Letter to John Fritz on Proposed RBC Risk 12-03-05

The Survey At this pre-data point in time, we plan to develop only new factors for fully insured, stand-alone Part D coverage for standard or actuarially equivalent coverage and the Reinsurance Payment Demonstration coverage. We will recommend that the current “Other Health� factor of 13% for Health RBC, and the corresponding Life RBC factor, continue to apply for the supplemental benefit portion of coverage, since this is not subject to any risk reduction from the government. Also, we will not be recommending any change for combined Medicare Advantage and Part D coverage. That is, the 15% and 9% factors will continue to hold for both the medical and pharmacy portions of this combined coverage. In the future, when experience data is available, our recommendation can be further refined. If you are not able to completely answer all of the questions below, please provide responses to those questions, or portions of questions, that you are able to answer.

Please provide your opinions for the following eight questions: 1. Assume that a carrier has filed a bid with CMS with a target benefit ratio (i.e. loss ratio) of X. What would you consider to be reasonably worst case (95% confidence level) and moderately adverse case (70% confidence level) scenarios for the experience expressed as a percent of X (not of premium)? That is, an answer of 150% of X would mean that actual ultimate claims costs would be 50% greater than the pricing actuaries had assumed in their pricing. In answering this question, assume that revenue is not risk adjusted for health status and that there is no risk corridor protection. Also assume that the carrier does not participate in the Reinsurance Payment Demonstration and receives the average premium calculated in the pricing of the product and filed with CMS for standard (or actuarially equivalent) coverage. a. Reasonably worst case scenario: __________________________________________ b. Moderately adverse case scenario: ________________________________________ 2. What would your answers to Question #1 be if you also consider that CMS will use health status risk adjustment to adjust revenue to account for the risk profile of the actual enrolled population (but still ignore risk corridors)? a. Reasonably worst case scenario: ___________________________________________ b. Moderately adverse case scenario: _________________________________________ 3. Would your answer to Question #1 change for Plans that participate in the Reinsurance Payment Demonstration? That is, the applicable fully insured coverage includes both the standard (or actuarially equivalent) benefit and the additional 80% of catastrophic claims in excess of $5,100 per individual per year. If so, please provide your new response below. In answering this question, again assume that revenue is not risk adjusted for health status and that there is no risk corridor protection. Also assume that the carrier receives the average premium calculated in the pricing of the catastrophic coverage for the Reinsurance Payment Demonstration and the average premium calculated in the pricing of the product and filed with CMS for standard (or actuarially equivalent) coverage. a. Reasonably worst case scenario: ___________________________________________ b. Moderately adverse case scenario: _________________________________________