Chapter 1A 1.

The Danner Bank loaned money to the CareWell Health Plan to fund an expansion of
a healthcare facility. With respect to the type of financial information user Danner represents to CareWell, it is correct to say that Danner is an: internal user with a direct financial interest Incorrect. A lender (bank) is an example of an external user internal user with an indirect financial interest Incorrect. A lender (bank) is an example of an external user with a direct financial interest. external user with a direct financial interest Correct. A lender is an external user with a direct financial interest. case-mix adjustment Incorrect. Dover Bank stands to gain or lose money as a result of the health plans performance.

2. Health plans have access to a variety of funding sources depending on whether they
are operated as for-profit or not-for-profit organizations. The Verde Health Plan is a forprofit health plan and the Noir Health Plan is a not-for-profit health plan. From the answer choices below, select the response that correctly identifies whether funds from debt markets and equity markets are available to Verde and Noir: Funds from Debt Markets: available to Verde and Noir Funds from Equity Markets: available to Verde and Noir Incorrect. While funds from debit markers are available to both, funds from equity markets are not available for not-for-profit plans. Funds from Debt Markets: available to Verde and Noir Funds from Equity Markets: available to Verde only Correct. Funds from debit markets are available to both for profit and notfor-profit health plans. Funds from equity markets are only available to forprofit plans. Funds from Debt Markets: available to Verde only Funds from Equity Markets: available to Noir only Incorrect. Funds from debit markets are available to both for profit and notfor-profit health plans. Funds from equity markets are only available to forprofit plans. Funds from Debt Markets: available to Noir only Funds from Equity Markets: available to Verde only Incorrect. While funds from equity markets are available only to for profit plans, funds from debit markets are available to both for profit and not-forprofit health plans.

Chapter 2 A
3.The following examples describe situations that expose an individual or a health plan to either pure risk or speculative risk:

Example 1 A health plan invested in 1,000 shares of stock issued by a technology company.

Example 2 An individual could contract a terminal illness. Example 3 A health plan purchased a new information system. Example 4 A health plan could be held liable for the negligent acts of an employee.

The examples that describe pure risk are examples 1 and 2 Incorrect. Pure risk involves no possibility of gain. examples 1 and 4 Incorrect. Pure risk involves no possibility of gain. examples 2 and 3 Incorrect. Pure risk involves no possibility of gain. examples 2 and 4 Correct. Pure risk involves no possibility of gain.

4. Contingency risks, or C-risks, are general categories of risk that have a direct bearing
on both the cash flow and solvency of a health plan. One of these C-risks, pricing risk (C-2 risk), is typically the most important risk a health plan faces. Pricing risk is crucial to a health plans solvency because: a sizable portion of any health plans assets are held in long-term investments and any shift in interest rates can significantly impact a health plans ability to pay medical benefits Incorrect. A large portion of a health plan's assets flow in and out of shortterm liquid investments. a health plan relies heavily on the sound judgment of its management, and poor management decisions can result in financial losses for the health plan Incorrect. This is an example of a C-4 or general management risk. a situation in which actual expenses exceed the amounts budgeted for those expenses may result in the health plan failing to retain assets sufficient to cover current obligations Incorrect. Deciding the specific level of capital and surplus is an example of C-4 management risk. a sizable portion of the total expenses and liabilities faced by a health plan come from contractual obligations to pay future medical costs, and the exact amounts of those costs are not known at the time a products premium is established Correct. A sizable portion of the total expenses and liabilities faced by a health plan come from contractual obligations to pay future medical costs, and the exact amount of these costs are not known at the time a products premium is established.

5. The HMO Model Act sets certain requirements that an entity that wishes to operate as
an HMO must meet. These requirements include: having an initial net worth of at least $5 million Incorrect. The HMO Model Act requires an intial net worth $1.5 million.

maintaining a net worth equal to at least 5% of premium revenues for the first $150 million in premium revenue Incorrect. The requirement states 2% of annual premium revenue on the first $150 million. using a prospective method to estimate future risk Incorrect. The HMO Model Act is restrospective in its assessment of risk. obtaining a certificate of authority (COA) before beginning operations Correct. Under the HMO Model Act, an HMO must obtain a COA before beginning operations.

6. The risk-based capital formula for health plans defines a number of risks that can
impact a health plans solvency. These categories reflect the fact that the level of risk faced by health plans is significantly impacted by provider reimbursement methods that shift utilization risk to providers. The following statements are about the effect of a health plan transferring utilization risk to providers. Select the answer choice containing the correct statement: The net effect of using provider reimbursement contracts to transfer risk is that the health plans net worth requirement increases. Incorrect. The net effect of using provider reimbursement contracts to transfer risk is that the health plans net worth requirement decreases. Once the health plan has transferred utilization risk to its providers, it is relieved of the legal obligation to provide medical services to plan members in the event of the providers insolvency. Incorrect. Tranferring utilization risk to providers does not eliminate the health plan's responsibility to arrange for medical services for members, even if the provider becomes insolvent. The greater the amount of risk the health plan transfers to providers, the larger the credit-risk factor becomes in the health plans RBC formula. Correct. The greater the amount of risk the health plan transfers to providers, the larger the credit-risk factor becomes in the health plans RBC formula. By decreasing its utilization risk, the health plan increases its underwriting risk. Incorrect. By decreasing utilization risk the health plan decreases its underwriting risk.

Chapter 2 B 7. The amount of risk for health plan products is dependent on the degree of influence
and the relationships that the health plan maintains with its providers. Consider the following types of managed care structures:

Preferred provider organization (PPO) Group model HMO Staff model health maintenance organization (HMO) Traditional health insurance

Of these health plan products, the one that would most likely expose a health plan to the highest risk is the:

preferred provider organization (PPO) group model HMO staff model health maintenance organization (HMO) traditional health insurance

A Incorrect. A PPO product is a lower risk, based on the relationship the health
plan maintains with the providers B Incorrect. Given the relationship the health plan maintains with the providers, this is a higher risk, but not the highest C Correct. Given the relationship the health plan maintains with the providers, this is the highest risk D Incorrect. A Traditional health insurance product exposes the plan to the least amount of risk.

8. The theory of vicarious liability or ostensible agency can expose a health plan to the
risk that it could be held liable for the acts of independent contractors. Factors that may give rise to the assumption that an agency relationship exists between a health plan and its independent contractors include: requiring the providers to supply their own office space employing nurses and other healthcare professionals to support the physician providers requiring providers to maintain their own medical records all of the above Incorrect. Supplying a provider with office space would give rise to the assumption that an agency relationship exists between a health plan and its independent contractors. Correct. This is a factor that would give rise to the assumption that an agency relationship exists between a health plan and its independent contractors. Incorrect. Keeping a provider's medical records would give rise to the assumption that an agency relationship exists between a health plan and its independent contractors. Incorrect. Several of the above responses are incorrect.

9. Many clinicians are concerned about the development of practice guidelines that seek
to define appropriate healthcare services that should be provided to a patient who has

been diagnosed with a specific condition. To avoid the risk associated with using such guidelines, health plans should advise clinicians that the existence of such a guideline: 1. Establishes standards of care to be routinely utilized with all patients presenting a specific condition 2. Preempts a physicians judgment when assessing the specific factors related to a patients condition Both 1 and 2 1 only 2 only Neither 1 nor 2 Incorrect. An existence of a guideline does establish a standard of care, and clinicians should rely on their skill and judgement to determine the best course for their patient, even pre-empting the recommendations of the guideline. Incorrect. Guideline are instructive, and most guidelines articulate agreed-upon standards of care, they are not a standard of care in and of themselves Incorrect. While a guideline can help support utilization management decisions, physcians should independently determine the best course for their patient, even pre-empting the recommendations of the guideline. Yes!

Chapter 3 A 10. In a fee-for-service (FFS) reimbursement method, providers are paid per treatment
or per service that they provide. One typical benefit of FFS reimbursement is that it: is highly effective in preventing excessive services that take the form of churning, unbundling, and upcoding provides physicians who attempt to control costs with a higher rate of compensation than is provided to physicians who make the effort to control costs is relatively easy to initiate, especially in markets where managed care penetration is low guards against the practice of defensive medicine

Incorrect. Churning, unbundling and upcoding are all disadvantages of the FFS payment method. Incorrect. Under FFS there is no incentive for providing cost effective care.

Correct. FFS reimbursement is easy to initiate, especially where market penetration is low. Incorrect. FFS does not guard against defensive medicine, which is an attempt to minimize malpractice risk by supplying extra services of little benefit to the patient.

Chapter 3 B 11. The Jamal Health Plan operates in a state that mandates that a health plan either
allow providers to become part of its network or reimburse those providers at the health plans negotiated-contract rate, so long as the non-contract provider is willing to perform the services at the contract rate. This type of law is known as: a fair procedure law a direct access law an any willing provider law a due process law Incorrect. Fair procedure law, or due process law requires health plans to disclose criteria they use for selection or deselection and to provide a process to challenge decisions Incorrect. A direct access law allows health plan members to see certain specialists without referral Correct. An any willing provider law allows any qualified provider, willing to perform services at the contracted rate, become part of the network Incorrect. Due process law requires health plans to disclose criteria they use for selection or deselection and to provide a process to challenge decisions

12. Mandated benefit laws are state or federal laws that require health plans to arrange
for the financing and delivery of particular benefits. Ways that mandated benefits have the potential to influence health plans include: 1. Causing a lower degree of uniformity among health plans of competing health plans in a given market 2. Increasing the cost of the benefit plan to the extent that the plan must cover mandated benefits that would not have been included in the plan in the absence of the law or regulation that mandates the benefits Both 1 and 2 1 only 2 only

Neither 1 nor 2 Incorrect. Mandated benefits increase the degree of uniformity within a particular market Incorrect. Mandated benefits increase the degree of uniformity within a particular market Correct. Mandated benefits increase the cost of the benefit plan, if the benefit would not have been included in the absence if law or regulation Incorrect. Mandated benefits increase the cost of the benefit plan, if the benefit would not have been included in the absence if law or regulation

13. Dr. Martin Cassini is an obstetrician who is under contract with the Bellerby Health
Plan. Bellerby compensates Dr. Cassini for each obstetrical patient he sees in the form of a single amount that covers the costs of prenatal visits, the delivery itself, and postdelivery care . This information indicates that Dr. Cassini is compensated under the provider reimbursement method known as a: global fee relative value scale unbundling discounted fee-for-service Correct. A global fee is a single fee that the provider is given for all services associated with an entire course of treatment for a plan member Incorrect. Under a relative value scale a health plan assigns weighted values to each medical procedure or service performed by a provider based on the cost and intensity of that service Incorrect. Unbundling is the practice of provider's billing for multiple components of a service that was previously included in a single fee Incorrect. Discounted fee-for-service reimburses the provider on a per-treatment basis on a level below the provider's usual charge for that service

14. Dr. Jacob Winburne is compensated by the Honor Health Plan under an
arrangement in which Honor establishes at the beginning of a financial period a fund from which claims approved for payment are paid. At the end of the given period, any funds remaining are paid out to providers. This information indicates that the arrangement between Dr. Winburne and Honor includes a provider incentive known as a:

risk pool, and any deficit in the fund at the end of the period would be the sole responsibility of Honor risk pool, and any deficit in the fund at the end of the period would be paid by both Dr. Winburne and Honor according to percentages agreed upon at the beginning of the contract period withhold, and any deficit in the fund at the end of the period would be the sole responsibility of Honor withhold, and any deficit in the fund at the end of the period would be paid by both Dr. Winburne and Honor according to percentages agreed upon at the beginning of the contract period Incorrect Yes Incorrect Incorrect

Chapter 4 A 15. Cascade Hospital has negotiated with the McBee Health Plan a straight per-diem
rate of $1,000 per day for medical admissions. One of McBees plan members was admitted to Cascade for 10 days. Total billed charges equaled $10,000, of which $2,000 were for noncovered items. This information indicates that, for this admission, the amount that McBee was obligated to reimburse Cascade was: $0 $8,000 $10,000 $12,000 Incorrect. The formula is per-diem rate X number of days Incorrect. A theoretical disadvantage of the per diem approach is that the per diem must be paid even if the billed charges are less than the per diem rate Correct. $1,000 X 10 = $10,000 Incorrect. The formula is per-diem rate X number of days.

16. The Chamber Health Plan reimburses primary care physicians on a monthly basis by
using a simple capitation method. Chamber assumes an annual utilization rate of three visits per year. The FFS rate per office visit is $75, and all plan members are required to make a $10 copayment for each office visit. This information indicates that the capitation rate that Chamber calculates per member per month (PMPM) is equal to:

$6.25 $16.25 $18.75 $21.25 Incorrect. The formula is (Annual Utilization Rate X FFS equivalent (FFS rate minus copayment)) / Number of reimbursement periods per year. Correct (3 X 75-10) / 12 is $16.25 Incorrect. The formula is (Annual Utilization Rate X FFS equivalent (FFS rate minus copayment) ) / Number of reimbursement periods per year Incorrect. The formula is (Annual Utilization Rate X FFS equivalent (FFS rate minus copayment) ) / Number of reimbursement periods per year.

17. Doctors Care is an individual practice association (IPA) under contract to the Jasper
Health Plan to provide primary and secondary care to Jaspers members. Jaspers capitation payments compensate Doctors Care for all physician services and associated diagnostic tests and laboratory work. The physicians at Doctors Care, as a group, determine how individual physicians in the group will be remunerated. The type of capitation used by Jasper to compensate Doctors Care is known as: PCP capitation partial capitation full professional capitation specialty capitation Incorrect. PCP capitation is a capitation arrangement which reimburses the provider for primary care services only Incorrect. Partial capitation, also known as PCP capitation, is a capitation arrangement which reimburses the provider for primary care services only Correct. Full professional capitation is an arrangement that covers all physician services Incorrect. Specialty capitation uses capitation to pay individual specialists or single-specialty groups.

18. The Swann Health Plan excludes mental health coverage from its basic health
benefit plan. Coverage for mental health is provided by a specialty health plan called a managed behavioral health organization (MBHO). This arrangement recognizes the fact that distinct administrative and clinical expertise is required to effectively manage mental

health services. This information indicates that Swann manages mental health services through the use of a: formulary risk pod carve-out case rate Incorrect. A formulary is a listing of drugs that are considered preferred therapy for a health plan's population and are to be used by the health plan's providers when prescribing medicine Incorrect. A risk pod is a small group of physicians practicing independently within a geographic region who are treated as a group for the purposes of measuring performance and setting compensation Correct. Carve outs are services tthat are excluded form a capitation payment or risk pool, or a health benefit plan Incorrect. Case rates are rates established on a case by case basis

Chapter 4B 19. The Longview Hospital contracted with the Carlyle Health Plan to provide inpatient
services to Carlyles enrolled members. Carlyle provides Longview with a type of stoploss coverage that protects, on a claims incurred and paid basis, against losses arising from significantly higher than anticipated utilization rates among Carlyles covered population. The stop-loss coverage specifies an attachment point of 130% of Longviews projected $2,000,000 costs of treating Carlyle plan members and requires Longview to pay 15% of any costs above the attachment point. In a given plan year, Longview incurred covered costs totaling $3,000,000. With regard to the type of stop-loss coverage provided to Longview by Carlyle and to whether this coverage is classified as insurance or reinsurance, the risk transfer approach used in this situation can be described as: aggregate stop-loss reinsurance aggregate stop-loss insurance specific stop-loss reinsurance specific stop-loss insurance Incorrect. Stop-loss reinsurance is a type of insurance that insurers purchase.

10

Correct. Aggregate stop-loss insurance protects non insurance entities, like physicians or hospitals from the losses that occur when utilization rates for a covered population as a whole are significantly higher than expected Incorrect. Specific stop-loss reinsurance protects the insurer from individual cases where medical expenses are catastrophic Incorrect. Specific stop-loss reinsurance protects the hospital or physician from individual cases where medical expenses are catastrophic

20. The Longview Hospital contracted with the Carlyle Health Plan to provide inpatient
services to Carlyles enrolled members. Carlyle provides Longview with a type of stoploss coverage that protects, on a claims incurred and paid basis, against losses arising from significantly higher than anticipated utilization rates among Carlyles covered population. The stop-loss coverage specifies an attachment point of 130% of Longviews projected $2,000,000 costs of treating Carlyle plan members and requires Longview to pay 15% of any costs above the attachment point. In a given plan year, Longview incurred covered costs totaling $3,000,000. For the year in which Longviews incurred covered costs were $3,000,000, the amount for which Longview will be responsible is: $2,000,000 $2,600,000 $2,660,000 $3,900,000 Incorrect. The formula is (Attachment Point + 15% of the amount over attachment.) Incorrect. The formula is (Attachment Point + 15% of the amount over attachment Correct. 130% of 200,000 is $260,000, and 15% of 40,000 (the amount over attachment) is $6,000. 260,000 + 6000 + $266,000 Incorrect. The formula is (Attachment Point + 15% of the amount over attachment.)

21. The Longview Hospital contracted with the Carlyle Health Plan to provide inpatient
services to Carlyles enrolled members. Carlyle provides Longview with a type of stoploss coverage that protects, on a claims incurred and paid basis, against losses arising from significantly higher than anticipated utilization rates among Carlyles covered population. The stop-loss coverage specifies an attachment point of 130% of Longviews projected $2,000,000 costs of treating Carlyle plan members and requires Longview to pay 15% of any costs above the attachment point. In a given plan year, Longview incurred covered costs totaling $3,000,000. Carlyle most likely is responsible for paying Longview for the claims incurred before Longview has actually paid the medical expenses.

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True False Incorrect. In stop-loss agreements the carrier is seldom responsible for paying the purchaser before the purchaser pays the medical expenses Correct!

Chapter 5 A 22. The following statements are about the option for health plan funding known as a
self-funded plan. Select the answer choice containing the correct response: In a self-funded plan, an employer is relieved of all risk associated with paying for the healthcare costs of its employees. Self-funded plans are subject to the same state laws and regulations that apply to health insurance policies. Employers electing to self-fund a health plan are required to pay claims from a separate trust established for that purpose. An employer electing to self-fund a health plan has the option of purchasing stoploss insurance to transfer part of the financial risk to an insurer. Incorrect. The employer bears some or all of the risk. Incorrect. Self-funded plans are expempt form state laws and regulations that apply to health insurance plan policies Incorrect. There are two types of funding vehicles for self-funded plans, a trusteed plan (separate trust) or a general asset plan, paying for healthcare expenses from the employers current operating funds. Correct. An employer electing to self-fund a health plan does have the option of purchasing stop-loss insurance to transfer part of the financial risk to an insurer becoming partially self-funded.

Chapter 5 B 23. With regard to alternative funding arrangements, the part of a health plan premium that is intended to contribute to the claims reserve that a health plan maintains to pay for unusually high utilization is known as the:
interest charge retention charge risk charge surplus

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Incorrect. An interest charge is, in a premium-delay arrangement, the part of the premium that affects the amount of interest lost to the health plan. Incorrect. Retention charge is the part of a premium that is intended to cover expenses (other than medical) and allow the health plan to make a profit Correct! Incorrect. A surplus is the amount which a health plans assets exceed its liabilities and capital.

24. The Rathbone Company has contracted with the Jarvin Insurance Company to
provide healthcare benefits to its employees. Under this contract, Rathbone assumes financial responsibility for paying 80% of its estimated annual claims and for depositing the funds necessary to pay these claims into a bank account. Although Rathbone owns the bank account, Jarvin, acting as Rathbones agent, makes the actual claims payments from this account. Claims in excess of Rathbones contracted percentage are paid by Jarvin. Rathbone pays to Jarvin a premium for administering the entire plan and bearing the costs of claims in excess of Rathbones obligation. This premium is substantially lower than would be charged if Jarvin were providing healthcare coverage under a traditional fully insured group plan. Jarvin is required to pay premium taxes only on the premiums it receives from Rathbone. This information indicates that the type of alternative funding method used by Rathbone is known as a: premium-delay arrangement reserve-reduction arrangement minimum-premium plan retrospective-rating arrangement Incorrect. A premium-delay arrangement allows the employer to defer payment of monthly premiums for some time beyond the typical 30-day grace period Incorrect. Under the usual reserve reduction agreement the employer is allowed to retain the amount of annual premium that is equal to the claims reserve Correct. Under a typical minimum-premium plan the employer assumes the financial responsibility for paying claims up to a specified level. Incorrect. Under retrospective-rating arrangements the insurance company charges the employer an initial premium that is less than what would be justified by the expected claim for the year.

25. Advantages to a company that elects to self-fund and to administer all aspects of its
healthcare benefit plan include: eliminating state premium taxes

13

avoiding state-mandated benefit requirements improving its cash flow position all of the above

Incorrect. While an advantage of self-funding is the elimination of state premium taxes, other answers are also correct. Incorrect. While avoiding state-mandated benefit requirements are an advantage of an employer's decision to self-fund, other responses are also correct. Incorrect. While companies who self-fund can improve their cash flow position, other responses are also correct Correct. All of the above are advantages of self-funding.

26. The following statements are about 501(c)(9) trusts. Select the answer choice
containing the correct statement: In the event a 501(c)(9) trust is terminated, any funds remaining in the trust revert back to the employer. In order to satisfy Internal Revenue Code (IRC) requirements, membership in a 501(c)(9) trust is mandatory for all employees. Contributions made by an employer to a 501(c)(9) trust are deductible for federal income tax purposes. Typically, a 501(c)(9) trust is controlled solely by the employer that established the trust. Incorrect. If the trust is terminated the assets that remain must be used for other benefits or distributed to members of the trust. Incorrect. Membership in the trust must be voluntary, with two exceptions. Correct. Contributions, with the exception of 'overfunding' a trust, are deductible for federal income tax purposes. Incorrect. The trust must be controlled by its membership, independent trustees or by trustees or other fiduciaries.

Chapter 6 A 27. Health plans with risk-based Medicare contracts are required to calculate and submit
to CMS a Medicare adjusted community rate (Medicare ACR). Medicare ACR can be defined as the: estimated cost of providing services to a beneficiary under Medicare FFS, adjusted for factors such as age and gender health plans estimate of the premium it would charge Medicare enrollees in the absence of Medicare payments to the health plan

14

average amount the health plan expects to receive from CMS per beneficiary covered health plans actual costs of providing benefits to Medicare enrollees in a given year Incorrect. To determine this estimated premium a health plan uses the same rates it would charge enrollees in non-Medicare plans for a health benefit package limited to covered Medicare services Correct. The ACR is the plan's estimate of the premium it would charge Medicare enrollees absent the Medicare payment Incorrect. While the plan does consider the CMS Medicare payument in its calculations, the givernment payment alone does not determine the ACR. Incorrect. The ACR is based on estimated premiums, not actuals.

28. The types of financial risks and costs to which a health plan is subject depends on
whether the health plan provides services to the Medicare and/or Medicaid populations or to the commercial population. One distinction between providing services to the Medicare and Medicaid populations and to the commercial population is that Medicare and Medicaid enrollees typically: are locked into a plan for a 12-month period, whereas enrollees from the commercial population may disenroll from a plan on a monthly basis require less enrollee education than do enrollees from the commercial population have higher incidences of chronic illness than do enrollees from the commercial population are enrolled in a health plan through a group situation, whereas the commercial population typically enrolls in a health plan on an individual basis Incorrect. Most medicaid enrollees can disenroll from a health plan on a monthly basis. Incorrect. Health plans are likely to incur greater expenses related to enrollee reducation to ensure that beneficiaries understand the appropriate sites and protocols for receiving care. Correct. Medicare and Medicaid enrollees typically have higher incidences of chronic illness than do enrollees from the commercial population. Incorrect. Medicare and Medicaid enrollees are enrolled on an individual basis.

29. Geena Falk is eligible for both Medicare and Medicaid coverage. If Ms. Falk incurs a
covered expense, then: Medicaid will be Ms. Falks primary insurer

15

Medicare will be Ms. Falks primary insurer Correct. Medicare is the primary insurer. either Medicare or Medicaid will be Ms. Falks primary insurer depending on her election Medicare and Medicaid will each be responsible for one-half of Ms. Falks covered expense

30. Juan Ramirez, a licensed social worker, and Dr. Laura Lui, a licensed psychiatrist,
are under contract to the Peninsula Health Plan. Peninsula has contracted with CMS to provide services to Medicare and Medicaid beneficiaries. Both Mr. Ramirez and Dr. Lui provide the same type of counseling services to Peninsula's enrollees. With respect to amendments made to the Balanced Budget Act (BBA) of 1997 that impact provider reimbursement, the amount by which Peninsula will reimburse Mr. Ramirez will be equal to: 50% of Dr. Lui's reimbursement 75% of Dr. Lui's reimbursement 90% of Dr. Lui's reimbursement 100% of Dr. Lui's reimbursement D is correct Non-Discrimination in Provider Reimbursement Law

31. One way that the Medicare and Medicaid programs differ is that under Medicare, a
smaller proportion of provider reimbursement goes to the primary care providers and a greater proportion of the reimbursement goes to hospitals and specialists. True False Correct Incorrect. In Medicare, a larger proportion of the provider reimbursement goes to hospitals.

32. Correct statements about the financial risks associated with benefits that health
plans provide to the Medicare and Medicaid markets include: that, because the government sets the payments received by health plans, the health plans cannot easily obtain an increase in those payments even in the face of rising costs that regulators determine which services must be provided under Medicare and Medicaid and which persons are eligible to enroll in a plan

16

that there is typically more provider reluctance to accept risk in connection with providing services to the Medicaid population than with providing services to the Medicare population all of the above Incorrect. While this statement is correct, other statements are true as well. Incorrect. While this statement is correct, other statements are true as well. Incorrect. While this statement is correct, other statements are true as well. Correct. All the answers above are correct.

Chapter 7A 33. The following paragraph contains two pair of terms enclosed in parentheses.
Determine which term in each pair correctly completes the statements. Then select the answer choice containing the two terms you have chosen. In a typical health plan, an (actuary / underwriter) is ultimately responsible for the determination of the appropriate rate to charge for a given level of healthcare benefits and administrative services in a particular market. The (actuary / underwriter) assesses and classifies the degree of risk represented by a proposed group or individual. actuary / actuary actuary / underwriter underwriter / actuary underwriter / underwriter Incorrect. An actuary is responsible for the determination of appropriate rates, but not the assessment and classification of the degree of risk Correct. An actuary is responsible for the determination of appropriate rates, and an underwriter the assessment and classification of the degree of risk Incorrect. An underwriter assesses and classifies the degree of risk, while an actuary is responsible for the determination of appropriate rates. Incorrect. While an underwriter assesses and classifies the degree of risk, an underwriter is not responsible for the determination of appropriate rates.

34. The Northwest Company offers its employees the option of choosing to receive their
healthcare benefits from an HMO or from a traditional indemnity plan. The premiums for the HMO are lower than for the traditional indemnity plan. In this situation, it is correct to assume that: 1. Individual low utilizers are more likely to enroll in the traditional indemnity plan 2. Individual high utilizers are more likely to enroll in the HMO Both 1 and 2

17

1 only 2 only Neither 1 nor 2 Incorrect. Low utilizers will traditionally select the lowest cost plan. High utilizers will select a plan with broad access to healthcare services. Incorrect. Low utilizers will traditionally select the lowest cost plan. Incorrect. High utilizers will select a plan with the broad access to healthcare services an indemnity plan affords Correct. Low utilizers will choose a low cost option, and high utilizers will select a plan with the broad access to healthcare services an indemnity plan affords.

35. In evaluating the claims experience during a given rating period of the Lucky
Company, the Calaway Health Plan determined that the claims incurred by Lucky were lower than Calaway anticipated when it established Luckys premium rate for the rating period. Calaway, therefore, refunded a portion of Luckys premium to reflect the betterthan-anticipated claims experience. This rating method is known as: durational rating retrospective experience rating blended rating prospective experience rating Incorrect Yes! Incorrect Incorrect

36. The Norton Health Plan used blended rating to develop a premium rate for the
Roswell Company, a large employer group. Norton assigned Roswell a credibility factor of 0.7 (or 70%). Norton calculated Roswells manual rate to be $200 and its experience claims cost as $180. Nortons retention charge is $3. This information indicates that Roswells blended rate is: $186 $189 $194 $197

18

Incorrect. The formula is (Experience Rate X Credibility factor) + [Manual Rate X (1.00 - Credibility Factor)] + Retention Charge Correct. $180 X .7 + [$200 X (1.0-.70] + $3 = $189 Incorrect. The formula is (Experience Rate X Credibility factor) + [Manual Rate X (1.00 - Credibility Factor)] + Retention Charge Incorrect. The formula is (Experience Rate X Credibility factor) + [Manual Rate X (1.00 - Credibility Factor)] + Retention Charge

Chapter 7 B 37. The Lindberg Company has decided to terminate its group healthcare coverage with
the Benson Health Plan. Lindberg has several former employees who previously experienced qualifying events that caused them to lose their group coverage. One federal law allows these former employees to continue their group healthcare coverage. From the answer choices below, select the response that correctly identifies the federal law that grants these individuals with the right to continue group healthcare coverage, as well as the entity which is responsible for continuing this coverage: Federal law: Consolidated Omnibus Budget Reconciliation Act (COBRA) Entity: Lindberg Federal law: Consolidated Omnibus Budget Reconciliation Act (COBRA) Entity: Benson Federal law: Employee Retirement Income Security Act (ERISA) Entity: Lindberg Federal law: Employee Retirement Income Security Act (ERISA) Entity: Benson Yes, correct! Incorrect. COBRA is the federal law that grants individuals with rights to continue coverage, but the entity responsible is the employer. Incorrect. ERISA regulates employer-sponsored benefit plans and establishes reporting requirements and disclosure requirements for plan provisions and funding Incorrect. ERISA regulates employer-sponsored benefit plans and establishes reporting requirements and disclosure requirements for plan provisions and funding.

38. The Arista Health Plan is evaluating the following four groups that have applied for
group healthcare coverage:

The Blaise Company, a large private employer The Colton County Department of Human Services (DHS) A multiple-employer group comprised of four companies The Professional Society of Daycare Providers

With respect to the relative degree of risk to Arista represented by these four companies, the company that would most likely expose Arista to the lowest risk is the:

19

Blaise Company Colton County DHS multiple-employer group Professional Society of Daycare Providers Correct. Blaise Company would represent the fewest underwriting risks because they would typically represent a balance of ages and health conditions, helping to prevetn antiselection Incorrect. While still a lower risk, typically public employees switch plans annually tro obtain the lowest premium, presenting a higher underwriting risk than large employers. Incorrect. Mutiple-employer groups have a higher risk of antiselection Incorrect. Professional associations have a higher risk of antiselection

39. Julio Benini is eligible to receive healthcare coverage through a health plan that is
under contract to his employer. Mr. Benini is seeking coverage for the following individuals:

Elena Benini, his wife Maria Benini, his 18-year-old unmarried daughter Johann Benini, his 80-year-old father who relies on Julio for support and maintenance

The health plan most likely would consider that the definition of a dependent, for purposes of healthcare coverage, applies to: Elena, Maria, and Johann Elena and Maria only Elena only Maria only Incorrect. Most health plans define a dependent as a spouse or an unmarried child (under the age of 19, or incapacitated, or under the age of 23-25 if a full time student) who relies on the employee for support and maintenance. Correct. Most health plans define a dependent as a spouse or an unmarried child (under the age of 19, or incapacitated, or under the age of 23-25 if a full time student) who relies on the employee for support and maintenance.

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Incorrect. Most health plans define a dependent as a spouse or an unmarried child (under the age of 19, or incapacitated, or under the age of 23-25 if a full time student) who relies on the employee for support and maintenance. Incorrect. Most health plans define a dependent as a spouse or an unmarried child (under the age of 19, or incapacitated, or under the age of 23-25 if a full time student) who relies on the employee for support and maintenance.

Chapter 8 A 40. The Raven Health Plan is domiciled in a state that requires the health plan to offer
small employers and their employees a comprehensive healthcare benefit plan that approximates the healthcare benefits available to large employer-employee groups. This type of uniform benefit plan is known as: a basic plan a low-option plan a standard plan an essential plan Incorrect. A basic, or low-option plan, typically includes features such as a high annual deductible, high copayments and a limited number of covered services Incorrect. A basic, or low-option plan, typically includes features such as a high annual deductible, high copayments and a limited number of covered services. Correct. A standard plan provides small employers a comprehensive benefits plan Incorrect. An essential, or low-option plan, typically includes features such as a high annual deductible, high copayments and a limited number of covered services.

41. The following statements are about the Health Insurance Portability and
Accountability Act (HIPAA) as it relates to the small group market. Three of these statements are true and one statement is false. Select the answer choice containing the FALSE statement.: A health plan that participates in the small group market is required to issue a contract to any employer that requests healthcare benefits, as long as the employer meets the statutory definition of a small group. A small group must consist of more than 10 employees in order to be underwritten on a group, rather than an individual, basis. A health plan is prohibited from canceling a small groups healthcare coverage because of poor claims experience. A health plan that participates in the small group market is limited in placing restrictions such as waiting periods and pre-existing conditions exclusions to individuals in high risk categories.

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Incorrect. The guaranteed issue provision requires each health plan that participates in small group coverage to issue a contract to any employer who requests, providing they meet the statutory definition of small group Correct. This is a FALSE statement Incorrect. The guaranteed renewal provision prohibits health plans from cancelling a small group's coverage based on poor claims experience. Incorrect. Health plans are limited in placing restrictions such as waiting periods and pre-existing conditions exclusions to individuals in high risk categories

42. In a comparison of small employer-employee groups to large employer-employee

groups, it is correct to say that small employer-employee groups tend to: more closely follow actuarial predictions with respect to morbidity rates generate more administrative expenses as a percentage of the total premium amount the group pays have less frequent and smaller claims fluctuations expose an health plan to a lower risk of antiselection Incorrect. Small groups less closely follow actuarial predictions of morbidity rates. Correct. Small groups generate more administrative expenses as a percentage of the total premium amount the group pays Incorrect. They have more and fequent and larger claims fluctuations. Incorrect. This market exposes the health plan to a greater risk of antiselection.

43. One way that a health plan can protect itself against case stripping is by requiring:
employees covered by a small group plan to contribute 100% of the cost of the healthcare coverage the small group to have no more than 10 members a minimum level of participation in order for a small group to be eligible for healthcare coverage its underwriters to consider the characteristics of the employer, but not of the group members, when underwriting the group Incorrect. When employers contribute more to the cost of health care coverage, employees are more likely to participate Incorrect. The larger the group, the more lives over which morbidity risk can be spread

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Correct. Though participation limits can be linited by law, most health plans can require a minimum level of participation in order for a small group to be eligible for healthcare coverage. Incorrect. The underwriters consider the characteristics of the group.

44. The following statements are about state health coverage reinsurance programs.
The reinsurance offered through these programs is administered on a for-profit basis by the federal government. The purpose of these programs is to reinsure MCOs and other carriers who offer guaranteed healthcare plans to small employers. These programs must reinsure only an entire small group, not specific individuals within a group. Any shortfalls in the pool established by these programs are funded by the state government.

Incorrect. Reinsurance offered by these programs are administered by not-forprofit entities whose board members are appointed by the state insurance commissioner for each state. Correct. Many states that require guaranteed issue of at least two mandated plans have established health coverage reinsurance programs for small employer groups. Incorrect. The programs reinsure either an entire small group, or specific individuals within the group. Incorrect. Shortfalls in the pool are funded through an assessment of the participating health plans.

Chapter 9 A 45. The Essential Health Plan markets a product for which it assumed total expenses to
equal 92% of premiums. Actual data relating to this product indicate that expenses equal 89% of premiums. This information indicates that the expense margin for this product has: a 3% favorable deviation a 3% adverse deviation an 11% favorable deviation an 11% adverse deviation Correct. The difference between the assumed expenses, as a percent of premium 92% and the actual expenses as percent of premium 89% is the 3% favorable deviation.

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Incorrect. When the actual amount of any expense varies from the health plan expectations, causing revenues to increase or expenses to decrease is called favorable deviation. Incorrect. The deviation is the difference between assumed and actual premiums. Incorrect. When the actual amount of any expense varies from the health plan expectations, causing revenues to increase or expenses to decrease is called favorable deviation. The deviation is the difference between assumed and actual premiums.

46. Residual trend is the difference between total trend and the portion of the total trend
caused by changes in provider reimbursement levels. Consider the following events that could affect an health plans provider reimbursement levels:

Event 1 The disenrollment of a large group with unusually high utilization rates Event 2 The introduction of a new treatment for infertility Event 3 A serious flu epidemic Event 4 A shift in inpatient medical services from obstetrical care to neonatal intensive care

One cause of residual trend is change in intensity, which would be represented by: Event 1 Event 2 Event 3 Event 4 Incorrect. Event 1 represents a change in utilization trend Incorrect. A new treatment in fertility would represent a change in technology Incorrect. A serious flu epidemic would represent a change in fluctuation Correct. Change in intensity represents changes in the level of intensity of services provided.

Chapter 9 B 47. The following statements are about rate ratios used by health plans. Select the
answer choice containing the correct statement: While rate ratios consider family size, they are most often based on competitive factors, such as the ratios being used by competitors and the ratios that plan sponsors are requesting.

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If the rate ratio for a couple rate category is 2.0, then the single premium is divided by 2.0 to derive the couple rate category premium. A rate ratio can only be increased if the health plan has obtained regulatory approval. The effect of a typical family rate ratio is that a family rate is somewhat higher than it otherwise should be, and the single rate is somewhat lower that it otherwise should be. Correct. Rate ratios are often based on competitive factors. Incorrect. The single premium is multiplied by 2.0 to derive the coupe rate category premium. Incorrect. A rate ratio is assigned by the health insurance plan to the health plan product Incorrect. Typically the family rate is subsidized by the single rate.

Chapter 10 A 48. All publicly traded health plans in the United States are required to prepare financial
statements for use by their external users in accordance with generally accepted accounting principles (GAAP). In addition, health insurers and health plans that fall under the jurisdiction of state insurance departments are required by law to prepare certain financial statements in accordance with statutory accounting practices (SAP). In a comparison of GAAP to SAP, it is correct to say that: GAAP is established and promoted by the National Association of Insurance Commissioners (NAIC), whereas SAP is established and promoted by the Financial Accounting Standards Board (FASB) the going-concern concept is an underlying premise of GAAP, whereas SAP tends to focus on the liquidation value of the MCO or the insurer GAAP provides for a single method of valuing all of a health plans assets, whereas SAP offers the health plan more than one method for valuing its assets the principle of conservatism is fundamental to GAAP, whereas SAP generally is not conservative in nature Incorrect. GAAP is established and promoted by the Financial Accounting Standards Board (FASB). Correct. The going-concern concept is an underlying premise of GAAP, whereas SAP tends to focus on the liquidation value of the MCO or the insurer. Incorrect. Both GAAP and SAP offer moret han one acceptable method for calculating or valuing assets. Incorrect. SAP values assets more conservatively than does the going-concern concept under GAAP.

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49. The following transactions occurred at the Lane Health Plan:

Transaction 1 Lane recorded a $25,000 premium prior to receiving the payment Transaction 2 Lane purchased $500 in office expenses on account, but did not record the expense until it received the bill a month later Transaction 3 Fire destroyed one of Lanes facilities; Lane waited until the facility was rebuilt before assessing and recording the amount of loss Transaction 4 Lane sold an investment on which it realized a $14,000 gain; Lane recorded the gain only after the sale was completed.

Of these transactions, the one that is consistent with the accounting principle of conservatism is: Transaction 1 Transaction 2 Transaction 3 Transaction 4 Incorrect. According to the principle of covservatism a health plan would report gains only after they actually occured. Incorrect. The principle of conservatism projects relatively low values for its assets and net income, and relatively high values for its liabilities and expenses. Incorrect. The principle of conservatism projects relatively low values for its assets and net income, and relatively high values for its liabilities and expenses. Correct. According to the principle of conservatism a health plan would report gains only after they actually occured.

Chapter 10 B 50. The Wallaby Health Plan purchased an asset two years ago for $50,000. At the time
of purchase, the asset had an appraised value of $52,000. The asset carries a value on Wallabys general ledger of $47,000, and its current market value is $80,000. According to the cost concept, Wallaby would report on its financial statements a value for this asset equal to: $47,000 $50,000 $52,000 $80,000

26

Incorrect. $47,000 is the book value for this asset. Correct. The cost concept states that companies should report an asset on their financial statement according to the actual cost at purchase. Incorrect. $52,000 is the appraised value at the time of purchase Incorrect. $80,000 is the current market value of this asset.

51. The Montvale Health Plan purchased a piece of real estate 20 years ago for
$40,000. It recently sold the real estate for $80,000 and reported a capital gain of $40,000 on this sale. Even though the purchasing power of the dollar declined by half during this period and Montvale realized no actual gain in purchasing power, Montvale recorded in its accounting records the $40,000 gain from this sale. This situation best illustrates the accounting concept known as the: measuring-unit concept time-period concept full-disclosure concept concept of periodicity Correct. The measuring unit concept states that a company should record the amounts associated with its business transactions in monetary terms. Incorrect. The time-period concept states that a company's financial statements should report business operations during a specified time period (usually one month, one quarter, one year). Incorrect. A full-disclosure concept states that financial statements must contain all material information about a company, and the company must disclose any additional information, that by its ommission, may mislead an interested user of the account information. Incorrect. The concept of periodicity oif the same as the time-period concept. The time-period concept states that a company's financial statements should report business operations during a specified time period (usually one month, one quarter, one year).

52. The Proform Health Plan uses agents to market its small group business. Proform
capitalizes the commission expense relating to this line of business by spreading the commissions over the premium-paying period of the healthcare coverage. This approach to expense recognition is known as: systematic and rational allocation matching principle immediate recognition

27

associating cause and effect Incorrect. Systematic and rational allocation expenses an assets cost over its estmated useful life Incorrect. This principle states a company should recognize expenses when the company earns the revenues realted to those expenses. Incorrect. Immediate recognition is when a company recognizes all applicable costs and expenses during the current accounting period. Correct. Under this method, costs that can be recognized as having a direct relationship to future earnings are charged to the earnings of future accounting periods.

Chapter 10 C 53. Changes in a companys cash flow occur as the result of three activities: operating
activities, investing activities, and financing activities. Activities that would be considered financing activities include: issuing common stock purchasing bonds receiving investment income paying expenses associated with healthcare services Correct. Issuing common stock is a financing activity Incorrect. This is an example of investing activities Incorrect. This is an example of operating activities Incorrect. This is an example of operating activities

54. The following information was presented on one of the financial statements prepared
by the Rouge Health Plan as of December 31, 1998: Assets Current assets Other assets Total Assets Liabilities Current liabilities Other liabilities Total Liabilities Stockholders Equity Common stock Additional paid-in capital

950,000 100,000 $ 1,050,000

$ $

800,000 100,000 900,000

50,000 100,000

28

Total Liabilities and Stockholders Equity This type of financial statement is called: a balance sheet an income statement a statement of owners equity a cash flow statement A : Incorrect B : Incorrect C: Correct D: Incorrect

$ 1,050,000

Chapter 11 A 55. As the first part of its strategic planning process, the Lakeland Health Plan
developed the following statements:

Statement 1 We will be recognized as the leader in the healthcare industry in all of our markets by the end of the next decade. Statement 2 We will deliver and finance quality healthcare at a reasonable cost to our customers.

From the answer choices below, select the response that correctly identifies these statements as vision statements or mission statements. Statement 1: vision Statement 2: vision Statement 1: vision Statement 2: mission Statement 1: mission Statement 2: mission Statement 1: mission Statement 2: vision Incorrect. While Statement one is correctly identified as a vision statement, Statement two is not a statement of an ideal that an organization would like to achieve Correct. Statement one is a statement of an ideal that an organization would like to achieve, and statement two is a statement that succiently sums an organization's reason for existence and overall purpose.

29

Incorrect. While statement two is correctly identified as a mission statement, statement one is not a statement that succiently sums an organization's reason for existence and overall purpose Incorrect. Statement one is not a statement of an ideal that an organization would like to achieve, and statement two is not a statement that succiently sums an organization's reason for existence and overall purpose.

Chapter 11 B 56. The following information relates to the capital structure of the Laredo Health Plan:
Type of Capital Debt Equity Percent of Capital 0.40 0.60 After-Tax Cost Rate 0.07 0.13

This information indicates that Laredos weighted average cost of capital (WACC) is equal to: 4.7% 5.3% 9.4% 10.6% Incorrect. The formula is (Percent of Debt Capital X Debt After-Tax Cost Rate) + (Percent of Equity Capital X Equity After-Tax Cost Rate.) Incorrect. The formula is (Percent of Debt Capital X Debt After-Tax Cost Rate) + (Percent of Equity Capital X Equity After-Tax Cost Rate.) Incorrect. The formula is (Percent of Debt Capital X Debt After-Tax Cost Rate) + (Percent of Equity Capital X Equity After-Tax Cost Rate.) Correct. (.40 X .07) + (.60 X .13) = .106

57. Pro forma financial statements project what a companys financial condition will be at
the end of an accounting period, assuming that the company achieves its objectives. Key drivers of assumptions used to project a companys assets include: cash flows accounts receivable as a percent of premium space required for continuing operations

30

all of the above Incorrect. While cash flow is one key driver, other answers are correct as well Incorrect. While accounts receivable as a percent of premium is one driver, other answers are correct as well. Incorrect. While space required for continued operations is one driver, other answers are correct as well Correct. All are key drivers of assumptions used to project a companys assets

Chapter 11 C Chapter 12 A 58. The following information was presented on one of the financial statements prepared
by the Rouge Health Plan as of December 31, 1998: Assets Current assets Other assets Total Assets Liabilities Current liabilities Other liabilities Total Liabilities Stockholders Equity Common stock Additional paid-in capital Total Liabilities and Stockholders Equity

950,000 100,000 $ 1,050,000

$ $

800,000 100,000 900,000

50,000 100,000

$ 1,050,000

An analyst at Rouge determined that current assets represented approximately 81% of Rouges total assets. This type of analysis, which indicates the relationship of one financial statement item to another financial statement item, is called: vertical analysis horizontal analysis trend analysis benchmark analysis Correct. Vertical analysis is a type of financial analysis that indicates the relationship of each financial statement item to another financial statement item.

31

Incorrect. Horizontal analysis measures the numerical amount that corresponding items change from one financial statement to another over consecutive accounting periods. Incorrect. A form of horizontal analysis used to address changes across multiple accounting periods is trend analysis Incorrect. Benchmarking is a process by which a company compares its own performance, products, and services with those of other companies or organizations that are recognized as the best in a particular category

Chapter 12 B 59. The following information was presented on one of the financial statements prepared
by the Rouge Health Plan as of December 31, 1998: Assets Current assets Other assets Total Assets Liabilities Current liabilities Other liabilities Total Liabilities Stockholders Equity Common stock Additional paid-in capital Total Liabilities and Stockholders Equity

950,000 100,000 $ 1,050,000

$ $

800,000 100,000 900,000

50,000 100,000

$ 1,050,000

Rouges current ratio at the end of 1998 was approximately equal to: 0.84 1.06 1.19 1.31 Incorrect. The formula is Current Assets/Current Liabilities Incorrect. The formula is Current Assets/Current Liabilities Correct. 950,000/800,000 = 1.19

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Incorrect. The formula is Current Assets/Current Liabilities

Chapter 12 C 60. The following information relates to the Hardcastle Health Plan for the month of
June:

Incurred claims (paid and IBNR) equal $100,000 Earned premiums equal $120,000 Paid claims, excluding IBNR, equal $80,000 Total health plan expenses equal $300,000

This information indicates that Hardcastles medical loss ratio (MLR) for the month of June was approximately equal to: 40% 67% 83% 120% Incorrect Incorrect Yes! Incorrect

61. The following information was presented on one of the financial statements prepared
by the Rouge health plan as of December 31, 1998: Assets Current assets Other assets Total Assets Liabilities Current liabilities Other liabilities Total Liabilities Stockholders Equity Common stock Additional paid-in capital

950,000 100,000 $ 1,050,000

$ $

800,000 100,000 900,000

50,000 100,000

33

Total Liabilities and Stockholders Equity

$ 1,050,000

When calculating its cash-to-claims payable ratio, Rouge would correctly divide its: cash by its reported claims only cash by its reported claims and its incurred but not reported claims (IBNR) reported claims by its cash reported claims and its incurred but not reported claims (IBNR) by its cash Incorrect. The formula is cash divided by payable claims. Correct. The formula is cash divided by payable claims. Incorrect. The formula is cash divided by payable claims. Incorrect. The formula is cash divided by payable claims.

Chapter 13 A 62. The goal of the investment department at the Wayfarer Health Plan is to maximize
investment return. The investment department executes investments on time and at a low cost. However, these transactions often result in low returns or risks that are deemed too high for Wayfarer. With regard to effectiveness and efficiency, it is correct to say that Wayfarers investment department is: both effective and efficient efficient, but not effective effective, but not efficient neither effective nor efficient Incorrect. The transactions resulting in low returns or risks too high for the health plan, can be called ineffective Correct. The Wayfarer investment department executes investments efficiently, but the investments themselves are not effective in achieving desired objectives Incorrect. The transactions resulting in low returns or risks too high for the health plan, can be called ineffective Incorrect. The Wayfarer investment department executes investments efficiently, but the investments themselves are not effective in achieving desired objectives

34

63. Variance analysis is the study of the difference between expected results and actual
results. Variances can be positive or negative. A positive variance is typically considered: favorable for both expenses and revenues favorable for expenses, but unfavorable for revenues favorable for revenues, but unfavorable for expenses unfavorable for both expenses and revenues Incorrect Incorrect Yes! Incorrect

64. Ways in which a company can increase its return on investment (ROI) include:
1. Reducing expenses to increase operating income 2. Increasing controllable investment Both 1 and 2 1 only 2 only Neither 1 nor 2 Incorrect. While a company can increase ROI by reducing expenses to increase operating income, increasing controllable investment will not net an ROI Correct. A company can increase its ROI by reducing expenses to increase operating income Incorrect. Decreasing controllable investment will net an ROI Incorrect. A company can increase ROI by reducing expenses to increase operating income.

Chapter 13 B 65. In order to achieve its goal of improved customer service, the Evergreen Health Plan
will add three new customer service representatives to its existing staff, install a new switching station, and install additional phone lines. In this situation, the cost that would

35

be classified as a sunk cost, rather than a differential cost, is the expense associated with: adding new customer service representatives maintaining the existing staff installing a new switching station installing additional phone lines Incorrect. Adding new customer service representatives may be described as a discrentionary cost Correct. A Sunk cost is a past cost that does not change as the result of a future decision Incorrect. Installing a new switching line can be considered a committed cost Incorrect. Installing new phone lines can be considered a committed cost

66. Costs that can be defined by behavior are most commonly classified as fixed costs,
variable costs and semi-variable costs. Examples of fixed costs include: rent, insurance expense, and depreciation on computer equipment rent, claims processing costs, and selling expenses claims processing costs, telephone expense, and depreciation on computer equipment premium processing, rent, and selling expenses Correct. Rent, insurance expense and depreciation on computer equipment are all fixed costs Incorrect. Claims processing and selling expenses are examples of variable costs Incorrect. Claims processing costs and telephone expense are examples of variable, and semi-variable costs Incorrect. Premium processing and selling expenses are variable costs

67. A cost for which a benefit is forfeited in choosing one decision alternative over
another is known as: a marginal cost a unit cost

36

an incremental cost an opportunity cost Incorrect. A marginal cost, also called an incremental cost, is the additional total expense incurred as a result of producing one additional unit of a product or service. Incorrect. A unit cost is the incurred expense attributable to a single measured amount of work Incorrect. An incremental cost, also called a marginal cost, is the additonal total expense incurred as a result of producing one additional unit of a product or service. Correct. An opportunity cost is a cost for which a benefit is forfeited in chosing one decision alternative over another.

68. For a given healthcare product, the Magnolia Health Plan has a premium of $80
PMPM and a unit variable cost of $30 PMPM. Fixed costs for this product are $30,000 per month. Magnolia can correctly calculate the break-even point for this product to be: 274 members 375 members 600 members 1,000 members Incorrect. The formula is: Fixed costs/(unit price - unit variable cost) Incorrect.The formula is: Fixed costs/(unit price - unit variable cost) Correct. $30,000/(80-30) = 600 Incorrect. The formula is: Fixed costs/(unit price - unit variable cost)

Chapter 13 C
69.The Amethyst Health Plan uses a budgeting approach that requires each line of business within Amethysts operation to justify its continued operation. Amethyst begins with the premise that no resources will be allocated for the following period unless each dollar to be spent is justified and is shown to be within departmental plans and corporate goals and objectives. The budgeting approach used by Amethyst is known as: bottom-up budgeting top-down budgeting

37

zero-based budgeting master budgeting Incorrect. This type of budgeting is presented by lower management and presented as a recommendation to upper management, using the previous year's budget as a starting point Incorrect. This type of budgeting is generated at the corporate level by upper management and is passed to lower management, using the previous year's budget as a starting point Correct. In zero-based budgeting, for every accounting period, each line of business in the health plan must justify its continued operation. Incorrect. The master budget is the overall operating and financing plan for a health plan in a specific period.

Chapter 14 A 70. A health plan may experience negative working capital whenever healthcare
expenses generated by plan members exceed the premium income the health plan receives. Ways in which a health plan can manage the volatility in claims payments, and therefore reduce the risk of negative working capital, include: 1. Accurately estimating incurred but not reported (IBNR) claims 2. Using capitation contracts for provider reimbursement Both 1 and 2 1 only 2 only Neither 1 nor 2 Correct. Both estimating IBNR and use of capitation are ways a health plan can stabilize expenses Incorrect. Using capitation contracts for provider reimbursement is also a way to stabilize expenses. Incorrect. Accurately estimating IBNR is also a way to stabilize expenses Incorrect. Both estimating IBNR and use of capitation are ways a health plan can stabilize expenses.

Chapter 14 B

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71. An investor deposited $1,000 in an interest-bearing account today. That sum will
accumulate to $1,200 two years from now. One true statement about this transaction is that: the process by which the original $1,000 deposit grows to $1,200 is known as compounding $1,200 is the present value of the $1,000 deposit the $200 increase in the deposits value is its incremental cash flow the $200 difference between the original deposit and the accumulated value of the deposit is known as the deposits discount Correct. Compounding is the process of converting the present value of an amount of money to it's future value Incorrect. The present value is how much the money is worth today. Incorrect. An incremental cash flow is the additional cost or revenue that result from a capital project Incorrect. Discounting involves calculating the present value of future money.

72. The following statements are about the capital budgeting technique known as the
payback method. Select the answer choice containing the correct statement: The main benefit of the payback method is that it is simple to use. The payback method measures the profitability of a given capital project. The payback method considers the time value of money. The payback method states a proposed projects cash flow in terms of present value for the life of the entire project. Correct. The payback method calculation is very simple; divide the actual cost of expenditure under consideration by the annual cash inflow. Incorrect. The payback method does not measure profitability, and provides no information about the rate of return on a health plan's investment Incorrect. The payback method ignores the time value of money Incorrect. The payback method ignores all cash inflows that occur after the payback period

73. The Jade Health Plan used a profitability index (PI) to rank the following capital
proposals: Proposal PI

39

A B

0.45 1.05

This information indicates that, of these two projects, Jade would most likely select: Proposal A, and the PI indicates that the net present value (NPV) for this project is less than zero Proposal A, and the PI indicates that the net present value (NPV) for this project is greater than zero Proposal B, and the PI indicates that the net present value (NPV) for this project is less than zero Proposal B, and the PI indicates that the net present value (NPV) for this project is greater than zero Incorrect. Health plans will move forward with projects whose PI is the largest. Incorrect. Health plans will move forward with projects whose PI is the largest. Incorrect. A project that has a PI of 1.0 means that the NVP is zero. Correct. Health plans will move forward with projects whose PI is the largest.

40