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

2. Health Insurance Task Force Meeting 1 Agenda n Year-by-year financial results under self-insurance  Rationale going in  Key Mercer recommendations  Results  Explanation n Why did UK-HMO rates increase more than the 11% capitation rate increase?

3. Health Insurance Task Force Meeting 2

4. 3 Breakdown Of Expenses for 2000-2001 Claims$22,500,000 Capitation$27,600,000 Administrative Fees$2,500,000 Stop/Loss Insurance$250,000 Reserve Adjustment($950,000) Total$51,900,000

5. Health Insurance Task Force Meeting 4 1997-1998 Plan Year n Rationale going in:  unknown; Mercer not involved until February 1998  likely used insured carrier rates that had already been quoted n Key Mercer recommendations:  none n June 30, 1998 result: $1.1 million deficit n Explanation of results  unknown (to Mercer)  medical inflation still very low during this period

6. Health Insurance Task Force Meeting 5 1998-1999 Plan Year n 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 n Key Mercer recommendations:  use of 4-tier structure for all plans  consistent tier factors across all plans  consider “single risk pool” rating

7. Health Insurance Task Force Meeting 6 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?) n June 30, 1999 result: $1.5 million deficit

8. Health Insurance Task Force Meeting 7 1998-1999 Plan Year (cont.) n 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 and enrollment reports – carrier enrollment was overstated on these reports  UK experienced revenue shortfall because there were actually fewer enrollees than reported to Mercer. This enrollment discrepancy was not discovered until well after 1999-2000 rates had been set.

9. Health Insurance Task Force Meeting 8 1999-2000 Plan Year n Rationale going in:  Rates for 1999-2000 based on experience through December 1998  At that time, no apparent major problems with UK strategy to rate each plan based on its own experience  Enrollment discrepancies were not known, so carrier reports were used (standard practice)

10. Health Insurance Task Force Meeting 9 1999-2000 Plan Year (cont.) n 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 n June 30, 2000 result: $4.6 million deficit

11. Health Insurance Task Force Meeting 10 1999-2000 Plan Year (cont.) n 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 per capita experience too low because enrollment too high)  Enrollment shift in UK-HMO population (enrollment older than 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 uncollected capitation payments (that had not been rated for)

12. Health Insurance Task Force Meeting 11 1999-2000 Plan Year (cont.) n Explanation:  “One time” charges  Humana had failed to bill UK for certain capitation charges 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. Health Insurance Task Force Meeting 12 2000-2001 Plan Year n Rationale going in:  Emerging poor experience for 1999-2000 known based on Mercer financial 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) n Key Mercer recommendations:  No free coverage – everyone must pay  Single risk pool – same rate increase for all plans (to manage anti-selection)  Add $1 to $1.5 million to UK-HMO rates to account for additional age/gender enrollment shift risk ($400,000 added)  Major plan design changes

14. Health Insurance Task Force Meeting 13 2000-2001 Plan Year (cont.) n June 30, 2001 result: $700,000 deficit n Explanation:  Claims projection right on target  Humana withdrawal on June 1, 2000 forced unanticipated enrollment 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. Health Insurance Task Force Meeting 14 2001-2002 Strategy n Rationale going in:  Experience of 1999-2000 plan year convinced UK staff to consider more major changes as recommended by William 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. Health Insurance Task Force Meeting 15 Why did UK-HMO rates increase more than capitation increase? n Discussed in depth August 8 (and summarized clearly in minutes) n Age/gender capitation matrix shifts risk of enrollment changes to UK health plan – result is shared risk between HMO and health plan  UK-HMO absorbs risk of adverse utilization and price fluctuations within each age/gender “cell”  UK health plan absorbs risk of transplants, durable medical equipment, and out-of-area emergency services (capitation rates do not cover these items)  UK health plan absorbs risk of “older” enrollment than anticipated n Example?