Final Trend Estimates and CY07 Rates

1. July 28, 2006 Final Trend Estimates and CY07 Rates Tim Doyle, FSA, MAAA Brad Rhodes Jeff Smith

2. Outline of Presentation A. Rate Impact B. Rate-Setting Methodology

3. A. Rate Impact • Recall from the June 22, 2006 presentation that Trend = Rate Increase • Aggregate rate increase/decrease is due to • Medical inflation (trend) • Benefit program changes • Demographic mix changes (enrollment distribution across rate cells) • Other (e.g., rebasing) • Overall revenue increase/decrease is additionally due to • Total enrollment changes

4. A. Rate Impact (continued) • Program-wide CY07 PMPM increase of 5.2 percent over mid-year CY06 rates based on March member months simulations • MCO-specific PMPM increases to be distributed after the presentation today

5. B: Rate-Setting Methodology 1. CY04 adjusted HFMR base as starting point 2. Program changes 3. Medical trends 4. Administrative and profit load 5. Relational modeling 6. Regional factors 7. Low birth weight babies

6. B.1: CY04 Adjusted HFMR Base as Starting Point • MCOs submitted CY04 HFMRs adjusted for • C&G and L&E reviews • Non-State Plan services • Removal of adult dental • FQHC pricing

7. B.2: Program Changes • Physician fee schedule • Increase to specified codes effective July 1, 2005 and July 1, 2006 • Impacts physician PMPM by 16 percent • Pharmacy copay • $3 copay for all brand drugs not on the preferred drug list, $1 copay for all generic drugs for adults. Pregnant women, children, and family planning drugs are excluded from copays • Increase in dental fees for restorative services • $0.52 million increase

8. B.2: Program Changes (continued) • TPL • $1.5 million removed from total expenses

9. B.3: Medical Trends • Preliminary trend ranges presented on June 22, 2006 • Final trend estimates presented in this section

10. Trend Methodology • Data analysis • Analyze MCO-reported financial and encounter data • Analyze HSCRC hospital data • Trend estimation • Past trends: Assessed based on the historical data • Future trends: Assessed with past trends as baseline compared to other benchmarks

11. Inpatient Hospital Unit Cost Trends: HSCRC Component • HSCRC rate updates *Forecast

12. Inpatient Trend Considerations • CY04–CY05 (also 3 months of CY06) trend estimates based on program-specific data • CY05–CY07 trend forecasts driven by HSCRC rate updates • Trends estimates incorporate HSCRC DRG day limit and GME discount impact

13. Inpatient Hospital PMPM Annual Trend by COA and Year

14. Outpatient Hospital Unit Cost Trends: HSCRC Component • HSCRC rate updates *Forecast

15. Outpatient Trend Considerations • CY04–CY05 (also 3 months of CY06) trend estimates based on program-specific data • CY05–CY07 trend forecasts driven by HSCRC rate updates • Trends estimates incorporate GME discount impact

16. Outpatient Hospital PMPM Annual Trend by COA and Year

17. Pharmacy Trend Considerations • CY04–CY05 (also 3 months of CY06) trend estimates based on MCO-specific data • CY05–CY07 trend forecasts based on pharmacy industry research

18. Pharmacy PMPM Annual Trend by COA and Year

19. Physician Trend Considerations • CY04–CY05 (also 3 months of CY06) trend estimates based on MCO-specific data • CY05–CY07 trend forecasts based on above baseline and industry research

20. Physician PMPM Annual Trend by COA by Year

21. Summary of Average Annual Trends by COA and COS(CY04–CY07) *Reflects -9.3% trend for CY04/05 and 3.8% trend for both CY05/06 and CY06/07.

22. Summary of Consolidated COS Annual Trend by COA and Year

23. B.4: Administrative and Profit Load • From the audited CY04 HFMR base cost, grouped separately by F&C and Disabled • Medical management costs • Administrative costs • Administrative trends • Medical management (at CPI +): 3.76 percent • Administrative costs (at CPI): 2.80 percent • Additional items • Underwriting Gain: 1.5 percent of medical expense • Reinsurance Administration Costs: $2.4 million added to base • Risk/Contingency Margin: 0.4 percent of medical expense • State policy decision: loading capped at CY06 level of 12.6 percent

24. Administrative and Profit Load Allocation • Premium Tax: 2.3 percent of medical expense • Overall, loading over medical portion of CY07 rates is 14.9 percent • Medical management, underwriting gains, risk/contingency margin, reinsurance administration, and premium tax as variable loading (proportionally to medical component of rate) • Administrative costs as fixed loading • Variable by F&C and Disabled • Variable by rate cell groupings • Administration costs for RACs • 75 percent fixed and 25 percent variable

25. B.5: Relational Modeling • Standard actuarial step • For smoothing • To reflect improved RAC assignment due to better encounter data and RAC relativities • To incorporate aging of RAC cohorts

26. B.6: Regional Factors • City versus Rest of State (ROS) regional factors based on the regional analysis presentation on June 22, 2006 • Results in City/ROS differential of 23 percent for demographic rate cells and 14 percent for RACs • Last year the differential was 27 percent for demographic rate cells and 17 percent for RACs

27. B.7: Low Birth Weight Babies • UMBC analysis applied to newborn/delivery kick payment and < 1 F&C • Adjusted to recognize 90 percent of differential in base cost analysis • Adjusted for differential trend