambiguous on a relevant issue, the actuary should consider obtaining guidance from an appropriate expert. In this situation, the actuary should describe how the relevant issue was addressed when preparing or reviewing the filing.
The actuary should determine which assumptions are necessary for the filing and select appropriate assumptions. Assumptions the actuary should consider selecting include, but are not limited to, the following:
The actuary should consider current premium levels and expectations for future rate changes.
3.4.2 Projections of Covered Lives
The actuary should consider the impact of future changes in the underlying covered population on the projected claims. These changes may include, but are not limited to, changes in demographics, risk profile, or family composition.
3.4.3 Levels and Trends in Morbidity, Mortality, and Lapsation
The actuary should consider current levels of and historic trends in morbidity, mortality, and lapsation rates.
3.4.4 Non-Benefit Expenses, Including but Not Limited to Administrative Expenses, Commissions, Broker Fees, and Taxes
The actuary should use appropriate methods and assumptions for calculating the non-benefit expenses component of premium rates. Possible methods include, but are not limited to, the use of a target loss ratio or the estimation of expenses appropriately attributed to the health benefit on a percentage of premium or fixed-dollar basis. When estimating the latter amounts, the actuary should consider the health plan entity’s own experience, reasonably anticipated internal or external future events, inflation, and business plans. The actuary may also consider relevant external studies. The actuary should consider the reasonableness of the non-benefit expense component of premium rates relative to projected expenses.
3.4.5 Investment Earnings and the Time Value of Money
The actuary should consider whether to reflect investment earnings and the time value of money in the calculations used in the filings. When applicable, the actuary should select assumptions for the rate of investment return and the discount rate that are individually reasonable, mutually consistent,and reflective of the terms of the contract.
3.4.6 Health Cost Trends
The actuary should consider historical experience trends when estimating future trends. Projected trends may be based on insured or population data. When medical expense trends are projected, the actuary should consider detail by service category (for example, inpatient, outpatient, professional, and drug) or service setting (for example, nursing home, home care, or assisted living facility),separated by cost and utilization, if relevant, reasonably available, and credible.
The actuary should consider changes in benefit provisions and provider contracting when projecting future trends from historical trends, as the change in unit costs and utilization may differ from prior periods. The actuary should be aware that historical trends may not be the best predictor of future trends.
The actuary should consider whether an adjustment for leveraging is needed for products with fixed-dollar, member-cost sharing elements such as co-pays, deductibles, and out-of-pocket limits.
In analyzing trend, the actuary should make a reasonable effort to remove and separately analyze other factors that affect cost. Examples include, but are not limited to, demographic changes, plan mix changes, durational effects, and underwriting.
3.4.7 Expected Financial Results, such as Profit Margin / Surplus Contribution, Loss Ratio, or Surplus Level
The actuary should consider the appropriate methods and assumptions for calculating the profit margin/ surplus contribution. Possible methods include, but are not limited to, the use of a target loss ratio or a target return on capital.
The actuary should consider the reasonableness of the profit margin/surplus contribution in relation to the degree of risk accepted by the plan sponsor.
3.4.8 Expected Impact of Known Contractual Arrangements with Health Care Providers and Administrators
A health plan entity may have many health care provider contracts with a wide variety of payment structures such as fee-for-service and capitation. When estimating the impact of health care provider contracts on future periods, the actuary should consider the appropriate level of detail needed to produce reasonable results.
3.4.9 Expected Impact of Reinsurance and Other Financial Arrangements
The actuary should consider how risk sharing, risk adjustment, reinsurance payments and other financial arrangements are reflected in the base period data, and how these amounts should be estimated and reflected in the projected premium rates, including their impact on financial results.
3.4.10 Provisions for Adverse Deviation
The actuary should consider whether the aggregate provisions for adverse deviation are sufficient to cover anticipated costs under moderately adverse experience.
3.5 Rating Calculations
The actuary should review and understand the formulas used to calculate premium rates and determine that, based on the available data and relevant assumptions, they are appropriate for the purpose of setting premium rates.
3.6 Use of Business Plans to Project Future Results
The filing actuary should request and, if available, review relevant business plans for the health plan entity or health benefit plan that is the subject of the filing. The filing actuary should consider the information therein along with any other information relevant to the business plan in setting the assumptions and methodologies used in the filing. The filing actuary is not required to use assumptions identical to those in the business plan in developing the rate filing.
3.7 Use of Past Experience to Project Future Results
The actuary should determine whether past claims experience can be used to project future results. The actuary should also determine the extent to which past experience trends are relevant to assumed future trends. The actuary should refer to ASOP No. 23, Data Quality, for guidance on data selection.
In making these determinations, the actuary should consider the applicability and credibility of the data. These considerations may differ for the total claims in a period, the claims for a particular service category, and the experience trends. To the extent that the filing actuary concludes that the experience data is not applicable or credible for a particular use, the filing actuary should identify additional sources that are appropriate (see ASOP No. 25, Credibility Procedures).
When using past experience to project future results, the actuary should make adjustments to reflect any known or expected changes that, in the actuary’s professional judgment, are likely to have a material effect on expected future results. These may include, but are not limited to, changes in the following:
a. selection of risks;
b. demographic and risk characteristics of the insured population;
c. policy provisions, including but not limited to benefits, limits, and cost sharing;
d. business operations, including how health coverages are marketed, distributed, underwritten, and managed, and changes in the product portfolio;
e. provider contracts;
f. premium rates, claim payments, expenses, and taxes;
g. seasonality in incurred claims;
h. trends in mortality, morbidity, and lapse;
i. catastrophic claim variability;
j. administrative procedures, including claim payment practices;
k. federal or state regulations (for example, risk adjustment, reinsurance, risk corridors, underwriting requirements, and benefit mandates);
l. medical practice (for example, changes in medical technology and provider organization);
m. cost containment procedures or quality improvement initiatives; and
n. economic conditions.
The actuary should make adjustments to past experience, as appropriate, in a way that reasonably matches claim experience to exposure. For example, the actuary should not use ratios of paid claims to collected premiums to project future incurred loss ratios except with appropriate adjustments.
The filing actuary should update prior earned premium and incurred claim estimates to reflect premium and claim development experience to date when, in the actuary’s professional judgment, the difference is material.
3.8 Rating Factors
For medical expense coverages, the actuary should be familiar with the rating factors used for the plans and the structure of those factors. The actuary should be familiar with the regulatory requirements for rating factors and structures.
Rating factors for medical expense coverages should be based on actuarially derived variations to the extent permitted by applicable law. In this regard, the actuary should refer to ASOP No. 12, Risk Classification, for guidance.
3.9 New Plans or Benefits
The actuary should consider available data relevant to new plans or benefits. In the absence of sufficient data, the actuary should use data from similar benefits or plans of coverage that are reasonably consistent with the new plans or benefits.
3.10 Projection of Future Capital and Surplus
As part of a health filing, the filing actuary may be called upon to project future capital and surplus for the entire health plan entity or a portion of it, such as a business unit. In doing so, the filing actuary should base the projection on reasonable assumptions that take into account any internal or external future actions known to the filing actuary that, in the filing actuary’s professional judgment, are likely to have a material effect on capital or surplus.
3.11 Regulatory Benchmark
The actuary may be called upon to project results in relation to a regulatory benchmark for the entire health plan entity or a portion of it, such as a line of business. The actuary should base the projection on appropriate available information about the relevant book of business.
Regulatory benchmarks might include, but are not limited to, the following:
3.11.1 Rate Adequacy
Rates may be considered adequate if they provide for payment of claims, administrative expenses, taxes, and regulatory fees and have reasonable contingency or profit margins.
3.11.2 Rates Not Excessive
Rates may be considered excessive if they exceed the rate needed to provide for payment of claims, administrative expenses, taxes, regulatory fees, and reasonable contingency and profit margins.
3.11.3 Rates Not Unfairly Discriminatory
Rates may be considered unfairly discriminatory if the rates result in premium differences among insureds within similar risk categories that: (1) are not permissible under applicable law; or (2) in the absence of an applicable law, do not reasonably correspond to differences in expected costs.
3.11.4 Projected Loss Ratio
A projected loss ratio may be considered unreasonable if it does not meet or exceed a threshold under applicable law.
3.12 Reasonableness of Assumptions
The actuary should review the assumptions employed in the filing for reasonableness. The assumptions should be reasonable in the aggregate and for each assumption individually. The support for reasonableness should be determined based on the actuary’s professional judgment, using relevant information available to the actuary. This information may include, but is not limited to, business plans; past experience of the health plan entity or the health benefit coverage; and any relevant industry, government, or academic studies that are generally known and reasonably available to the actuary. The actuary should make a reasonable effort to become familiar with such studies.
The filing actuary may rely upon others to provide assumptions for developing the regulatory filing. However, the filing actuary should review the assumptions for reasonableness. The filing actuary should use any such assumption only if the actuary believes it is reasonable, unless it is prescribed by applicable law. The filing actuary should disclose any such reliance in accordance with ASOP No. 41, Actuarial Communications.
3.13 Reliance on Data or Other Information Supplied by Others
When relying on data or other information supplied by others, the actuary should refer to ASOP No. 23, Data Quality, for guidance. The filing actuary should disclose any such reliance in accordance with ASOP No. 41.
The actuary should prepare and retain documentation in compliance with the requirements of ASOP No. 41. The actuary should also prepare and retain documentation to demonstrate compliance with the disclosure requirements of section 4.1.
Section 4. Communications and Disclosures
4.1 Communications and Disclosures
When issuing actuarial communications relating to health filings for health plan entities, the actuary should refer to ASOP Nos. 23 and 41. A health filing will usually require the completion of an actuarial report, as defined by ASOP No. 41. In addition, such actuarial communications should disclose the following:
a. the sources of information;
b. any material information supplied by others and the extent of the actuary’s reliance on such information;
c. any unresolved concerns the actuary may have about the information that could have a material effect on the actuarial work product;
d. any material changes to rating methodology, plan provisions, sources or quality of experience data, or assumptions since a substantially similar previous filing, if any. This includes, but is not limited to, changes in covered services, cost sharing, rating factors, and non-benefit expenses;
e. limitations on the use of the actuarial work product;
f. the reasons that the filing actuary departed from the guidance set forth in this standard in order to comply with applicable law, or for any other reason the actuary deemed appropriate;
g. the definition of “actuarially sound,” if that term is used to describe a processor result;
h. the actuary’s understanding of pertinent sections of applicable law that are silent or ambiguous, as required by section 3.3;
i. any adjustments to past experience used to project future results, as discussed in section 3.7;
j. the disclosure in ASOP No. 41, section 4.2, if any material assumption or method was prescribed by applicable law (statutes, regulations, and other legally binding authority);
k. the disclosure in ASOP No. 41, section 4.3, if the actuary states reliance on other sources and thereby disclaims responsibility for any material assumption or method selected by a party other than the actuary; and
l. the disclosure in ASOP No. 41, section 4.4, if, in the actuary’s professional judgment, the actuary has otherwise deviated materially from the guidance of this ASOP.
Background and Current Practices
Note: This appendix is provided for informational purposes but is not part of the standard of practice.
Many jurisdictions require the filing of actuarial memoranda or similar documents in connection with health plan entities or health insurance policy filings. An actuary may be involved in the preparation or review of these filings. The applicable laws differ as to their content, scope, and requirements. Many laws are silent as to procedures and assumptions to be employed, thus giving the actuary significant discretion to exercise professional judgment in these areas.
The recently enacted Affordable Care Act (ACA) added additional filing requirements for medical expense policies for the individual and small group markets. Beginning in 2011, rate filings for the individual and small group market must comply with new federal and state requirements resulting from the passage of the Affordable Care Act (ACA).
Current practices for some forms of health insurance, such as disability income and long-term care are well established. However, the passage of the ACA changed the landscape for medical expense coverages.
A practice note related to ACA filings, Actuarial Practices Relating to Preparing, Reviewing, and Commenting on Rate Filings Prepared in Accordance with the Affordable Care Act (October 2012) (http://www.actuary.org/files/RRPN_100512.pdf) was published in October 2012 by the American Academy of Actuaries. A supplement to this practice note (http://www.actuary.org/files/RRPN_042613_updated_exposure_draft_final.pdf ) was published as an exposure draft in April 2013. These documents provide information to actuaries providing rate filings subject to the Affordable Care Act. These documents provide information on current practice to actuaries preparing, reviewing, or commenting on rate filings in accordance with Section 2794 of the Public Health Service Act, as amended by the Affordable Care Act for the 2014 filings prepared in 2013. The addendum to the practice note addresses a revised Department of Health and Human Services (HHS) form filing called the uniform rate review template (URRT) and actuarial memorandum instructions. The originally published practice note discussed the preliminary justification form, which was replaced by the URRT and actuarial memorandum instructions by HHS.
HHS and the states will revise regulations and interpretations periodically. HHS has provided instructions for the preparation of actuarial memoranda and certifications as well as for the completion of the various required formats for submission of rate filings. These instructions should be reviewed and are located on the System for Electronic Rate and Form Filing (SERFF) website of the National Association of Insurance Commissioners at the following link: http://www.serff.com/documents/plan_management_data_templates_help_partIII_actuarial_memo.pdf.
Other useful information can be found on the Centers for Medicare & Medicaid Services (CMS) website at the following link: http://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/index.html.
Presentations and other training material presented by CMS may also be found on the CMS website at the following link: http://www.cms.gov/CCIIO/Resources/Training-Resources/index.html.
Comments on the Exposure Draft and Responses
The exposure draft of ASOP No. 8, Regulatory Filings for Health Benefits, Health Insurance, and Entities Providing Health Benefits, now titled Regulatory Filings for Health Benefits, Accident and Health Insurance, and Entities Providing Health Benefits was issued in June 2013 with a comment deadline of October 15, 2013. Six comment letters were received, some of which were submitted on behalf of multiple commentators, such as by firms or committees. For purposes of this appendix, the term “commentator” may refer to more than one person associated with a particular comment letter. The Task Force on Regulatory Filings and the Health Committee of the Actuarial Standards Board carefully considered all comments received, and the Health Committee and ASB reviewed (and modified, where appropriate) the changes proposed by the task force.
Click here to view the comments in their entirety.