Free AHIP (Health Plan Finance and Risk Management) Questions and Answers — Questions and Answers
Question 1: A for-profit company runs the Caribou health plan. Balance sheets, income statements, and cash flow statements are all parts of the financial statements that Caribou creates. Caribou starts with the net income amount on its income statement and then adjusts this figure to operating cash flows to create its cash flow statement. The health plan's operating, investing, and financing operations all impact Caribou's cash flow. <br> <br> The basic formula for Caribou's Income statement is
- Assets = Liabilities + Owners' Equity
- Cash Inflows – Cash Outflows = Net Cash Inflow (Outflow)
- Revenues – Expenses = Net Income (Net Loss) (Correct answer)
- Sources of Funds – Uses of Funds = Net Change in Cash
Correct answer: Revenues – Expenses = Net Income (Net Loss)
The income statement, also known as the profit and loss statement, is a financial document that reports a company's financial performance over a specific accounting period. Its fundamental formula is straightforward: Revenues minus Expenses equals Net Income (or Net Loss). This equation calculates the company's profitability by subtracting all costs and expenditures incurred from the total revenue generated during that period.
Question 2: An actuary for the Noble Health Plan noted that its real administrative costs were greater than its projected administrative costs and that the actual morbidity was lower than its assumed morbidity. Noble's real underwriting margin, in this case, was
- larger than its assumed underwriting margin, but the plan's actual expense margin was lower than its assumed expense margin (Correct answer)
- larger than its assumed underwriting margin, and the plan's actual expense margin was higher than its assumed expense margin
- smaller than its assumed underwriting margin, and the plan's actual expense margin was lower than its assumed expense margin
- smaller than its assumed underwriting margin, but the plan's actual expense margin was higher than its assumed expense margin
Correct answer: larger than its assumed underwriting margin, but the plan's actual expense margin was lower than its assumed expense margin
The underwriting margin reflects the profitability from claims experience. If actual morbidity (claims) was lower than assumed, it means the health plan paid out less in benefits than anticipated, resulting in a *larger* (more favorable) underwriting margin. Conversely, the expense margin reflects profitability from administrative costs. If actual administrative costs were greater than projected, the plan spent more on operations than expected, leading to a *lower* (less favorable) expense margin.
Question 3: Two word pairs in parenthesis are used in the statement below. Find the word in each combination that completes the sentence appropriately. Choose the response option that includes the two words you've chosen. The underwriting risk and affiliate risk of a health plan are most likely (increased/reduced) by purchasing stop-loss coverage.
- reduces / reduces
- increases / increases
- increases / reduces
- reduces / increases (Correct answer)
Correct answer: reduces / increases
Stop-loss coverage is designed to protect a health plan (especially self-funded ones) from unexpectedly high claims costs. By transferring the risk of catastrophic claims to a stop-loss carrier, the health plan's own underwriting risk, which is the risk of claims exceeding expectations, is significantly *reduced*. However, this arrangement introduces or *increases* a form of affiliate risk, as the health plan now relies on the financial stability and performance of the stop-loss provider (the "affiliate" in this business relationship) to cover those large claims.
Question 4: A stop-loss contract may provide that either the paid claims method or the incurred claims method will be used to resolve claims. Employees at The Concord Company have access to a self-funded health plan for their medical care. A Concord employee covered by this plan had surgery on March 17, and because the procedure was so expensive, Concord's particular stop-loss coverage was triggered. On April 10, Concord covered the costs of the associated medical care. The stop-loss contract's term expired on April 1. According to this information, the stop-loss carrier is liable for covering a portion of the surgery's expense under
- the incurred claims method but not the paid claims method (Correct answer)
- both the paid claims method and the incurred claims method
- the paid claims method but not the incurred claims method
- neither the paid claims method nor the incurred claims method
Correct answer: the incurred claims method but not the paid claims method
The incurred claims method covers expenses for services rendered while the stop-loss contract was active, regardless of when the payment occurs. Since the surgery was on March 17, before the April 1 expiration, the claim was incurred within the contract term. Conversely, the paid claims method would only cover expenses if they were actually paid by Concord before the contract expired on April 1, which was not the case here as payment happened on April 10.
Question 5: The underwriting margin of a health plan can be accurately stated as follows:
- Controlling anti selection is the only way the health plan can successfully decrease its exposure to underwriting risk and thus change its underwriting margin.
- The health plan's product will cost less and become more affordable with a higher assumed underwriting margin, increasing the plan's competitiveness.
- Because stop-loss insurance can help the health plan control its spending but not its underwriting risk, it has no impact on the health plan's underwriting margin.
- The health plan's projected underwriting margin is likely directly impacted by both the amount of risk it takes on when delivering benefits and the quantity of competition it faces in the market. (Correct answer)
Correct answer: The health plan's projected underwriting margin is likely directly impacted by both the amount of risk it takes on when delivering benefits and the quantity of competition it faces in the market.
The underwriting margin represents the profitability of a health plan, calculated by subtracting claims and administrative costs from premium revenue. This margin is directly influenced by the amount of risk the plan assumes, as higher risk can lead to increased claims expenditures. Additionally, market competition affects pricing strategies and the ability to set premiums, thereby impacting the potential underwriting margin.
Question 6: The health care plan for its employees is self-funded by the Kayak Company. This plan is an illustration of a general asset plan, a subtype of self-funded plan. This strategy is entirely self-funded, which suggests that
- The plan most likely is exempt from ERISA requirements concerning the limits on benefit discrimination for classes of employees
- The plan is exempt from the state laws and regulations that apply to health insurance policies (Correct answer)
- The plan has no funding vehicle
- Kayak passes to its employees the financial risk of providing healthcare coverage
Correct answer: The plan is exempt from the state laws and regulations that apply to health insurance policies
Self-funded health plans, like Kayak Company's, are typically governed by the Employee Retirement Income Security Act (ERISA). A key feature of ERISA is its preemption clause, which exempts self-funded plans from state laws and regulations that apply to traditional health insurance policies. This means states cannot mandate specific benefits or solvency requirements for these plans, providing employers with greater flexibility in plan design.
Question 7: When it comes to going-concern accounting under GAAP, the Ascot health plan's accountants probably
- Assume that Ascot is not about to be liquidated, unless there is evidence to the contrary (Correct answer)
- Assume that Ascot will pay its liabilities immediately or in full during the current accounting period
- Defer certain costs that Ascot has incurred, unless these costs contribute to the health plan's future earnings
- Value Ascot's assets more conservatively than they would under SAP
Correct answer: Assume that Ascot is not about to be liquidated, unless there is evidence to the contrary
The going-concern assumption under Generally Accepted Accounting Principles (GAAP) dictates that a business entity, such as the Ascot health plan, is presumed to continue operating for the foreseeable future. Accountants apply this principle by assuming the entity will not be liquidated unless there is clear evidence to the contrary. This assumption influences how assets are valued and liabilities are presented, reflecting the business's ability to meet its obligations in the normal course of operations.
Free AHIP (Health Plan Finance and Risk Management) Questions and Answers
A for-profit company runs the Caribou health plan.
Balance sheets, income statements, and cash flow statements are all parts of the financial statements that Caribou creates.
Caribou starts with the net income amount on its income statement and then adjusts this figure to operating cash flows to create its cash flow statement.
The health plan's operating, investing, and financing operations all impact Caribou's cash flow.
The basic formula for Caribou's Income statement is