Overview of CY 2007 HealthChoice Rates

1. Overview of CY 2007 HealthChoice Rates Medicaid Advisory Committee Meeting October 26, 2006

2. Development of Rates • CY07 HealthChoice rates were developed based upon the CY04 audited financial reports submitted by the plans as well as reported diagnosis & utilization encounter data. • The actuary, Mercer, developed trend factors to project the CY04 historical costs to the payment period, and applied a series of actuarial adjustments as necessary.

3. Components of Rate Increase • The level of the CY07 rate increase will be influenced by the following factors: • Changes in the financial base • Medical expense trend • Administrative cost allowance • Modest Profit / Contingency • Actuarial adjustments • State-designated incentive payments

4. Financial Base –Medical Expenses • The 2007 HealthChoice rates are based upon CY04 financial experience of the Plans:

5. Medical Trend • The actuary developed their trend estimates evaluating plan financial reports, HSCRC datasets, and HealthChoice encounter data. • Trend factors recognize changes in cost and utilization from the base period to the payment period.

6. Summary of Average Annual Trends (CY04–CY07)

7. Administrative Costs • The CY07 rates include administrative costs that were based upon independently reviewed CY04 MCO reported costs trended using CPI. • Aggregate administrative costs are “capped” at CY06 rate levels.

8. Administrative Costs PMPM

9. Profit and Contingency • The CY07 rates include a fixed profit percentage of 1.5% of medical expense. • The CY07 rates include a fixed contingency margin percentage of 0.39% of medical expense. • An additional $2.4 million was included to reflect the administrative component of reinsurance premium costs.

10. Actuarial Adjustments • The actuaries applied a series of adjustments in finalizing the rates. • These adjustments recognize the impact of benefit or eligibility changes that took place after the beginning of the base year (CY04). • Some adjustments increase and some adjustments decrease the rates.

11. Actuarial Adjustments Adjustments applied having the impact of increasing the rates were as follows: • FY 05 physician fee increase • FY 06 physician fee increase

12. Actuarial Adjustments Adjustments applied having the impact of decreasing the rates were as follows: • Adult dental carve out • Adult drug co-pays • Lower than anticipated MCO savings for third party liability • Improve RAC assignments due to better encounter data submissions

13. Incentive Payments • CY07 rates included $7.6 million for statewide incentive payments to plans that operated in at least 20 counties. This is approximately 75% of the statewide incentive pool in 2006. • New for CY07 was the implementation of a quality incentive pool of $2.53 million. This is approximately 25% of the statewide incentive pool in 2006.

14. Changes in 2007 Rate Setting • In addition to the change in methodology for the Statewide Incentive Payout, the Program also expanded diagnosis fields for RAC assignments.

15. Final Rates Effective January 2007: • Families & Children 5.8% • Disabled 4.7% • AIDS 8.4% • Deliveries 4.3% • Total including incentives 5.2%