HealthChoice CY 2008 Rate Setting Update Maryland Medicaid Advisory Committee Meeting September 27, 2007

2 Rate Setting Steps b Create base year data b Add program adjustments, such as physician fee increase b Create trends from base year to rate year b Apply and update risk assessment b Update rates at mid year to incorporate changes

3 Process b Met with MCOs monthly starting in February to discuss new rate compilation and any issues b Met with DBM in July to discuss rate impact and obtain approval of rate increase b Submitted rates to MCOs in August 2007 and met individually with all plans b Submitting regulations in September to AELR for January 2008 effective date b MCOs will give notice of intention to participate in CY 2008 by October 1, 2007 b Submit rates to Centers for Medicare and Medicaid Services (CMS) for approval in October, 2007

4 Actual Trends PMPM Trends/Program Changes used in Developing CY07 Rates PMPM Trends/Program Changes Observed in HFMR ServiceCY04/05CY05/06CY04/05CY05/06 Inpatient5.0%7.9%2.5%10.7% Outpatient8.1%12.5%11.4%4.4% Physician3.2%4.9%-1.1%12.7% Pharmacy6.1%8.3%4.7%5.8% Dental4.9%7.6%10.3%9.8% All Other-9.3%3.8%-7.3%7.7% Total* 4.4%8.0%3.2%9.1% * To compare on an equivalent basis, program adjustments of 2.9% need to be added to the trends used in the 2007 rates, they are already included in the HFMR results.

5 MCO Financial Results b Year Result Rate Margin Increase % b CY 00 $ 3,850,332 margin*.4% b CY 01 $ 2,511,347 margin* 4.5 %.2% b CY 02 $ 106,587 margin* 7.9 % --- b CY 03 $29,511,052 margin* 8.5 % 2.2% b CY 04 $26,400,623 margin* 5.3 % 1.8% b CY 05 $58,396,843 margin** 5.8 % 3.7% b CY 06 $28M margin projected 6.3% 1.6% b CY 07 $27M margin projected 5.2% 1.5% b CY %*** *CY Financials reviewed by Clifton Gunderson,LLP, **CY 05 Financials reviewed by Myers and Stauffers ***Actual increase of 6.4% was reduced to account for HIV/AIDS drug carve out.

6 Impact of Carve Out on Rates b Expense reduction due to removal of one class of drugs for HIV/AIDs recipients caused a reduction in the rate increase of approximately 2%.

Rate Setting b Overall rate increase of 4.4% with a FY 2008 MCO budget impact of $ 21M GF and $7.5M GF for HIV/AIDS drug carve out to fee-for- service b Rates are based on CY 05 audited consolidated financial data trended forward b Issues included in the base: physician fee increases and cost containment

8 Rate Setting Adjustments b Most significant adjustments for CY 08 rate setting: Fixed percentages for profit (1.5%) and contingency margin (.4%) as a percentage of medical expenses Actual administrative percentage is 12.2% of expenses Cohort aging analysis with impact of approximately 1% Efficiency adjustment methodology incorporated with immaterial impact in CY 08 Stillborn policy change and adjustment incorporated Dental pool established for achieving utilization goals for non- utilizers of services Continuing cost containment