HCMG EXAM 1 REVIEW QUESTIONS
AND ANSWERS 100% CORRECT
Define premium - ANSWER-The amount the buyer pays in exchange for receiving
coverage during a specific period
Define claims - ANSWER-Insurer agrees to pay the losses/expenses as specified in the
agreement/contract
How does variability play a role in insurer's average cost? - ANSWER-declines as more
people are insured
spreads the risk of loss over a large number of people
What is a risk rating? - ANSWER-Increased/decreased insurance rates depending on
your health
premiums reflect each buyer's claim cost
premiums reflect what is likely to happen during a certain time
Define adverse selection - ANSWER-Proclivity of people with higher than average
expected costs to buy more insurance than people with lower average expected costs
at a given premium rate
What would happen if both high risk and low risk people were offered the same
premium? - ANSWER-Low risk people would have to pay more than they had to before
and high risk people would have to pay less than before -> low risk people will not buy
coverage anymore
->average cost of claims increase ->higher premium
->death spiral: market ends up with only high risks at high premiums
why risk rating helps to maintain this
What is a "death sprial"? - ANSWER-Death spiral: market ends up with only high risks
at high premiums
What was the risk rating of health insurace for individuals and small empoyers before
the affordable care act (ACA)? - ANSWER--premiums reflect on the buyers predicted
costs given age, gender, and conditions
-buyers with higher predicted costs paid higher premiums
, What does risk rating of insurance produce? - ANSWER-it produces EX POST CROSS
SUBSIDIES within a given rating group = during the coverage period, coverage
expenses are generally greater than premiums for people with high expenses and lower
than premiums for people with low expenses
What's a condition waiver? Pre ACA - ANSWER-excludes coverage for a specified
health condition for some period of time
What is guaranteed renewable coverage (pre ACA)? - ANSWER-usually not feasible to
offer multi-year contracts with guaranteed rates
rates can only be increased over time for a RATING GROUP not based on enrollee's
health status
What are the regulations of risk rating pre ACA? - ANSWER--regulation limited health,
age, and/or gender related premium variation for individuals and small groups in some
states
-NY and VT had close to pure community rating
-some states limited how much health status could affect rates (up to 50% increase or
decrease)
What are the regulations of risk rating post ACA (2014+)? - ANSWER--guaranteed
issue and parital community rrating for individual and small group markets
-rates for individuals and small groups cannot reflect health conditions but are allowed
to vary within a 3 to 1 age band
-states an allow higher rates for smokers
Illustrative age rating approches - ANSWER-if people are below the compressed 3:1
age rate curve, they are less likely to buy insurance
Potential harm in guaranteed renewable coverage? - ANSWER-people who remain
healthy over time might seek new coverage at a lower rate (or move into employer
coverage) -> increase rates for those who remain in the original but now less healthy
pool
What are some factors that have helped maintain viable guarenteed renewable
coverage? - ANSWER--switch costs deterred some healthy enrollees from switching
(you have to pay a fee if you wanted to switch)
-insurers charged higher premiums in early years to help keep subsequent rates low
enough to deter switching
AND ANSWERS 100% CORRECT
Define premium - ANSWER-The amount the buyer pays in exchange for receiving
coverage during a specific period
Define claims - ANSWER-Insurer agrees to pay the losses/expenses as specified in the
agreement/contract
How does variability play a role in insurer's average cost? - ANSWER-declines as more
people are insured
spreads the risk of loss over a large number of people
What is a risk rating? - ANSWER-Increased/decreased insurance rates depending on
your health
premiums reflect each buyer's claim cost
premiums reflect what is likely to happen during a certain time
Define adverse selection - ANSWER-Proclivity of people with higher than average
expected costs to buy more insurance than people with lower average expected costs
at a given premium rate
What would happen if both high risk and low risk people were offered the same
premium? - ANSWER-Low risk people would have to pay more than they had to before
and high risk people would have to pay less than before -> low risk people will not buy
coverage anymore
->average cost of claims increase ->higher premium
->death spiral: market ends up with only high risks at high premiums
why risk rating helps to maintain this
What is a "death sprial"? - ANSWER-Death spiral: market ends up with only high risks
at high premiums
What was the risk rating of health insurace for individuals and small empoyers before
the affordable care act (ACA)? - ANSWER--premiums reflect on the buyers predicted
costs given age, gender, and conditions
-buyers with higher predicted costs paid higher premiums
, What does risk rating of insurance produce? - ANSWER-it produces EX POST CROSS
SUBSIDIES within a given rating group = during the coverage period, coverage
expenses are generally greater than premiums for people with high expenses and lower
than premiums for people with low expenses
What's a condition waiver? Pre ACA - ANSWER-excludes coverage for a specified
health condition for some period of time
What is guaranteed renewable coverage (pre ACA)? - ANSWER-usually not feasible to
offer multi-year contracts with guaranteed rates
rates can only be increased over time for a RATING GROUP not based on enrollee's
health status
What are the regulations of risk rating pre ACA? - ANSWER--regulation limited health,
age, and/or gender related premium variation for individuals and small groups in some
states
-NY and VT had close to pure community rating
-some states limited how much health status could affect rates (up to 50% increase or
decrease)
What are the regulations of risk rating post ACA (2014+)? - ANSWER--guaranteed
issue and parital community rrating for individual and small group markets
-rates for individuals and small groups cannot reflect health conditions but are allowed
to vary within a 3 to 1 age band
-states an allow higher rates for smokers
Illustrative age rating approches - ANSWER-if people are below the compressed 3:1
age rate curve, they are less likely to buy insurance
Potential harm in guaranteed renewable coverage? - ANSWER-people who remain
healthy over time might seek new coverage at a lower rate (or move into employer
coverage) -> increase rates for those who remain in the original but now less healthy
pool
What are some factors that have helped maintain viable guarenteed renewable
coverage? - ANSWER--switch costs deterred some healthy enrollees from switching
(you have to pay a fee if you wanted to switch)
-insurers charged higher premiums in early years to help keep subsequent rates low
enough to deter switching
