Overview of CY 2007 HealthChoice Rates Medicaid Advisory Committee Meeting October 26, 2006

Development of Rates  CY07 HealthChoice rates were developed based upon the CY04 audited financial reports submitted by the plans as well as reported diagnosis & utilization encounter data.  The actuary, Mercer, developed trend factors to project the CY04 historical costs to the payment period, and applied a series of actuarial adjustments as necessary.

Components of Rate Increase  The level of the CY07 rate increase will be influenced by the following factors: Changes in the financial base Medical expense trend Administrative cost allowance Modest Profit / Contingency Actuarial adjustments State-designated incentive payments

Financial Base –Medical Expenses  The 2007 HealthChoice rates are based upon CY04 financial experience of the Plans: $ PMPM CY04 Families & Children $ Disabled $ Deliveries$9, Total $226.23

Medical Trend  The actuary developed their trend estimates evaluating plan financial reports, HSCRC datasets, and HealthChoice encounter data.  Trend factors recognize changes in cost and utilization from the base period to the payment period.

Summary of Average Annual Trends (CY04–CY07) F&CDisableSOBRAAIDSHIVBirthTotal Inpatient Hospital 7.3% 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%

Administrative Costs  The CY07 rates include administrative costs that were based upon independently reviewed CY04 MCO reported costs trended using CPI.  Aggregate administrative costs are “capped” at CY06 rate levels.

Administrative Costs PMPM ComponentsCY06CY07 General$21.32$22.85 Medical Management $6.27$6.39 Total$27.59$29.24

Profit and Contingency  The CY07 rates include a fixed profit percentage of 1.5% of medical expense.  The CY07 rates include a fixed contingency margin percentage of 0.39% of medical expense.  An additional $2.4 million was included to reflect the administrative component of reinsurance premium costs.

Actuarial Adjustments  The actuaries applied a series of adjustments in finalizing the rates.  These adjustments recognize the impact of benefit or eligibility changes that took place after the beginning of the base year (CY04).  Some adjustments increase and some adjustments decrease the rates.

Actuarial Adjustments Adjustments applied having the impact of increasing the rates were as follows:  FY 05 physician fee increase  FY 06 physician fee increase

Actuarial Adjustments Adjustments applied having the impact of decreasing the rates were as follows:  Adult dental carve out  Adult drug co-pays  Lower than anticipated MCO savings for third party liability  Improve RAC assignments due to better encounter data submissions

Incentive Payments  CY07 rates included $7.6 million for statewide incentive payments to plans that operated in at least 20 counties. This is approximately 75% of the statewide incentive pool in  New for CY07 was the implementation of a quality incentive pool of $2.53 million. This is approximately 25% of the statewide incentive pool in 2006.

Changes in 2007 Rate Setting  In addition to the change in methodology for the Statewide Incentive Payout, the Program also expanded diagnosis fields for RAC assignments.

Final Rates Effective January 2007:  Families & Children5.8%  Disabled4.7%  AIDS8.4%  Deliveries4.3%  Total including incentives5.2%