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2015 Unified Rate Review Template Part III Actuarial Memorandum

Company Legal Name: Coventry Health Care of Missouri (CHC-MO) State: Missouri HIOS Issuer ID: 77660 Market: Small Group HMO Rate Filing Effective Date: 01/01/2015 through 12/31/2015

1. Scope and Purpose:

The purpose of this actuarial memorandum is to support the development of the Part I Unified Rate Review Template. CHC-MO intends to use the following rate development for small group business within its Missouri service area effective 1/1/2015 through 12/31/2015 for the products listed in Exhibit A. This memorandum is not intended to be used for any other purpose. 2. Summary of Changes

A. Proposed Rate Increases Not applicable. This is the initial offering of this product. B. Reasons for Rate Increase Not applicable. This is the initial offering of this product.

3. Experience Period Data

A. Experience Period

As CHC-MO did not have any HMO membership in 2013, there is no base period experience for Worksheet 1.

B. Earned Premium As CHC-MO did not have any HMO membership in 2013, there is no base period premium for Worksheet 1. C. Allowed Incurred Claims CHC-MO did not have any small group HMO membership in 2013. The following sections discuss the claims and adjustment factors used to develop the credibility manual.

The following table reports incurred claims used in the credibility manual:

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Allowed Incurred Coventry Claim System $ 83.6M $ 66.1M External Vendor Claim System $ 22.6M $ 16.9M IBNR $ 1.0M $ 0.8M Total $107.1M $ 83.8M Allowed and incurred claims come directly from the CHL-MO claim records for hospital and physician services. Capitated benefits use the capitation rate for incurred claims and the allowed claims are calculated as the incurred claims plus estimated cost sharing. Incurred claims are developed through the process of estimating the incurred but not paid (IBNP) reserves using aggregate block of business paid claims. Paid claims are adjusted using the IBNP completion factors. More specifically, historical claim payment patterns are used to predict the ultimate incurred claims for each date-of-service month. The IBNP is estimated using actuarial principles and assumptions which consider historical claim submission and adjudication patterns, unit cost and utilization trends, claim inventory levels, changes in membership and product mix, seasonality, and other relevant factors including a review of large claims. This same process is used to develop IBNP estimates for allowed claims. As noted above, the experience period reflects three months of paid claim run-off to reduce the impact of IBNP estimates in the most recent incurred month. As a result, the IBNP reserves account for approximately 0.9% of the experience period incurred claims.

4. Benefit Categories Claim tagging is used to fit all fee-for-service medical claims into four categories: Hospital Inpatient, Hospital Outpatient, Physician Services, and Other Medical. Other medical services include ambulance services, home health, durable medical equipment, and prosthetics. The utilization for these services are counted by service type and rolled up into one utilization number for the total category. Inpatient utilization is counted as days; outpatient and other medical utilization is counted as services; physician utilization is counted as services; and pharmacy is counted as prescriptions. Capitated services are paid on a per member per month (PMPM) basis and have no utilization values attached.

5. Projection Factors

A. Change in the Morbidity of the Population Insured Effective January 1, 2014, all policies issued in the individual and small group market are subject to new rating rules, including guaranteed issue and no medical underwriting. In addition, subsidies will be available to many individuals and families who are currently uninsured. The change in the morbidity of the future insured population relative to the current population in the experience period is based on changes in underwriting and rating factors, as well as expected sources of market expansion (including Medicare, Medicaid, individual insurance, small group employer insurance, large group employer insurance, and the high risk pool).

In addition, under Missouri state law, small groups will have the opportunity to elect to retain existing coverage instead of purchasing ACA-compliant coverage. It is expected that groups who elect to retain existing coverage have appreciably lower rates than those being offered through this filing on

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comparable products, due to favorable underwriting. Therefore, Coventry has adjusted the expected morbidity of the ACA-compliant Single Risk Pool to compensate for this impact. B. Changes in Benefits Compared to the 2013 experience, the filed products include additional benefits to comply with Missouri Essential Health Benefits (EHBs) according to the benchmark plan. The benefit changes from those reflected in the credibility manual experience that have an impact on rates include the following:

Expansion of Biofeedback coverage Changes to private duty nursing coverage Hearing aid coverage Expansion of pediatric vision benefits covered Coverage of services at Residential Treatment Centers Pediatric Dental benefits

The estimated net allowed impact of these changes relative to the current individual base period experience is or approximately of claims cost. The impact on utilization trend due to changes in benefits is described below under trend factors.

C. Changes in Demographics The manual experience data was normalized for projected changes in the 2015 age gender mix using Coventry demographic factors. The manual data was normalized for rating area comparing the current and projected member distributions by county using our company-specific market defined rating area factors. D. Other Adjustments

The expected mix of business for 2015 was projected and used to determine a projected market average rate. The effect of the change in mix of business due to differences in benefits, demographics, area, and network is shown in the Other adjustment column. An anticipated increase in the utilization and average cost of Hepatitis C treatments is expected to increase pharmacy costs .

E. Trend Factors Allowed medical trend includes known and anticipated changes in provider contract rates, severity and medical technology impacts, and expected changes in utilization. The impact of benefit leveraging is accounted for separately in the projected paid-to-allowed ratio. The change in projected utilization trend due to changes in benefits is also considered. Pharmacy trend considers the impact of patent expirations, new drugs, other general market share shifts, and overall utilization trend. Changes to the current network are included in the Other Trend. We project an average annual allowed claim trend of 8.5% from the experience to the pricing period.

6. Credibility/Manual Rate A. Manual rate

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B. Credibility

As noted in the Manual Rate section, the manual rate is developed using the experience . The manual is considered fully credible.

Given CHC-MO does not currently have any small group HMO experience in Missouri, the manual rate was given 100% credibility.

7. Paid to Allowed

The projected paid to allowed ratio in the projection is based on the projection of members by benefit plan on Worksheet 2. Assuming the migration in Section 14, the paid-to-allowed ratio is approximately 82% in the 2015 projection.

8. Risk Adjustment and Reinsurance A. Projected Risk Adjustment PMPM

Since the products were developed to be an attractive option across the entire spectrum of risk, the risk adjustment PMPM, net of risk adjustment user fees, is expected to .

B. Projected ACA Reinsurance Recoveries (Net of Reinsurance Premium)

The ACA Reinsurance program does not distribute funds to Small Group plans but only collects the program contribution. This contribution of $3.67 PMPM has been reflected in Section III of Worksheet 1.

9. Non-Benefit Expenses and Profit and Risk A. Administrative Expense Load

The methodology used to determine the appropriate administrative expense PMPM for this product line involved forecasting 2015 administrative expenses and membership nationally. Administrative expenses were based on historical expense levels and the changes expected with the requirements of PPACA. The projected administrative expense . The percent of premium load does not vary by product. Cost containment programs and quality improvement activities represent 1.3% of premium. B. Commissions

C. Profit and Risk Margin

D. Taxes and Fees

Taxes and fees include only the amounts eligible to be subtracted from premiums for the purposes of calculating MLR rebates. They are as follows:

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Insurer Tax Exchange User Fees PCORI Tax State Premium Tax Federal Income Tax

The reinsurance charge of $3.67 PMPM is not included in the amounts listed above despite its treatment as a claim in the MLR calculations. This filing assumes no on-exchange membership so the assumed exchange user fee is 0%.

10. Projected Loss Ratio

Under the current pricing assumption, the average MLR, as defined by PPACA, is projected to be .

11. Single Risk Pool

In compliance with 45 CFR part 156, 156.80(d), CHC-MO proposes a market-wide index rate, universal to all covered lives and modified only by those Permitted Plan-Level Adjustments described in 45 CFR part 156, 156.80(d)(2), and described in detail herein.

12. Index Rate

A. Experience Period Index Rate CHC-MO does not have any experience period data and therefore a value of $0 was entered on Worksheet 1. B. Projection Period Index Rate The index rate reflects the projected mix of business by plan. The AV pricing values for each plan are set based on the actuarial value and cost-sharing design of the plan, the impact of induced utilization, and the plans provider network, delivery system characteristics, and utilization management practices. Rates do not differ for any characteristic other than those allowable under the regulations as described in 45 CFR Part 156, 156.80(d)(2). No variation in administrative costs is considered for plans within a product. Small Group Market Trend Adjustments: The following table illustrates the quarterly trend factors, the resulting index rate for effective dates during each calendar quarter, the projected membership distribution by effective date, and the weighted-average index rate.

Effective Dates Membership Trend Factor Index Rate 1Q 2015 25% 1 $458.76 2Q 2015 25% 1.020 468.22 3Q 2015 25% 1.042 477.86 4Q 2015 25% 1.063 487.71

Combined

100% 1.031 473.14

13. Market-Adjusted Index Rate

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The Market Adjusted Index Rate reflects the Projected Period Index Rate adjusted for the expected Risk Adjustment impact and payment of the Reinsurance Program Fee.

14. Plan-Adjusted Index Rates

The Plan Adjusted Index Rates are developed using plan-specific adjustments to the Market Adjusted Index Rate. The following briefly describes how each set of adjustments was determined. A. Actuarial Value and Cost Sharing We used models to estimate the impact of different cost sharing designs. We also reviewed the projected experience and the projected membership by plan to estimate an overall paid-to-allowed ratio. The result of these analyses was plan specific cost sharing adjustments that were applied to reflect the impact of the different levels of cost sharing on the use of medical services. These adjustments

have been normalized to result in an aggregate factor of 1.0 when applied to the projected 2015 membership. B. Provider Network, Delivery System, and Utilization Management Network adjustments were applied to reflect the estimated impact of differences in the network size, efficiency, and provider contract terms. We worked with our contracting area and other subject matter experts to review the impact of these differences and estimated the expected impact on allowed claims. C. Benefits in addition to EHBs

The products discussed in this filing provide coverage for only those benefits defined as Essential Health Benefits (EHB). These products do not provide coverage for non-EHBs. D. Non-Tobacco Adjustment

E. Catastrophic Plan Eligibility

Not applicable. CHC-MO is not offering Catastrophic plans as part of this filing.

F. Distribution and Administrative Costs

Adjustments were made for projected administrative costs and profit margin. These are discussed above in the Non-Benefit Expenses and Profit & Risk section, and exclude the Reinsurance Contribution, Risk Adjustment User Fee, and Exchange User Fee, which are reflected elsewhere. These expense and profit assumptions do not vary by plan.

15. Plan-Adjusted Index Rates Calibration

A. Age Curve Calibration The age factors are based on the HHS Default Standard Age curve. We projected an average age factor for the 2015 membership of . We determined a calibration factor of by determining the average age factor (using the HHS standard age curve) for the projected enrollment by age and taking its reciprocal. The average age factor is a member-weighted

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average; .

B. Geographic Factor Calibration For this rate filing, we have relied on our currently filed Small Group rating area factors, modified based on information received from our Network Management team which indicated the expected savings associated with improved unit cost arrangements with contracted facilities and providers within each applicable rating area. Exhibit G displays the projected membership by area and the projected average area factor of . The Geographic Factor Calibration is the reciprocal, . C. Trend Factor Calibration

CHC-MO intends to increase rates quarterly by a factor equal to the claim trend described in this filing (8.5% annual), with the assumption of uniform membership throughout the year. Therefore, the Trend Factor calibration factor was calculated to be 1.031. Dividing a Plan Adjusted Index Rate by this factor results in the Calibrated Plan Adjusted Index Rate, equal to the basis for rates used in the first quarter of 2015.

16. Consumer-Adjusted Premium Rate Development

Rates are determined using the prescribed member build-up approach. In the event that a family includes more than three dependents under age 21, only the three oldest dependents will be considered in determining the familys premium. Additional dependents (non-billable members) will not be included in the rate calculation. The premium for each billable member is calculated as: Calibrated Plan Adjusted Index Rate * Age Factor * Area Factor

17. AV Metal Values

The AV Metal Values on Worksheet 2 were based on the AV calculator. There were adjustments made to reflect benefit features not handled by the AV calculator. Attached is the certification required by 45 CFR Part 156, 156.135. Adjustments made to plan design entry within the AV Calculator (Certification Option 1)

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Different pharmacy copays for preferred pharmacies, non-preferred pharmacies and mail

order. Copays entered into the AV calculator as a weighted average of the copays across pharmacy types.

Tier 1A (preferred generics). Subclass of generic drugs for which we collect a lower copay than other generics. Copays entered into AV calculator for generic drugs as a weighted average of preferred generics and other Tier 1 drugs.

Tiers 4 and 5 (preferred and non-preferred specialty drugs). Pharmacy coinsurance for specialty drugs entered into AV calculator as a weighted average of Tiers 4 and 5.

Outpatient Facility sub-categories. The Outpatient Facility benefit is made up of two sub-categories; OP surgical hospital and OP surgical freestanding. The average effective coinsurance using the weightings of the internal sub-categories was entered.

Calculations made outside the AV Calculator for plan design impact (Certification Option 2)

Different cost-sharing for X-Ray and lab services by place of service. Used Coventry data to calculate the percent of these services that are performed by place of service and adjusted overall member cost-share to account for that difference. An out-of-model adjustment was made to the AV calculation to account for this plan design feature.

18. AV Pricing Values

The Actuarial Calculator produces Actuarial Values (AVs) that reflect the portion of costs that will be paid by the carrier versus the member, on average. The AV Pricing Value includes the following allowable, plan level adjustments to the index rate

Paid to allowed ratio for the plan Plan Specific Network Discounts Administrative Costs Commission / Distribution Costs Additional Plan Benefits Above the EHBs

The utilization adjustments discussed in Section 13.A. were applied to reflect expected differences in utilization due to metal tier and plan design.

19. Membership Projections

Membership projections are based on historical experience, enrollment in ACA-compliant plans through May 2014, and our expectations for future sales as additional members move to these plans from grandfathered and transitional plans.

20. Terminated Products

All products with existing membership in 2013 will be retired in 2014. In compliance with Missouri state law, existing groups may elect to retain these plans or purchase an ACA-compliant plan. New small groups must choose an ACA-compliant plan. The HIOS Products that were discontinued at the end of 2013 are:

77660MO001 21. Plan type

The plan types in the drop down boxes on Worksheet 2 adequately identify the products in the projection period.

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22. Warning Alerts

.

23. Reliance On Others

While I have reviewed the reasonableness of the assumptions in support of both the preparation of the Part I Unified Rate Review Template and the assumptions in support of the rate development applicable to the products discussed in this filing, I relied on the expertise of the following noted individuals, along with work products produced at their direction, for the following items:

24. Actuarial Certification:

I, , am an actuary of Aetna, of which CHC-MO is a wholly owned subsidiary. I am a member of the American Academy of Actuaries and I meet the Academy qualification standards for rendering opinions of this type.

I hereby certify in my opinion, that:

This filing is in conformity with all applicable Actuarial Standards of Practice, including, but not limited to:

ASOP No. 5, Incurred Health and Disability Claims ASOP No. 8, Regulatory Filings for Health Plan Entities ASOP No. 12, Risk Classification ASOP No. 23, Data Quality ASOP No. 25, Credibility Procedures Applicable to Accident and Health, Group Term Life, and Property/Casualty Coverages ASOP No. 26, Compliance with Statutory and Regulatory Requirements for the Actuarial Certification of Small Employer Health Benefit Plans ASOP No. 41, Actuarial Communications.

The projected index rate is:

a. In compliance with all applicable State and Federal Statutes and Regulations (45 CFR 156.80(d)(1))

b. Developed in compliance with the applicable Actuarial Standards of Practice c. Reasonable in relation to the benefits provided and the population anticipated to be

covered d. Neither excessive nor deficient

The index rate and only the allowable modifiers as described in 45 CFR 156.80(d)(1) and 45

CFR 156.80(d)(2) were used to generate plan level rates.

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The percent of total premium that represents essential health benefits included in Worksheet

2, Sections III and IV were calculated in accordance with actuarial standards of practice. Qualification The Part 1 Unified Rate Review Template does not demonstrate the process used by CHC-MO to develop rates. Rather it represents information required by Federal regulation to be provided in support of the review of rate increases, for certification of qualified health plans and for certification that the index rate is developed in accordance with federal regulation and used consistently and only adjusted by the allowable modifiers. ___________________________ ___________________

(Date)