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

2. 2 Mercer Government Human Services Consulting Outline of Presentation A. Rate Impact B. Rate-Setting Methodology

3. 3 Mercer Government Human Services Consulting 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. 4 Mercer Government Human Services Consulting 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. 5 Mercer Government Human Services Consulting 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. 6 Mercer Government Human Services Consulting 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. 7 Mercer Government Human Services Consulting 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. 8 Mercer Government Human Services Consulting B.2: Program Changes (continued) TPL – $1.5 million removed from total expenses

9. 9 Mercer Government Human Services Consulting B.3: Medical Trends Preliminary trend ranges presented on June 22, 2006 Final trend estimates presented in this section

10. 10 Mercer Government Human Services Consulting 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. 11 Mercer Government Human Services Consulting Inpatient Hospital Unit Cost Trends: HSCRC Component Year Rate Update FY054.81% FY065.01% FY073.56% FY08*3.91% *Forecast  HSCRC rate updates

12. 12 Mercer Government Human Services Consulting 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. 13 Mercer Government Human Services Consulting Inpatient Hospital PMPM Annual Trend by COA and Year F&CDisabledSOBRA AIDSHIV Delivery/ Birth Total CY04/055.4%4.9%5.4% 5.1%4.6%5.0% CY05/068.8%8.2%8.8%8.3%8.1%6.7%7.9% CY06/077.7%7.2%7.7%7.3%7.2%6.2%7.0% Total7.3%6.8%7.3%7.0%6.8%5.8%6.6%

14. 14 Mercer Government Human Services Consulting Outpatient Hospital Unit Cost Trends: HSCRC Component *Forecast Year Rate Update FY053.78% FY063.98% FY073.56% FY08*3.22% HSCRC rate updates

15. 15 Mercer Government Human Services Consulting 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. 16 Mercer Government Human Services Consulting F&CDisabledSOBRAAIDSHIV Delivery/ Birth Total CY04/058.0%8.2%8.0%8.5% 8.0%8.1% CY05/0612.1%13.3%12.1% 12.5% CY06/0711.4%12.6%11.4% 11.8% Total10.5%11.4%10.5%10.7% 10.5%10.8% Outpatient Hospital PMPM Annual Trend by COA and Year

17. 17 Mercer Government Human Services Consulting 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. 18 Mercer Government Human Services Consulting F&CDisabledSOBRAAIDSHIV Delivery/ Birth Total CY04/055.5%6.1%5.5%7.6% 5.5%6.1% CY05/067.6%8.4%7.6%9.9% 7.6%8.3% CY06/077.6%8.4%7.6%9.9% 7.6%8.3% Total6.9%7.6%6.9%9.1% 6.9%7.6% Pharmacy PMPM Annual Trend by COA and Year

19. 19 Mercer Government Human Services Consulting 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. 20 Mercer Government Human Services Consulting Physician PMPM Annual Trend by COA by Year F&CDisabledSOBRAAIDSHIV Delivery/ Birth Total CY04/053.2%3.0%3.3%4.0% 3.0%3.2% CY05/065.0%4.7%5.0%5.9% 5.0%4.9% CY06/075.0%4.7%5.0%5.9% 5.0%4.9% Total4.4%4.2%4.4%5.3% 4.3%4.4%

21. 21 Mercer Government Human Services Consulting Summary of Average Annual Trends by COA and COS (CY04–CY07) F&CDisabledSOBRAAIDSHIV Delivery/ Birth Total Inpatient Hospital7.3% 6.8% 7.3% 7.0% 6.8% 5.8% 6.6% Outpatient10.5% 11.4% 10.5% 10.7% 10.5%10.8% Physician 4.4% 4.2% 4.4% 5.3% 4.3% 4.4% Dental 6.7% 5.4% 6.7% 5.4% 0.0% 6.7% Pharmacy6.9% 7.6%6.9%9.1% 6.9%7.6% All Other*-1.0% -0.6%-1.0% -0.6% -0.5% -1.0% -0.8% Total6.7% 6.8% 7.2% 7.5% 7.7% 5.6% 6.6% *Reflects -9.3% trend for CY04/05 and 3.8% trend for both CY05/06 and CY06/07.

22. 22 Mercer Government Human Services Consulting F&CDisabledSOBRAAIDSHIV Delivery / Birth Total CY04/054.4%4.3%5.0%5.3%5.5%4.3%4.4% CY05/068.0%8.3%8.5%8.8%9.0%6.5%8.0% CY06/077.7%7.8%8.1%8.3%8.6%6.0%7.5% Total6.7%6.8%7.2%7.5%7.7%5.6%6.6% Summary of Consolidated COS Annual Trend by COA and Year

23. 23 Mercer Government Human Services Consulting 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. 24 Mercer Government Human Services Consulting 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. 25 Mercer Government Human Services Consulting 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. 26 Mercer Government Human Services Consulting 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. 27 Mercer Government Human Services Consulting 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