University of Kentucky Health Insurance Task Force Meeting August 15, 2001

1. University of Kentucky Health Insurance Task Force Meeting August 15, 2001

2. Agenda • Year-by-year financial results under self-insurance • Rationale going in • Key Mercer recommendations • Results • Explanation • Why did UK-HMO rates increase more than the 11%capitation rate increase?

4. Breakdown Of Expenses for 2000-2001

5. 1997-1998 Plan Year • Rationale going in: • unknown; Mercer not involved until February 1998 • likely used insured carrier rates that had already been quoted • Key Mercer recommendations: • none • June 30, 1998 result: $1.1 million deficit • Explanation of results • unknown (to Mercer) • medical inflation still very low during this period

6. 1998-1999 Plan Year • Rationale going in: • Mercer hired in mid-February (1998) to produce rates in two weeks for July 1, 1998 effective date • No time for strategy discussions or changes • Key Mercer recommendations: • use of 4-tier structure for all plans • consistent tier factors across all plans • consider “single risk pool” rating

7. 1998-1999 Plan Year (cont.) • summer planning meeting to address self-insurance “house-keeping” and strategy issues • took place 6/12/98 • Mercer recommended simple enrollment tracking system to accurately monitor eligibility (Excel? Access?) • June 30, 1999 result: $1.5 million deficit

8. 1998-1999 Plan Year (cont.) • Explanation • Mercer financial analysis (earned premium vs. expenses)produced a $150,000 GAIN for plan year • Difference was on the revenue side • Mercer analysis based on insurance carrier claims andenrollment reports – carrier enrollment was overstated onthese reports • UK experienced revenue shortfall because there were actuallyfewer enrollees than reported to Mercer. This enrollmentdiscrepancy was not discovered until well after 1999-2000rates had been set.

9. 1999-2000 Plan Year • Rationale going in: • Rates for 1999-2000 based on experience throughDecember 1998 • At that time, no apparent major problems with UK strategyto rate each plan based on its own experience • Enrollment discrepancies were not known, so carrier reports were used (standard practice)

10. 1999-2000 Plan Year (cont.) • Key Mercer recommendations: • consistent, 4-tier rate structure • single risk pool • in terms of what is covered, standardize some benefits(transplant coverage, prescription drugs) across all plans • June 30, 2000 result: $4.6 million deficit

11. 1999-2000 Plan Year (cont.) • Explanation: • Return of medical inflation • Rates inadequate by about $3 million; remainder due to other“one-time” charges • Inadequate rates – causes • Understated historical enrollment (baseline percapita experience too low because enrollment too high) • Enrollment shift in UK-HMO population (enrollment olderthan in previous year, so actual age/gender capitation payments higher than UK-HMO rate increase) • Poor transplant experience (very difficult to predict) • Anthem BCBS experience very poor • Humana began to assess previously uncollectedcapitation payments (that had not been rated for)

12. 1999-2000 Plan Year (cont.) • Explanation: • “One time” charges • Humana had failed to bill UK for certain capitationcharges since conversion to self-insurance (July 1997) • Humana requested $900,000 reimbursement • UK (with Mercer assistance) negotiated $400,000 settlement • Timing issue of cash claims

13. 2000-2001 Plan Year • Rationale going in: • Emerging poor experience for 1999-2000 known based on Mercerfinancial modeling PRIOR to 2000-2001 rate setting • Rates based on experience through November/December 1999 • August 1999 – Mercer warns of need for major corrective actions(rate increases, plan design changes) • Key Mercer recommendations: • No free coverage – everyone must pay • Single risk pool – same rate increase for all plans (to manageanti-selection) • Add $1 to $1.5 million to UK-HMO rates to account for additionalage/gender enrollment shift risk ($400,000 added) • Major plan design changes

14. 2000-2001 Plan Year (cont.) • June 30, 2001 result: $700,000 deficit • Explanation: • Claims projection right on target • Humana withdrawal on June 1, 2000 forced unanticipatedenrollment shifts (obviously too late to change rates) • Humana population was older – they shifted to lower cost plans(less premium collected but claims remained the same)

15. 2001-2002 Strategy • Rationale going in: • Experience of 1999-2000 plan year convinced UK staff to consider more major changes as recommended byWilliam M. Mercer, Incorporated • Single risk pool • Reduced number of vendors • Prescription drug carve-out (and other specialty vendors) • Totally new plan designs • Planning began in June 2000 • Rate for anticipated UK-HMO enrollment shifts • No free coverage (rating structure must recognize that medical costs are increasing much faster than UK overall budget allocation) • Results to be determined

16. Why did UK-HMO rates increase morethan capitation increase? • Discussed in depth August 8 (and summarized clearly in minutes) • Age/gender capitation matrix shifts risk of enrollment changes to UK health plan – result is shared risk between HMO andhealth plan • UK-HMO absorbs risk of adverse utilization and price fluctuations within each age/gender “cell” • UK health plan absorbs risk of transplants, durable medicalequipment, and out-of-area emergency services (capitationrates do not cover these items) • UK health plan absorbs risk of “older” enrollment thananticipated • Example?