AHM 520 - Tests

Assignment 1: Health Plan Financial Information
Reading 1A: Health Plan Financial Information
• Define financial information and list examples of a health plan's financial information
• Identify the internal users and external users of a health plan's financial information
• Distinguish between for-profit and not-for-profit Health Plan organizations
• Discuss the common types of Health Plan organizations
Instructions:
1. Select or enter the best answer for each of the 4 questions.

2. Answer all the questions. Remember to scroll down if necessary.
Complete the Test

3. Click Complete the Test to score your answers and view a report.
1. Users of the Fulcrum Health Plan financial information include:
• The independent auditors who review Fulcrum's financial statements

• Fulcrum's controller (comptroller)
• Fulcrum's plan members Go to
• The providers that deliver healthcare services to Fulcrum plan question
members 2.
• Fulcrum's competitors
Of these users, the ones that most likely can correctly be classified as
external users with a direct financial interest in Fulcrum are the
independent auditors, the plan members, the providers, and the
competitors only
independent auditors, the controller, and the providers only
controller and the competitors only
plan members and the providers only
2. The Eclipse Health Plan is a not-for-profit health plan that qualifies under Go to
the Internal Revenue Code for tax-exempt status. This information indicates question
that Eclipse 3.
has only one potential source of funding: borrowing money

does not pay federal, state, or local taxes on its earnings
must distribute its earnings to its owners-investors for their personal
gain
is a privately held corporation
3. The Challenger Group is a type of management services organization Go to

question
(MSO) that purchases the assets of physician practices, provides practice
4.
management and administrative support services to participating providers,
and offers physicians a long-term contract and an equity position in
Challenger. This information indicates that Challenger is a type of health plan
known as
an integrated delivery system (IDS)
a medical foundation
a provider-sponsored organization (PSO)
a physician practice management (PPM) company
4. A key factor that distinguishes the various types of health plans is the type
and amount of risk that a health plan assumes with respect to the delivery
Back to
and financing of healthcare benefits. An example of a type of health plan that Top
typically assumes the financial risk of delivering and financing healthcare
benefits is a
third party administrator (TPA)
utilization review organization (URO)
preferred provider organization (PPO)
pharmacy benefit management (PBM) plan
>---------- End of the Test ----------<
1 D
2 B
3 D
4 C
Assignment 2: Risk Management in Health Plans
Reading 2A: Types of Risk
• Distinguish between pure risk and speculative risk

• Define risk management
• Define the risks included in risk-based capital (RBC) requirements for Health Plans
• Discuss the three broad strategies Health Plans use to deal with risk
• Explain how C-risks (Contingency risks) and RBC risks relate to Health Plan solvency
Instructions:

Complete the Test

1. The following statements are about pure risk and speculative risk—two Go to
kinds of risk that both businesses and individuals experience. Select the question
answer choice containing the correct statement. 2.
Healthcare coverage is designed to help plan members avoid pure risk,

not speculative risk.
Only pure risk involves the possibility of gain.
An example of speculative risk is the possibility that an individual will
contract a serious illness.
Only speculative risk contains an element of uncertainty.
2. The following paragraph contains an incomplete statement. Select the

answer choice containing the term that correctly completes the statement.
Health plans face four contingency risks (C-risks): asset risk (C-1), pricing
Go to
risk (C-2), interest-rate risk (C-3), and general management risk (C-4). Of question
these risks, ________________ is typically the most important risk that 3.
health plans face. This is true because a sizable portion of the total expenses
and liabilities faced by a health plan come from contractual obligations to pay
for future medical costs, and the exact amount of these costs is not known
when the healthcare coverage is priced.
asset risk (C-1)
pricing risk (C-2)
interest-rate risk (C-3)
general management risk (C-4)
3. The Health Maintenance Organization (HMO) Model Act, developed by the Go to

question
National Association of Insurance Commissioners (NAIC), represents one
4.
approach to developing solvency standards. One drawback to this type of
solvency regulation is that it
uses estimates of future expenditures and premium income to estimate
future risk
fails to adjust the solvency requirement to account for the size of an
HMO's premiums and expenditures
assumes that the amount of premiums an HMO charges always directly
corresponds to the level of the risk that the HMO faces
fails to mandate a minimum level of capital and surplus that an HMO
must maintain
4. The NAIC has developed a risk-based capital (RBC) formula for all health Go to
plans that accept risk. One true statement about the RBC formula for health question
plans is that it 5.
is a set of calculations, based on information in a health plan's annual

financial report, that yields a target capital requirement for the
organization
fails to take into account a health plan's underwriting risk, which is the
risk that the premiums the health plan receives will be insufficient to pay
for the healthcare services it provides to its plan members
applies to all health plans in the United States
fails to assess the specific level of risk faced by each health plan
5. Provider reimbursement methods that transfer some utilization risk from a Go to

health plan to providers affect the health plan's RBC formula. A health plan's question
use of these reimbursement methods is likely to result in 6.
an increase the health plan's underwriting risk

a decrease the health plan's credit risk
a decrease the health plan's net worth requirement
all of the above
6. Three general strategies that health plans use for controlling types of risk
are risk avoidance, risk transfer, and risk acceptance. The following
Back to
statements are about these strategies. Three of these statements are true, Top
and one statement is false. Select the answer choice containing the FALSE
statement.
Generally, the smaller the likely benefits of accepting a risk, and the
lower the costs of avoiding that risk, the greater the likelihood that a
health plan will elect to avoid the risk.
A health plan is seldom able to transfer any of the risk that utilization
rates will be higher than expected and that its cost of providing
healthcare will exceed the revenues it receives.
If a risk is a pure risk from the point of view of a health plan, then the
health plan most likely will attempt to avoid the risk.
A health plan would most likely transfer some or all of its utilization risk
if it pays a provider a rate that is based on the number of plan enrollees
that choose the provider as their primary care provider (PCP).
>---------- End of the Test ----------<
1 A
2 B
3 C
4 A
5 C
6 B
Reading 2B: Risk Management in Health Plan
• List some of the factors that may give rise to the assumption of an agency relationship between Health Plans and
their providers
• Discuss some measures a Health Plan might take to limit the liability associated with credentialing its providers
• Explain some of the ways a risk manager can reduce or eliminate risk exposures related to utilization review
• List some of the actions that a risk manager can take in managing the process of providing healthcare in a Health
Plan environment
Instructions:

Complete the Test

1. Under the doctrine of corporate negligence, a health plan and its physician
administrators may be held directly liable to patients or providers for failing
Go to
to investigate adequately the competence of healthcare providers whom it
question
employs or with whom it contracts, particularly where the health plan actually 2.
provides healthcare services or restricts the patient's/enrollee's choice of
physician.
True
False
2. The Eagle health plan wants to limit the possibility that it will be held
vicariously liable for the negligent acts of providers. Dr. Michael Chan is a Go to
member of an independent practice association (IPA) that has contracted question
with Eagle. One step that Eagle could take in order to limit its exposure under 3.
the theory of vicarious liability is to
supply Dr. Chan with office space
employ nurses, laboratory technicians, and therapists to support Dr.
Chan
be responsible for keeping Dr. Chan's medical records updated
ensure that documents provided to Dr. Chan's patients describe him as
an independent practitioner
3. Rasheed Azari, the risk manager for the Tower health plan, is attempting Go to
question
to work with providers in the organization in order to reduce the providers'
4.
exposure related to utilization review. Mr. Azari is considering advising the
providers to take the following actions:
• 1-Allow Tower's utilization management decisions to override a

physician's independent medical judgment
• 2-Support the development of a system that can quickly render a
second opinion in case of disagreement surrounding clinical judgment
• 3-Inform a patient of any issues that are being disputed relative to a
physician's recommended treatment plan and Tower's coverage
decision
Of these possible actions, the ones that are likely to reduce physicians'
exposures related to utilization review include actions
1, 2, and 3
1 and 2 only
1 and 3 only
2 and 3 only
4. The following statements are about risk management in health plans. Back to
Select the answer choice containing the correct response. Top
Risk management is especially important to health plans because the
Employee Retirement Income Security Act of 1974 (ERISA) allows plan
members to recover punitive damages from healthcare plans.
With regard to the relative risk for health plan structures based upon the
degree of influence and relationships that health plans maintain with
their providers, preferred provider organizations (PPOs) typically have a
higher risk than do group HMOs and staff HMOs.
Although there are clear risks associated with the provision of healthcare
services and coverage decisions surrounding that care, the bulk of risk in
health plans is associated with a health plan's benefit administration and
contracting activities.
A health plan generally structures its risk management process around
loss reduction techniques and loss transfer techniques.
>---------- End of the Test ----------<
1 A
2 D
3 D
4 D
Assignment 3: Provider Reimbursement Arrangements
Reading 3A: Provider Reimbursement and Plan Risk
• Discuss the three main drivers of complexity in the healthcare regulatory environment
• Describe the influence of the Department of Health and Human Services, the Department of Labor, the Office of
Personnel Management, and the Department of Defense on the healthcare environment
• Explain the financial effects that mandated benefit laws and regulations have on Health Plans
Instructions:

Complete the Test

1. Several federal agencies establish rules and requirements that affect Go to
health plans. One of these agencies is the Department of Labor (DOL), which question
is primarily responsible for _________. 2.
issuing regulations pertaining to the Health Insurance Portability and

Accountability Act (HIPAA) of 1996
administering the Medicare and Medicaid programs
administering ERISA, which imposes various documentation, appeals,
reporting, and disclosure requirements on employer group health plans
administering the Federal Employees Health Benefits Program (FEHBP),
which provides voluntary health insurance coverage to federal
employees, retirees, and dependents
2. The Atoll Health Plan must comply with a number of laws that directly
affect the plan's contracts. One of these laws allows Atoll's plan members to
Go to
receive medical services from certain specialists without first being referred
question
to those specialists by a primary care provider (PCP). This law, which reduces 3.
the PCP's ability to manage utilization of these specialists, is known as
_________.
a due process law
an any willing provider law
a direct access law
a fair procedure law
3. Mandated benefit laws are state or federal laws that require health plans to
Back to
arrange for the financing and delivery of particular benefits. Within a market, Top
the implementation of mandated benefit laws is likely to cause __________.
a reduction in the number of self-funded healthcare plans
an increase in the cost to the health plans
a reduction in the size of the provider panels of health plans
a reduction in the uniformity among the healthcare plans of competing
health plans
>---------- End of the Test ----------<

1 C
2 C
3 B
Reading 3B: Provider Reimbursement Methods
• Discuss the advantages and disadvantages of traditional, salary, fee-for service, and discounted fee-for-service
provider reimbursement methods
• Explain how utilization risk is distributed in each of the provider reimbursement methods
• Define churning, upcoding, and unbundling and recognize which provider reimbursement systems are designed to
solve these problems
• Explain the purpose of using the relative value scale and resource-based relative value scale systems
• Define global fees, withholds, risk pools, and bonuses and explain how they are used by health plans to motivate
providers to manage overutilization
• Discuss the methods that health plans use to reimburse hospitals
Instructions:

Complete the Test

1. The physicians who work for the Sunrise Health Plan, a staff model HMO,
Go to
are paid a salary that is not augmented with another type of incentive plan.
question
Compared to the use of a traditional reimbursement method, Sunrise's use of 2.
a salary reimbursement method is more likely to
encourage Sunrise's physicians to perform services that are not
medically necessary
completely eliminate service risk for Sunrise's physicians
decrease Sunrise's liability for any negligent acts of the physicians in the
plan's network of providers
help stabilize expenses for Sunrise
2. The Acorn Health Plan uses a resource-based relative value scale (RBRVS)
to help determine the reimbursement amounts that Acorn should make to Go to
providers who are compensated under an FFS system. With regard to the question
advantages and disadvantages to Acorn of using RBRVS, it can correctly be 3.
stated that
an advantage of using RBRVS is that it can assist Acorn in developing
reimbursement schedules for various types of providers in a
comprehensive healthcare plan
an advantage of using RBRVS is that it puts providers who render more
medical services than necessary at financial risk for this overutilization
a disadvantage of using RBRVS is that it will be difficult for Acorn to
track treatment rates for the health plan's quality and cost management
functions
a disadvantage of using RBRVS is that it rewards procedural healthcare
services more than cognitive healthcare services
3. Health plans sometimes use global fees to reimburse providers. Health Go to

plans would use this method of provider reimbursement for all of the question
following reasons EXCEPT that global fees 4.
eliminate any motivation the provider may have to engage in churning
transfer some of the risk of overutilization of care from the health plan to
the providers
eliminate the practice of upcoding within specific treatments
reward providers who deliver cost-effective care
4. The reimbursement arrangement that Dr. Caroline Monroe has with the
Go to
Exmoor Health Plan includes a typical withhold arrangement. One true
question
statement about this withhold arrangement is that, for a given financial 5.
period,
Dr. Monroe and Exmoor are equally responsible for making up the
difference if cost overruns exceed the amount of money withheld
Exmoor most likely distributes to Dr. Monroe the entire amount withheld
from her if her costs are below the amount budgeted for the period
Exmoor pays Dr. Monroe at the end of the period an amount over and
above her usual reimbursement, and this amount is based on the
performance of the plan as a whole
Exmoor most likely withholds between 3% and 5% of Dr. Monroe's total
reimbursement
5. The following statements are about various reimbursement arrangements Go to

that health plans have with hospitals. Select the answer choice containing the question
correct statement. 6.
A sliding scale per-diem charges arrangement differs from a sliding scale

discount on charges arrangement in that only a sliding scale per-diem
charges arrangement is based on total volume of admissions and
outpatient procedures.
Under a typical reimbursement arrangement that is based on diagnosis-
related groups (DRGs), if the payment amount is fixed on the basis of
diagnosis, then any reduction in costs resulting from a reduction in days
will go to the health plan rather than to the hospital.
A negotiated straight per-diem charge requires payment of a single
charge for a day in the hospital, regardless of any actual charges or
costs incurred during the hospital stay.
A straight discount on charges arrangement is the most common
reimbursement method in markets with high levels of health plans.
6. Health plans seeking to provide comprehensive healthcare plans must

Back to
contract with a variety of providers for ancillary services. One characteristic Top
of ancillary services is that
physician behavior typically does not impact the utilization rates for
these services
package pricing is the preferred reimbursement method for ancillary
service providers
these services include physical therapy, behavior therapy, and home
healthcare, but not diagnostic services such as laboratory tests
few plan members seek these services without first being referred to the
ancillary provider by a physician
>---------- End of the Test ----------<
1 D
2 A
3 A
4 B
5 C
6 D
Assignment 4: Capitation and Plan Risk
Reading 4A: Capitation in Provider Reimbursement
• Describe percent-of-premium capitation and PMPM capitation

• Explain the differences among and uses of PCP, specialty, full professional, and global capitation arrangements
• Explain how carve-outs are used in conjunction with some capitation contracts
• Discuss contact capitation
• Describe some of the key information requirements for developing a capitation reimbursement system
Instructions:

Complete the Test

1. In order to calculate a simple monthly capitation payment, the Argyle
Health Plan used the following information:
• The average number of office visits each member makes in a year is

two Go to
• The FFS rate per office visit is $55 question
• The member copayment is $5 per office visit 2.
• The reimbursement period is one month
Given this information, Argyle would correctly calculate that the per member
per month (PMPM) capitation rate should be
$4.17
$8.33
$9.17
$10.00
2. The provider contract that Dr. Timothy Meyer, a pediatrician, has with the
Cardigan health plan states that Cardigan will compensate him under a
capitation arrangement. However, the contract also includes a typical low
enrollment guarantee provision. Statements that can correctly be made about
this arrangement include that the low enrollment guarantee provision most
likely Go to
question
A. Causes Dr. Meyer's capitation contract with Cardigan to transfer more 3.
risk to him than the contract otherwise would transfer
B. Specifies that Cardigan will pay Dr. Meyer under an arrangement

other than capitation until a specified number of children covered by
the plan use him as their PCP
Both A and B
A only
B only
Neither A nor B
Go to
3. One true statement about a type of capitation known as a percent-of-
question
premium arrangement is that this arrangement 4.
is the most common type of capitation

is less attractive to providers when the arrangement sets provisions to
limit risk
sets provider reimbursement at a specific dollar amount per plan
member
transfers some of the risk associated with underwriting and rating from a
health plan to a provider
4. The provider contract that Dr. Zachery Cogan, an internist, has with the
Neptune Health Plan calls for Neptune to reimburse him under a typical PCP
capitation arrangement. Dr. Cogan serves as the PCP for Evelyn Pfeiffer, a
Go to
Neptune plan member. After hospitalizing Ms. Pfeiffer and ordering several
question
expensive diagnostic tests to determine her condition, Dr. Cogan referred her 5.
to a specialist for further treatment. In this situation, the compensation that
Dr. Cogan receives under the PCP capitation arrangement most likely includes
Neptune's payment for
all of the diagnostic tests that he ordered on Ms. Pfeiffer
his visits to Ms. Pfeiffer while she was hospitalized
the cost of the services that the specialist performed for Ms. Pfeiffer
all of the above
5. The following statements illustrate common forms of capitation:
1. The Antler Health Plan pays the Epsilon Group, an integrated delivery
system (IDS), a capitated amount to provide substantially all of the
inpatient and outpatient services that Antler offers. Under this
arrangement, Epsilon accepts much of the risk that utilization rates
will be higher than expected. Antler retains responsibility for the plan's
marketing, enrollment, premium billing, actuarial, underwriting, and
Go to
member services functions.
question
2. The Bengal Health Plan pays an independent physician association 6.
(IPA) a capitated amount to provide both primary and specialty care
to Bengal's plan members. The payments cover all physician services
and associated diagnostic tests and laboratory work. The physicians in
the IPA determine as a group how the individual physicians will be
paid for their services.
From the following answer choices, select the response that best indicates
the form of capitation used by Antler and Bengal.
Antler = subcapitation
Bengal = full-risk capitation
Antler = subcapitation
Bengal = full professional capitation
Antler = global capitation
Bengal = subcapitation
Antler = global capitation
Bengal = full professional capitation
6. The following statements are about carve-out programs. Three of these Go to

statements are true, and one statement is false. Select the answer choice question
containing the FALSE statement. 7.
In the type of carve-out in which entire categories of care are

administered by independent organizations, a health plan typically
reimburses these organizations under an FFS contract.
Typically, a health plan will offer carved-out services to its enrollees, but
will manage these services separately.
Carve-outs are services that are excluded from a capitation payment, a
risk pool, or a health benefit plan.
The most rapidly growing area relaed to carve-outs is disease
management (DM).
7. The Marble Health Plan sets aside a PMPM amount for each specialty.
When a PCP in Marble's provider network refers a Marble plan member to a
specialist and the specialist provides medical services to the member, the Go to
specialist begins to receive a share of those funds on a monthly basis. Marble question
determines the monthly payment for each specialist by dividing the number 8.
of active patients for that specialty by the total specialty pool for that month.
This form of payment, which is similar to a case rate, is known as
referral circle capitation
risk pod capitation
contact capitation
retrospective reimbursement capitation
8. A reconciliation is the process by which a health plan assesses providers' Go to

performance relative to contractual terms and reimbursement. With regard to question
this process, it can correctly be stated that 9.
a reconciliation typically includes payment to the providers of any

withholds or bonuses due to them
a health plan typically should conduct a reconciliation immediately after
the evaluation period has ended
most agreements between health plans and providers require
reconciliations to be performed quarterly
a health plan typically should not conduct reconciliation for a provider
until the plan has received all claims or other documentation of services
that the physician provided during the evaluation period
9. With regard to capitation arrangements for hospitals, it can correctly be Back to

Top
stated that
the most common reimbursement method for hospitals is professional
services capitation
most jurisdictions prohibit hospitals and physicians from joining together
to receive global capitations that cover institutional services provided by
the hospitals
a health plan typically can capitate a hospital for outpatient laboratory
and X-ray services only if the health plan also capitates the hospital for
inpatient care
many hospitals have formed physician hospital organizations (PHOs),
hospital systems, or integrated delivery systems (IDSs) that can accept
global capitation payments from health plans
>---------- End of the Test ----------<

1 B
2 C
3 D
4 B
5 D
6 A
7 C
8 A
9 D
Reading 4B: Risk Transfer in Health Plan
• Distinguish between the terms stop-loss insurance and stop-loss reinsurance from the insurance industry perspective
• Explain the differences between specific stop-loss coverage and aggregate stop-loss coverage
• Discuss the advantages and disadvantages to a Health Plan of transferring risk by obtaining stop-loss coverage
• Discuss the advantages and disadvantages to a Health Plan of providing stop-loss coverage to providers and
employer groups
Instructions:

Complete the Test

1. The Newfeld Hospital has contracted with the Azalea Health Plan to provide
inpatient services to Azalea's enrolled members. The contract calls for Azalea
to provide specific stop-loss coverage to Newfeld once Newfeld's treatment
costs reach $20,000 per case and for Newfeld to pay 20% of the next Go to
$50,000 of expenses for this case. After Newfeld's treatment costs on a case question
reach $70,000, Azalea reimburses the hospital for all subsequent treatment 2.
costs.
One true statement about this specific stop-loss coverage is that

the carrier is Newfeld
the attachment point is $20,000
the shared-risk corridor is between $0 and $70,000
this coverage can also be activated when the total covered medical
expenses generated by the hospitalizations of Azalea plan members
reach a specified level
2. The Newfeld Hospital has contracted with the Azalea Health Plan to provide
inpatient services to Azalea's enrolled members. The contract calls for Azalea
to provide specific stop-loss coverage to Newfeld once Newfeld's treatment
costs reach $20,000 per case and for Newfeld to pay 20% of the next
$50,000 of expenses for this case. After Newfeld's treatment costs on a case Go to
question
reach $70,000, Azalea reimburses the hospital for all subsequent treatment 3.
costs.
The maximum amount for which Newfeld is at risk for any one Azalea plan
member's treatment costs is
$10,000
$14,000
$30,000
$34,000
3. The Sanford Group, a provider group, entered into a risk contract with a
health plan. Sanford has purchased aggregate stop-loss coverage with an
attachment point of 115% of the group's predicted healthcare costs of Go to
$2,000,000 for the year. Sanford has a copayment of 10% for any costs question
above the attachment point. If Sanford's actual costs for the year are 4.
$2,800,000, then, according to the terms of the aggregate stop-loss
agreement, the amount that Sanford is responsible for is
$2,080,000
$2,300,000
$2,350,000
$2,380,000
4. A stop-loss contract may provide that claims are settled using a paid
claims method or an incurred claims method. The Concord Company provides
health coverage to its employees through a self-funded health plan. On March
17, a Concord employee who is enrolled in this plan underwent surgery, and Go to
the surgery was sufficiently expensive to trigger Concord's specific stop-loss question
coverage. On April 10, Concord paid the medical expenses associated with 5.
the surgery. The term of the stop-loss contract ended on April 1. This
information indicates that the stop-loss carrier is responsible for paying a
portion of the cost of the surgery under
both the paid claims method and the incurred claims method
the paid claims method but not the incurred claims method
the incurred claims method but not the paid claims method
neither the paid claims method nor the incurred claims method
Go to
5. A health plan that capitates a provider group typically provides or offers to
question
provide stop-loss coverage to that provider group. 6.
True
False
6. The sentence below contains two pairs of words enclosed in parentheses.

Determine which word in each pair correctly completes the statement. Then
select the answer choice containing the two words that you have chosen.
Back to
Top
Purchasing stop-loss coverage most likely (increases / reduces) a health
plan's underwriting risk and (increases / reduces) the health plan’s affiliate
risk.
increases / increases
increases / reduces
reduces / increases
reduces / reduces
>---------- End of the Test ----------<
1 B
2 C
3 C
4 C
5 A
6 C
Assignment 5: Fully Funded and Self-Funded Health Plans
Reading 5A: Health Plan Funding
• Distinguish between fully funded and self-funded health plans

• Identify and describe the two main types of self-funded health plans
Instructions:

Complete the Test

1. The Poplar Company and a Blue Cross/Blue Shield organization have
Go to
contracted to provide a typical fully funded health plan for Poplar's
question
employees. One true statement about this health plan for Poplar's employees 2.
is that
Poplar bears the entire financial risk if, during a given period, the dollar
amount of services rendered to Poplar plan members exceeds the dollar
amount of premiums collected for this health plan
Poplar and the Blue Cross/Blue Shield organization share the financial
risk of paying for claims under Poplar's health plan
the Blue Cross/Blue Shield organization, upon acceptance of a premium,
becomes the group plan sponsor for Poplar's health plan
the Blue Cross/Blue Shield organization, upon acceptance of a premium,
bears the entire financial risk of paying for the administrative expenses
associated with health plan operations
2. The Kayak Company self funds the health plan for its employees. This plan
is an example of a type of self-funded plan known as a general asset plan. Go to
question
3.
The fact that this is a completely self-funded plan indicates that
the plan has no funding vehicle
Kayak passes to its employees the financial risk of providing healthcare
coverage
the plan most likely is exempt from ERISA requirements concerning the
limits on benefit discrimination for classes of employees
the plan is exempt from the state laws and regulations that apply to
health insurance policies
3. The Kayak Company self funds the health plan for its employees. This plan
is an example of a type of self-funded plan known as a general asset plan.
Back to
Top
Because Kayak's plan is a general asset plan, the funds that Kayak sets aside
for the health plan are
subject to the claims of Kayak's creditors
available to Kayak solely for the purpose of paying for the healthcare
expenses of Kayak's covered employees
placed in a trust fund established by Kayak to pay for the health plan
considered separate from Kayak's current operating funds
>---------- End of the Test ----------<

1 D
2 D
3 A
Reading 5B: Alternative Funding Methods
• Distinguish between a contributory plan and a noncontributory plan

• Describe the individual components of a premium, including the interest charge, the risk charge, and the retention
charge
• List the key characteristics of premium-delay arrangements, reserve-reduction arrangements, minimum-premium
plans, retrospective-rating arrangements, and administrative-services-only contracts
Instructions:

Complete the Test

1. The methods of alternative funding for health coverage can be divided into
the following general categories:
• Category A—Those methods that primarily modify traditional fully

Go to
insured group insurance contracts
question
• Category B—Those methods that have either partial or total self- 2.
funding
Typically, small employers are able to use some of the alternative funding
methods in
both Category A and Category B
Category A only
Category B only
neither Category A nor Category B
2. Under the alternative funding method used by the Flair Company, Flair
assumes financial responsibility for paying claims up to a specified level and
deposits the funds necessary to pay these claims into a bank account that
belongs to Flair. However, an insurer, which acts as an agent of Flair, makes
the actual payment of claims from this account. When claims exceed the Go to
specified level, the insurer pays the balance from its own funds. No state question
premium tax is levied on the amounts that Flair deposits into this bank 3.
account.
From the following answer choices, choose the name of the alternative
funding method described.
Retrospective-rating arrangement
Premium-delay arrangement
Reserve-reduction arrangement
Minimum-premium plan
3. Under the alternative funding method used by the Trilogy Company, the
insurer charges Trilogy an initial premium that is based on the assumption
that claims will be 93% of the expected claims for the year. If claims exceed
93% of expected claims, then Trilogy must reimburse the insurer for any Go to
additional claims paid, up to 112% of expected claims. The insurer bears the question
responsibility for paying claims in excess of 112% of expected claims. 4.
From the following answer choices, choose the name of the alternative
funding method described.
Retrospective-rating arrangement
Premium-delay arrangement
Reserve-reduction arrangement
Minimum-premium plan
4. The purest form of a self-funded benefit plan is one in which the employer
pays benefits from current revenue, administers all aspects of the plan, and
Go to
bears the risk that actual benefit payments will exceed the expected amount
question
of payments. A decision to use this kind of self-funding is generally 5.
considered most desirable when certain conditions are present. These
conditions most likely include that the benefit plan
is a contributory plan
is subject to collective bargaining
is unable to secure discounts from the physicians who provide medical
services to the plan members
has a relatively high frequency of low severity claims
5. The Harp Company self-funds the health plan for its employees. The plan Go to
is administered under a typical administrative-services-only (ASO) question
arrangement. One true statement about this ASO arrangement is that 6.
this arrangement prevents Harp from purchasing stop-loss coverage for

its health plan
the amount that Harp pays the administrator to provide the ASO
services is not subject to state premium taxes
the administrator is responsible for paying claims from its own assets if
Harp's account is insufficient
the charges for the ASO services must be stated as a percentage of the
amount of claims paid for medical expenses incurred by Harp's covered
employees and their dependents
6. The Jasmine Company, which self funds the health plan for its 200
employees, has established a 501(c)(9) trust as a means of addressing
Back to
possible claims fluctuations under the health plan. This plan is not a part of a Top
collective bargaining process. A potential disadvantage to Jasmine of using a
501(c)(9) trust is that
the cost of maintaining the trust may be prohibitive to Jasmine
the trust must always maintain enough assets to pay the health plan's
claims that have been incurred but not yet paid
Jasmine is prohibited from earning any return on the trust assets
the contributions to this trust are not deductible for federal income tax
purposes
>---------- End of the Test ----------<
1 C
2 D
3 A
4 D
5 B
6 A
Assignment 6: Financial Aspects of Medicare and Medicaid for Health Plans
Reading 6A: Financial Aspects of Medicare and Medicaid for Health Plans
• Describe the new payment methodology for Medicare

• Define the Medicare adjusted community rate (Medicare ACR) and its relationship to the Medicare average
payment rate (Medicare APR)
• List the two federal Medicaid law directives to states concerning payment methodology for health plans and
describe some methods used by states to comply with these directives
• Describe some of the financial risks for a health plan that provides healthcare services to the Medicare and
Medicaid populations versus the commercial population
• List the key features of a state Medicaid program that will determine a Medicaid MCO's level of risk
• Describe some of the aspects of health plan's regulatory environment that impose additional costs on health plans
• Discuss provider reimbursement in Medicare and Medicaid markets
Instructions:

Complete the Test

1. The following statements are about the new methodology authorized under
Go to
the Balanced Budget Act of 1997 (BBA) for payments by the Centers for
question
Medicaid & Medicare Services (CMS) to Medicare-contracting health plans. 2.
Select the answer choice containing the correct statement.
Under this new methodology, Medicare-contracting health plans are paid
the lower of (a) a floor payment amount per enrollee covered or (b) the
health plan's payment rate increased by 2% from the previous year.
The new methodology has decreased the rate of growth in payments
from CMS to Medicare-contracting health plans.
Under this new methodology, Medicare-contracting health plans are paid
90% of the adjusted average per capita cost (AAPCC) of providing a
service to a beneficiary.
Under the principal inpatient diagnostic cost group (PIP-DCG), a new risk
adjustment methodology, Medicare-contracting health plans will no
longer be required to calculate and submit to CMS a Medicare adjusted
community rate (ACR).
Go to
2. With regard to the Medicaid program in the United States, it can correctly
question
be stated that 3.
the federal government provides none of the funding for state Medicaid
programs
federal Medicaid law is different from Medicare law in that the federal
government explicitly sets forth the methodology for payment of
Medicaid-contracting plans but not Medicare-contracting plans
a state's payment to health plans for providing Medicaid services cannot
be more than it would have cost the state to provide the services under
Medicaid fee-for-service (FFS)
states are prohibited from carving out specific services from the
capitation rate that health plans receive for providing Medicaid services
3. Providing services under Medicare or Medicaid can impose on health plans
financial risks and costs that are greater than those related to providing Go to
services to the commercial population. Reasons that an health plan's financial question
risks and costs for providing services to Medicare and Medicaid enrollees tend 4.
to be higher include
most Medicare and Medicaid enrollees can disenroll from a health plan on
a monthly basis
the high incidences of chronic illness in both the Medicare and Medicaid
populations results in higher costs related to coordinating care and case
management
Medicare and Medicaid enrollees tend to have a high level of costs in the
first few months of enrollment as the health plan educates them about
the health plan system and performs initial health screening to evaluate
their health
all of the above
Go to
4. If Grace Wilson is eligible for benefits under both the Medicare and
question
Medicaid programs, then 5.
Medicare is Ms. Wilson's primary insurer

a Medicare- or Medicaid-contracting health plan is allowed to lock-in Ms.
Wilson's enrollment for a maximum period of 24 months
the BBA requires the state to guarantee Ms. Wilson's eligibility for a
minimum of 18 months once she enrolls in a health plan network
Ms. Wilson can only receive Medicare- or Medicaid-covered services from
a provider who participates in a health plan network
5. Federal law addresses the relationship between Medicare- or Medicaid-

contracting health plans and providers who are at "substantial financial risk."
Under federal law, Medicare- or Medicaid-contracting health plans
A. Place a provider at "substantial risk" whenever incentive arrangements

Go to
put the provider at risk for amounts in excess of 10% of his or her
question
total potential reimbursement for providing services to Medicare and 6.
Medicaid enrollees
B. Must provide stop-loss coverage to a provider who is placed at

"substantial financial risk" for services that the provider does not
directly provide to Medicare or Medicaid enrollees
Both A and B
A only
B only
Neither A nor B
6. One law prohibits Dr. Laura Cole from making a referral to another Go to
question
provider entity for designated health services if Dr. Cole or one of her
7.
immediate family members has a financial relationship with the entity. This
law is known as the
safe harbor law
upper payment limit law
anti-kickback law
physician self-referral law
7. The following statements are about the financial risks for health plans in
Back to
Medicare and Medicaid markets. Three of these statements are true, and one Top
statement is false. Select the answer choice containing the FALSE statement.
One reason that health plans in the Medicare and Medicaid markets
experience financial risk is that government regulations determine which
services must be provided to Medicare and Medicaid enrollees.
Effective use of hospital utilization is the single most likely factor to
contribute to the success of a Medicare-contracting health plan.
If a Medicare-contracting health plan is a provider-sponsored
organization (PSO), it is prohibited from sharing financial risk with its
providers.
Typically, providers are more reluctant to accept financial risk in
connection with providing services to the Medicaid population than with
providing services to the Medicare population.
>---------- End of the Test ----------<
1 B
2 C
3 D
4 A
5 C
6 D
7 C
Assignment 7: Rating and Underwriting
Reading 7A: The Relationship Between Rating and Underwriting
• Explain the relationship between rating and underwriting

• Describe the actuarial function and the underwriting function in a health plan
• Discuss the common tiers used in rating methods
• Define community rating, manual rating, experience rating, and blended rating, and describe circumstances under
which a health plan would use each method
Instructions:

Complete the Test

1. The Fiesta Health Plan prices its products in such a way that the rates for
its products are reasonable, adequate, equitable, and competitive. Fiesta is
using blended rating to calculate a premium rate for the Murdock Company, a
large employer. Fiesta has assigned a credibility factor of 0.6 to Murdock. Go to
question
Fiesta has also determined that Murdock's manual rate is $200 PMPM and 2.
that Murdock's experience rate is $180 PMPM.
According to regulations, Fiesta's premium rates are reasonable if they

vary only on the factors that affect Fiesta's costs
are at a level that balances Fiesta's need to generate a profit against its
need to obtain or retain a specified share of the market in which it
conducts business
are high enough to ensure that Fiesta has enough money on hand to pay
operating expenses as they come due
do not exceed what Fiesta needs to cover its costs and provide the plan
with a fair profit
2. The Fiesta Health Plan prices its products in such a way that the rates for
its products are reasonable, adequate, equitable, and competitive. Fiesta is
using blended rating to calculate a premium rate for the Murdock Company, a
large employer. Fiesta has assigned a credibility factor of 0.6 to Murdock. Go to
Fiesta has also determined that Murdock's manual rate is $200 PMPM and question
that Murdock's experience rate is $180 PMPM. 3.
Fiesta would correctly calculate that its blended rate PMPM for Murdock
should be Fiesta's retention charge plus
$152
$188
$192
$228
3. The Violin Company offers its employees a triple option of health plans: an
HMO, an HMO with a point of service (POS) option, and an indemnity plan. Go to
Premiums are lowest for the HMO option and highest for the indemnity plan. question
Violin employees who anticipate that they will be individual low utilizers of 4.
healthcare services are most likely to enroll in the
HMO and are least likely to enroll in the HMO with the POS option
HMO and are least likely to enroll in the indemnity plan
indemnity plan and are least likely to enroll in the HMO
indemnity plan and are least likely to enroll in the HMO with the POS
option
4. The following statements illustrate the use of different rating methods by

health plans:
• The Dover health plan established rates for small groups by using a
rating method which requires that the average premium in each group
cannot be more than 120% of the average premium for any other
group. Under this method, all members of each group pay the same
Go to
premium, which is based on the experience of the group.
question
• Under the rating method used by the Rolling Hills health plan, the 5.
health plan calculates the ratio of a group's experience to the group's
historical manual rate. Rolling Hills then multiplies this ratio by the
group's future manual rate. Rolling Hills cannot consider the group's
experience in determining premium rates.
From the following answer choices, select the response that correctly
indicates the rating methods used by Dover and Rolling Hills.
Dover = modified community rating
Rolling Hills = factored rating
Dover = modified community rating
Rolling Hills = adjusted community rating (ACR)
Dover = community rating by class (CRC)
Rolling Hills = factored rating
Dover = community rating by class (CRC)
Rolling Hills = adjusted community rating (ACR)
5. Experience rating and manual rating are two rating methods that the Go to
Cheshire health plan uses to determine its premium rates. One difference question
between these two methods is that, under experience rating, Cheshire 6.
uses a purchaser's actual experience to estimate the group's expected

experience, whereas, under manual rating, Cheshire uses its own
average experience—and sometimes the experience of other plans—to
estimate the group's expected experience
can establish rates for groups that have no previous plan experience,
whereas, under manual rating, Cheshire cannot establish rates for
groups with no previous plan experience
charges each group in the same class the same premium whereas, under
manual rating, Cheshire charges lower premiums to groups that have
experienced lower utilization rates
can use group demographics to help determine the rate for a block of
business, whereas, under manual rating, Cheshire cannot use group
demographics when determining the rate for a block of business
6. Experience rating methods can be either prospective or retrospective. With

Back to
regard to these types of experience rating methods, it can correctly be stated Top
that
a health plan typically can expect much higher profit levels from using
retrospective experience rating rather than prospective experience rating
a health plan using prospective experience rating is more likely than a
health plan using retrospective experience rating to have to pay an
experience rating dividend if a group's experience has been better than
expected during the rating period
the premium determined under retrospective experience rating is usually
higher than the premium under prospective experience rating
most states require HMOs to use retrospective experience rating rather
than prospective experience rating
>---------- End of the Test ----------<

1 D
2 B
3 B
4 D
5 A
6 C
Reading 7B: Group Underwriting
• Identify the key federal and state laws and regulations that apply to group underwriting
• Discuss how a health plan adjusts for morbidity factors and other underwriting risk factors in group underwriting
• Identify and describe the key aspects associated with underwriting the proposed group and the proposed group
coverage
Instructions:

Complete the Test

1. The following statements are about federal laws and regulations which Go to
affect health plans that offer products and services to the employer group question
market. Select the answer choice containing the correct statement. 2.
Amendments to the HMO Act of 1973 require federally qualified HMOs to

adjust a group's prior premiums on the basis of the group's experience
during the prior rating period.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1986
requires that, if a plan sponsor elects to terminate its group coverage
with a health plan, then the health plan must continue its coverage for
the COBRA-qualified beneficiaries in the group.
The Health Insurance Portability and Accountability Act (HIPAA) of 1996
generally requires the guaranteed renewal of healthcare coverage for
certain individuals and for both small and large groups, regardless of the
health status of any member.
The Mental Health Parity Act (MHPA) of 1996 mandates that all health
plans must offer benefits for mental healthcare.
Go to
2. One true statement about mandated benefit laws is that they question
3.
apply equally to self-funded and fully funded groups

require a health plan to cover certain conditions or treatments or to pay
a specified level of benefits for certain conditions or treatments
have no impact on a health plan's underwriting and rating decisions
typically decrease a health plan's risk because the health plan may need
to delay premium rate decreases or may be prevented from increasing
premium rates
Go to
3. With regard to the major risk factors associated with group underwriting, it
question
can correctly be stated that, typically, 4.
the age and gender of group plan members are not predictors of
utilization of health services by group members
a health plan's product design or delivery system has an impact on
member selection of the health plan, unless the members are in an
environment in which employees have at least two benefit options or
health plans from which to choose
a health plan should track demographic factors of groups only if the plan
specifically adjusts for demographic factors on a group basis
a large group is more likely to exhibit a consistent claims pattern, level
of healthcare cost, or utilization of services than is a small group
Go to
4. With regard to a health plan's underwriting of groups, it can correctly be
question
stated that, generally, a 5.
health plan will require that contributory healthcare plans have a
participation level of between 50% and 70%
health plan will decline to cover a group that has been formed for the
sole purpose of obtaining healthcare coverage
health plan's underwriters will not examine the age spread of the entire
group being underwritten
health plan would expect a group with a large proportion of young
females to have lower healthcare costs than does a similar group with a
large proportion of young males
5. Most organizations that obtain group healthcare coverage can be classified

Go to
as one of three types of groups: employer-employee groups, multiple-
question
employer groups, and professional associations. One true statement about 6.
these types of groups is that
antiselection risk is higher for both multiple-employer groups and
professional associations than it is for an employer-employee group
private employers typically present a higher underwriting risk to health
plans than do public employers
individual members of a multiple-employer group or a professional
association typically are required to obtain healthcare coverage through
the group or association
a health plan is prohibited, when evaluating the risks represented by a
professional association, from considering the industry experience of the
agent or broker that sells a group plan to the association
6. Because a health plan cannot decline coverage for individuals who are
eligible for conversion of group health coverage to individual health coverage, Back to
the bulk of the health plan's underwriting for conversion policies is Top
accomplished through health plan design.
True
False
>---------- End of the Test ----------<
1 C
2 B
3 D
4 B
5 A
6 A
Assignment 8: Small Group Underwriting and Individual Underwriting
Reading 8A: Small Group Underwriting and Individual Underwriting
• List the common characteristics of small group reform laws

• Explain the effect of the guaranteed issue provision on the small group markets to which they apply
• Define risk pooling as it relates to small group markets
• Discuss state reinsurance programs for small group carriers
• Identify and describe some characteristics of small groups and individuals that underwrites consider, where state
law permits
Instructions:

Complete the Test

1. The Cardinal health plan complies with all of the provisions of HIPAA.
Cardinal has received requests for healthcare coverage from the following
companies that meet the statutory definition of a small group:
Go to
• The Xavier Company has excellent claims experience
question
• The Youngblood Company has not previously offered group healthcare 2.
coverage to its employees
• The Zebulon Company has poor claims experience
According to HIPAA's provisions, Cardinal must issue a healthcare contract to

Xavier, Youngblood, and Zebulon
Xavier and Youngblood only
Xavier only
none of these companies
2. Over time, health plans and their underwriters have gathered increasingly Go to
reliable information about the morbidity experience of small groups. question
Generally, in comparison to large groups, small groups tend to 3.
have more frequent and larger claims fluctuations

generate lower administrative expenses as a percentage of the total
premium amount the group pays
more closely follow actuarial predictions regarding morbidity rates
all of the above
3. The Lighthouse health plan operates in a state that allows the health plan
to use an underwriting method of determining a group's premium in which Go to
underwriters treat several small groups as one large group for risk question
assessment purposes. This method, which helps Lighthouse more accurately 4.
estimate a small group's probable claims costs, is known as
case stripping
the low-option rating method
the rate spread method
pooling
Go to
4. The following statements are about a health plan's underwriting of small
question
groups. Select the answer choice containing the correct statement. 5.
Almost all states prohibit health plan s from rejecting a small group
because of the nature of the business in which the small business is
engaged.
Most states prohibit health plans from setting participation levels as a
requirement for coverage, even when coverage is otherwise guaranteed
issue.
In underwriting small groups, a health plan's underwriters typically
consider both the characteristics of the group members and of the
employer.
Generally, a health plan's underwriters require small employers to
contribute at least 80% of the cost of the healthcare coverage.
5. The following statement(s) can correctly be made about a health plan's

underwriting of small groups:
A. Typically, a health plan medically underwrites both the employees of a

Go to
small group and their dependents, even though small group reform
question
laws prohibit health plans from singling out individuals for rejection or 6.
substandard rate-ups.
B. In the absence of laws mandating otherwise, a health plan's

underwriting standards grow stricter as group size gets smaller.
Both A and B
A only
B only
Neither A nor B
6. State A, which requires guaranteed issue of at least two mandated

Go to
healthcare plans, has established a typical health coverage reinsurance
question
program for small employer groups. One true statement about this 7.
reinsurance program is that it most likely
is administered by a commercial reinsurance company that operates in
State A
allows a small employer carrier operating in State A to reinsure either an
entire small group or specific individuals within the group
has, for the coverage on a plan, a base premium, which is multiplied by
a factor of 2 in the case of reinsurance on entire groups or a factor of 3
for reinsurance on individuals
prohibits a small employer carrier operating in State A from placing
individuals enrolled in small groups in a reinsurance pool
7. Kevin Olin applied for individual healthcare coverage from the Mercury
health plan. Before issuing the policy, Mercury's underwriters attached a rider Back to
that excludes from coverage any loss that results from Mr. Olin's chronic Top
knee problem. This information indicates that Mr. Olin's policy includes
a moral hazard rider
an essential plan rider
an impairment rider
an insurable interest rider
>---------- End of the Test ----------<

1 A
2 A
3 D
4 C
5 A
6 B
7 C
Assignment 9: Pricing and Rating
Reading 9A: Pricing a health plan
• Describe the relationships among health plan risk, rate-setting, and provider reimbursement
• Describe how demand and costs combine to establish the upper and lower limit on pricing a health plan
• Explain how an MCO uses underwriting margins, expense margins, and investment margins in its pricing strategy
• Identify and describe rating factors that an MCO uses in developing premium rates for a health plan
Instructions:

Complete the Test

1. The ability of a health plan to effectively perform the rating and
Go to
underwriting functions has become critical to the plan's success. In
question
developing its pricing strategy, a health plan has to address the 2.
marketplace's ongoing trends and factors, which include
a decreased focus on small to mid-size employer groups
an improvement in the financial performance of health plans
a consolidation of the key players in the health plan industry
a decreased complexity of the products being offered.
2. When pricing its product, the Panda Health Plan assumes a 4% interest
rate on its investments. Panda also assumes a crediting interest rate of 4%. Go to
The actual interest rate earned by Panda on the assets supporting its product question
is 6%. The following statements can correctly be made about the investment 3.
margin and interest margin for Panda's products.
Panda most likely built the crediting interest rate of 4% into the
investment margin of its product.
Panda's investment margin is the difference between its actual benefit
costs and the benefit costs that it assumes in its pricing.
The interest margin for this product is 2%.
All of these statements are correct.
3. An actuary for the Noble Health Plan observed that the plan's actual
Go to
morbidity was lower than its assumed morbidity and that the plan's actual
question
administrative expenses were higher than its assumed administrative 4.
expenses. In this situation, Noble's actual underwriting margin was
larger than its assumed underwriting margin, and the plan's actual
expense margin was higher than its assumed expense margin
larger than its assumed underwriting margin, but the plan's actual
expense margin was lower than its assumed expense margin
smaller than its assumed underwriting margin, but the plan's actual
expense margin was higher than its assumed expense margin
smaller than its assumed underwriting margin, and the plan's actual
expense margin was lower than its assumed expense margin
4. A product is often described as having a thin margin or a wide margin. Go to

With regard to the factors that help determine the size of the margin of a question
health plan's product, it can correctly be stated that the 5.
greater the risk a health plan assumes in a health plan, the thinner the
product margin should be
more that competition acts to force prices down, the wider the product
margins tend to become
greater the demand for the product, the thinner the margin for this
product tends to become
longer the premium rates are guaranteed to a group, the wider the
health plan's margin should be
Go to
5. One true statement about a health plan's underwriting margin is that question
6.
the only way that the health plan can effectively reduce its exposure to
underwriting risk, and therefore adjust its underwriting margin, is to
control antiselection
a larger assumed underwriting margin will reduce the price of the health
plan's product and will make the plan more competitive
the health plan's purchase of stop-loss insurance has no effect on its
underwriting margin because stop-loss insurance can help the health
plan control its expenses but not its underwriting risk
both the level of underwriting risk that the health plan assumes in
providing benefits and the market competition it encounters most likely
directly affect the size of its assumed underwriting margin
6. For each of its products, the Wisteria Health Plan monitors the provider
Back to
reimbursement trend and the residual trend. One true statement about these Top
trends is that
the provider reimbursement trend probably is more difficult for Wisteria
to quantify than is the residual trend
Wisteria's residual trend is the difference between the total trend and
the portion of the total trend caused by changes in Wisteria's provider
reimbursement levels
the residual trend most likely has more impact on Wisteria's total trend
than does the provider reimbursement trend
an example of a residual trend would be a 5% increase in the capitation
rate paid to a PCP by Wisteria
>---------- End of the Test ----------<
1 C
2 C
3 B
4 D
5 D
6 B
Reading 9B: Rate-Setting in Managed Care
• Describe the rate-setting process for HMOs, traditional indemnity plans, PPOs, and plans in a multiple-choice
environment
Instructions:

Complete the Test

Go to
1. One true statement about the rate ratios used by a health plan is that the question
2.
end result of a typical family rate ratio is that the health plan's family
rate is subsidized by its single premium rate
health plan cannot arbitrarily increase or decrease its rate ratio for a rate
category
rate ratios used by the health plan most likely have been established by
government regulations
health plan should determine its rate ratios by considering family size
alone rather than competitive factors such as the ratios that competitors
are using
2. The following statements indicate the pricing policies of two health plans
that operate in a particular market:
• The Accent Health Plan consistently underprices its product

Go to
• The Bolton Health Plan uses extremely strict underwriting practices for question
the small groups to which it markets its plan 3.
From the following answer choices, select the response that correctly
indicates the most likely market effects of the pricing policies used by Accent
and Bolton.
Accent = unprofitable business
Bolton = high acquisition rate
Accent = unprofitable business
Bolton = low acquisition rate
Accent = high profits
Bolton = high acquisition rate
Accent = high profits
Bolton = low acquisition rate
3. The following statements are about a health plan's pricing of a preferred

Back to
provider organization (PPO) plan. Three of the statements are true, and one Top
statement is false. Select the answer choice containing the FALSE statement.
Typically, the first step in pricing a PPO is to develop a base indemnity
claims cost, which results from adjusting the indemnity plan as though
the entire eligible group of employees is enrolled in the indemnity plan.
To develop the expected claims costs for the in-network PPO plan, the
health plan's actuaries adjust the base indemnity claims costs to reflect
pertinent characteristics of the plan, including the specific network plan
design and provider discount arrangements.
One difficulty in pricing a PPO is that the health plan's actuaries have no
method of estimating which employees would be likely to select which
provider groups.
After the health plan's actuaries use risk adjustment factors to adjust
the existing claims costs for selection issues, the actuaries weight the in-
network and out-of-network costs to arrive at a composite claims cost
for the PPO plan.
>---------- End of the Test ----------<

1 A
2 B
3 C
Assignment 10: Accounting and Financial Reporting
Reading 10A: Accounting Principles and Concepts
• Outline main points of the "entity" and "going-concern" concepts with respect to financial reporting in health plans
• Explain the key qualitative factors that affect accounting information and give examples of such factors in health
plans
Instructions:

Complete the Test

1. Two sets of financial accounting standards are generally accepted Go to
accounting principles (GAAP) and statutory accounting practices (SAP). One question
true statement about these financial accounting standards is that 2.
state laws and regulations in the United States govern the

implementation of GAAP, but not the implementation of SAP
health plans must prepare their financial statements for their external
users according to applicable laws, regulations, and accounting
principles, particularly GAAP
GAAP specifically focuses on the requirements of insurance regulators
and policyholder interests
the Financial Accounting Standards Board (FASB) is a private
organization whose purpose is to establish and promote SAP in the
United States
2. The Brookhaven Company is the parent company of two subsidiaries: an

HMO and an insurance company. The headings on Brookhaven's financial
statements read "Consolidated Financial Statements of Brookhaven
Go to
Company." From the following answer choices, select the response that
question
correctly indicates, under the entity concept, whether the HMO and the 3.
insurance company are accounted for as separate entities and whether the
subsidiaries' financial results would be included in Brookhaven's consolidated
financial statements.
Accounted for as Separate Entities? = yes
Results Included in Brookhaven's Statements? = yes
Accounted for as Separate Entities? = yes
Results Included in Brookhaven's Statements? = no
Accounted for as Separate Entities? = no
Results Included in Brookhaven's Statements? = yes
Accounted for as Separate Entities? = no
Results Included in Brookhaven's Statements? = no
Go to
3. If the Ascot health plan's accountants follow the going-concern concept
question
under GAAP, then these accountants most likely 4.
assume that Ascot will pay its liabilities immediately or in full during the
current accounting period
defer certain costs that Ascot has incurred, unless these costs contribute
to the health plan's future earnings
assume that Ascot is not about to be liquidated, unless there is evidence
to the contrary
value Ascot's assets more conservatively than they would under SAP
4. For this question, select the answer choice containing the terms that
correctly complete blanks A and B in the paragraph below. The FASB
mandates that accounting information must exhibit certain qualitative
characteristics. One of these characteristics is _____A_____, which means Go to
that a company's financial statements use the same accounting policies and question
procedures from one accounting period to the next, unless there is a sound 5.
reason for changing a policy or procedure. Another characteristic is
_____B_____, which requires a company to disclose in its financial
statements all significant financial information about the company.
A = reliability
B = comparability
A = reliability
B = materiality
A = consistency
B = comparability
A = consistency
B = materiality
5. The accounting department of the Enterprise health plan adheres to the

following policies:
• Policy A—Report gains only after they actually occur

• Policy B—Report losses immediately Back to
• Policy C—Record expenses only when they are certain Top
• Policy D—Record revenues only when they are certain
Of these Enterprise policies, the ones that are consistent with the accounting
principle of conservatism are Policies
A, B, C, and D
A, B, and D only
A and B only
C and D only
>---------- End of the Test ----------<
1 B
2 A
3 C
4 D
5 B
Reading 10B: Principles for Maintaining Accounts
• Discuss the main points in the cost concept, the measuring-unit concept, the full-disclosure concept, and the time-
period concept with respect to financial reporting in health plans
• Discuss the realization principle and the matching principle with respect to revenue and expense recognition under
generally accepted accounting principles
• Distinguish between accrual-basis accounting and cash-basis accounting
Instructions:

Complete the Test

1. This concept, which holds that a company should record the amounts
associated with its business transactions in monetary terms, assumes that
the value of money is stable over time. This concept provides objectivity and Go to
reliability, although its relevance may fluctuate. question
2.
From the following answer choices, choose the name of the accounting
concept that matches the description.
Measuring-unit concept
Full-disclosure concept
Cost concept
Time-period concept
2. This concept, which is an extension of the going-concern concept, holds

that the value of an asset that a company reports in its accounting records
should be the asset's historical cost, not its current market value. Although
this concept offers objectivity and reliability, it may lack relevance, Go to
question
particularly for assets held for a long period of time. 3.
From the following answer choices, choose the name of the accounting
concept that matches the description.
Measuring-unit concept
Full-disclosure concept
Cost concept
Time-period concept
3. In the following paragraph, a sentence contains two pairs of words Go to

question
enclosed in parentheses. Determine which word in each pair correctly
4.
completes the statement. Then select the answer choice containing the two
words that you have selected.
The Igloo health plan recognizes the receipt of its premium income during the
accounting period in which the income is earned, regardless of when cash
changes hands. However, Igloo recognizes its expenses when it earns the
revenues related to those expenses, regardless of when it receives cash for
the revenues earned. This information indicates that the (realization /
capitalization) principle governs Igloo's revenue recognition, whereas the
(matching / initial-recording) principle governs its expense recognition.
realization / matching
realization / initial-recording
capitalization / matching
capitalization / initial-recording
4. Under GAAP, three approaches to expense recognition are generally

Go to
allowed: associating cause and effect, systematic and rational allocation, and
question
immediate recognition. A health plan most likely would use the approach of 5.
systematic and rational allocation in order to
report the payment of the health plan's utility bills
spread the payment of sales force commissions over the premium-
paying period of healthcare coverage
report the fees paid by the health plan to attorneys and consultants
depreciate the cost of a new computer system over the useful life of the
system
5. The Zane health plan uses a base of accounting known as accrual-basis Go to

accounting. With regard to this base of accounting, it can correctly be stated question
that accrual-basis accounting 6.
enables an interested party to view the consequences of obligations

incurred by Zane, but only if the health plan ultimately completes the
business transaction
is not suitable for measuring Zane's profitability
requires Zane to record revenues when they are earned and expenses
when they are incurred, even if cash has not actually changed hands
prohibits Zane from making adjusting entries to its accounting records at
the end of each accounting year
Back to
6. One true statement about cash-basis accounting is that Top
cash receipt, but not cash disbursement, is an important component of
cash-basis accounting
most companies use a pure cash-basis accounting system
cash-basis accounting records revenue according to the realization
principle and expenses according to the matching principle
health insurance companies and health plans that fall under the
jurisdiction of state insurance commissioners must report some items on
a cash basis for statutory reporting purposes
>---------- End of the Test ----------<

1 A
2 C
3 A
4 D
5 C
6 D
Reading 10C: Financial Statements
• Describe the components and purposes of a health plan's balance sheet, income statement, cash flow statement, and
statement of owners' equity
• Explain the importance of notes and supplementary information
• Provide an example of the relationships among the various financial statements
Instructions:

Complete the Test

Go to
1. With regard to the financial statements prepared by health plans, it can
question
correctly be stated that 2.
both for-profit, publicly owned health plans and not-for-profit health
plans are required by law to provide all interested parties with an annual
report
a health plan's annual report typically includes an independent auditor's
report and notes to the financial statements
any health plan that owns more than 20% of the stock of a subsidiary
company must compile the financial statements for the health plan's
annual report on a consolidated basis
a health plan typically must prepare the financial statements included in
its annual report according to SAP
2. The Caribou health plan is a for-profit organization. The financial

statements that Caribou prepares include balance sheets, income statements,
and cash flow statements. To prepare its cash flow statement, Caribou begins
with the net income figure as reported on its income statement and then Go to
reconciles this amount to operating cash flows through a series of question
adjustments. Changes in Caribou's cash flow occur as a result of the health 3.
plan's operating activities, investing activities, and financing activities.
The main purpose of Caribou's balance sheet is to

reveal how Caribou obtained particular assets or liabilities
show how much money Caribou has realized from its operations during
an accounting period
measure the owners' wealth
reconcile the cash that Caribou has on hand at the beginning and at the
end of an accounting period
3. The Caribou health plan is a for-profit organization. The financial Go to

question
4.
with the net income figure as reported on its income statement and then
reconciles this amount to operating cash flows through a series of
adjustments. Changes in Caribou's cash flow occur as a result of the health
The basic formula for Caribou's income statement is

Cash Inflows – Cash Outflows = Net Cash Inflow (Outflow)
Revenues – Expenses = Net Income (Net Loss)
Sources of Funds – Uses of Funds = Net Change in Cash
Assets = Liabilities + Owners' Equity

with the net income figure as reported on its income statement and then
reconciles this amount to operating cash flows through a series of Go to
question
To prepare its cash flow statement, Caribou uses the direct method rather
than the indirect method.
True
False

with the net income figure as reported on its income statement and then Go to
reconciles this amount to operating cash flows through a series of question
Caribou is engaged in an operating activity when it

purchases or sells assets of the health plan
disposes of a subsidiary
repays funds loaned by its creditors
pays expenses associated with the healthcare services provided to its
members
6. The McGwire Health Plan is a for-profit health plan that issues stock.
Back to
Events that will cause the owners' equity account of McGwire to change Top
include
McGwire's retention of net income
McGwire's payment of cash dividends on the stock it issued
McGwire's purchase of treasury stock
all of the above
>---------- End of the Test ----------<
1 B
2 C
3 B
4 B
5 D
6 D
Assignment 11: The Strategic Planning Process in Health Plans
Reading 11A: The Strategic Plan
• Define strategic planning, mission statement, and vision statement

• Explain the steps in a health plan's typical strategic planning framework
• Describe the purpose of a SWOT analysis and list some attributes that health plans evaluate to determine their
strengths, weaknesses, opportunities, and threats
Instructions:

Complete the Test

1. As part of the first step in its strategic planning process, the Trout health
plan developed the following statements:
• Statement A—Trout will deliver quality healthcare to our customers at Go to

a reasonable cost. question
• Statement B—Within five years, Trout will be recognized as the 2.
industry leader in all of our markets.
Statement A can best be described as a

vision statement, and Statement B also can best be described as a vision
statement
vision statement, whereas Statement B can best be described as a
mission statement
mission statement, whereas Statement B can best be described as a
vision statement
mission statement, and Statement B also can best be described as a
mission statement
2. A health plan can use a SWOT (strengths, weaknesses, opportunities, and Go to

threats) analysis to analyze its relationships with the major providers in each question
market in which it conducts business. 3.
True
False
3. The Column health plan is in the process of developing a strategic plan.

The following statements are about this strategic plan. Three of the Back to
statements are true, and one statement is false. Select the answer choice Top
containing the FALSE statement.
Human resources most likely will be a critical component of Column's
strategic plan because, in health plan markets, the size and the quality
of a health plan's provider network is often more important to customers
than are the details of a product's benefit design.
Column's strategic plan should only address how the health plan will
differentiate its products, rather than where and how it will sell these
products.
Column most likely will need to develop contingency plans to address
the need to make adjustments to its original strategic plan.
Column's information technology (IT) strategy most likely will be a
critical element in successfully implementing the health plan's strategic
plan.
>---------- End of the Test ----------<

1 C
2 A
3 B
Reading 11B: The Strategic Financial Plan
• Distinguish between a health plan's strategic financial plan and operational budget
• Describe the purpose of the financial planning function in for-profit and not-for-profit health plans
• Define debt and equity with respect to a health plan's capital structure
• Define cost of capital and the capital asset pricing model
• Calculate a health plan's weighted average cost of capital
• Explain the purpose of a health plan's pro forma financial statements
• List some key drivers of a health plan's pro forma income statement and balance sheet
• Define sensitivity analysis and describe how a health plan uses the optimistic, most likely, pessimistic scenario
modeling and Monte Carlo simulation
Instructions:

Complete the Test

Go to
1. If the operational budget prepared by the Satilla health plan is typical of
question
most operational budgets, then 2.
its purpose is to track Satilla's operations and short-term profitability

the key information source for this operational budget is Satilla's
external environment
the time frame for this operational budget is three to five years
its focus is on the threats that Satilla faces from its external environment
2. The Coral Health Plan, a for-profit health plan, has two sources of capital: Go to
debt and equity. With regard to these sources of capital, it can correctly be question
stated that 3.
Coral's equity holders have an ownership interest in the health plan

the interest that Coral pays on its debt most likely is not tax deductible
to Coral
Coral's debt holders have no legal claim to Coral's assets
equity is a more risky source of capital, from Coral's perspective, than is
debt
3. Analysts will use the capital asset pricing model (CAPM) to determine the Go to
cost of equity for the Maxim health plan, a for-profit plan. According to the question
CAPM, Maxim's cost of equity is equal to 4.
the average interest rate that Maxim is paying to debt holders, adjusted
for a tax shield
Maxim's risk-free rate minus its beta
Maxim's risk-free rate plus an adjustment that considers the market
rate, at a given level of systematic (nondiversifiable) risk
Maxim's risk-free rate plus an adjustment that considers the market
rate, at a given level of nonsystematic (diversifiable) risk
4. The Nuevo health plan's capital structure consists of 30% debt and 70%
equity. Nuevo's average after-tax cost of debt is 6% and its cost of equity is
12%. The following statement(s) can correctly be made about Nuevo's
weighted average cost of capital (WACC):
Go to
A. Nuevo has a WACC of 10.2% question
5.
B. If Nuevo establishes its WACC as the handle rate for capital

investments, then it can expect an investment to add value to the
health plan only if the investment is expected to earn a return of less
than Nuevo's WACC
Both A and B
A only
B only
Neither A nor B
5. The core of a health plan's strategic financial plan is the development of its
Go to
pro forma financial statements. The following statements are about these pro
question
forma financial statements. Select the answer choice containing the correct 6.
statement.
A health plan's pro forma financial statements forecast what the plan's
financial condition will be at the end of an accounting period, without
regard to whether the health plan achieves its objectives.
Forecasting the balance sheet is more critical to the health plan than
forecasting either the cash flow statement or the income statement,
because the balance sheet drives the development of the other two
statements.
In order to avoid allowing the desired financial results to drive the
assumptions used in developing the pro forma income statement, a
health plan should avoid linking these assumptions to the health plan's
overall strategic plan.
A health plan can use its pro forma cash flow statement to calculate the
net present value of the health plan's strategic plan.
6. The Savanna health plan used a risk analysis technique which defines the
key assumptions of Savanna's strategic financial plan in terms of
mathematical formulas that can be correlated to each other or analyzed
Back to
independently. This technique allowed Savanna to simulate probable future Top
events on a computer and produce a distribution of possible outcomes. This
risk analysis technique, which can be used to predict Savanna's distribution of
expected claims, is known as
a hurdle rate simulation
optimistic, most likely, pessimistic scenario modeling
a Monte Carlo simulation
debt covenant modeling
>---------- End of the Test ----------<
1 A
2 A
3 C
4 B
5 D
6 C
Assignment 12: Financial Statement Analysis in Health Plans
Reading 12A: Financial Statement Analysis
• Differentiate between a health plan's external analysts and internal analysts and describe the types of financial
information each one seeks
• Distinguish between horizontal analysis and vertical analysis of a health plan's financial statements
• Analyze the trends a health plan exhibits using trend analysis
• List and apply the information contained in a common-size financial statement
• Explain how to use cash flows that are reported in the cash flow statement to reveal financial information that is not
immediately apparent from a health plan's balance sheet and income statement
Instructions:

Complete the Test

Go to
1. One difference between the internal and external analysis of a health
question
plan's financial information is that 2.
internal analysis of the health plan can be more detailed and more
specific than can external analysis
internal analysts are more likely than external analysts to want
comparative financial data about the health plan
only internal analysts use trend analysis to analyze the health plan's
financial statements
only internal analysts typically conduct the financial analysis of the
health plan themselves
2. The sentence below contains two pairs of terms enclosed in parentheses.

Determine which term in each pair correctly completes the statement. Then
select the answer choice containing the two terms that you have selected.
Go to
In analyzing its financial data, a health plan would use (horizontal / common- question
size financial statement) analysis to measure the numerical amount that 3.
corresponding items change from one financial statement to another over
consecutive accounting periods, and the health plan would use (trend /
vertical) analysis to show the relationship of each financial statement item to
another financial statement item.
horizontal / trend
horizontal / vertical
common-size financial statement / trend
common-size financial statement / vertical
Go to
3. A health plan most likely would use benchmarking in order to question
4.
measure its performance and practices against those of other companies
to help identify those practices that will lead to superior performance in a
variety of financial and non-financial areas
calculate the percentage changes in its financial statement items over
several consecutive accounting periods
determine both the direction and velocity of trends in its financial
statements
display only percentage relationships in its financial statements
4. Assume that the Lambda, Mesa, and Novella health plans are equal in
every way except that the health plans have obtained equal amounts of net
cash inflows from different sources, as shown below:
Health Plan Source
Lambda Financing activities Back to
Mesa Investing activities Top
Novella Operating activities

From the following answer choices, select the response which indicates the
health plan that would most likely be the most attractive to a potential plan
sponsor, to a potential creditor, and to a potential investor.
Potential Plan Sponsor = Lambda
Potential Creditor = Mesa
Potential Investor = Novella
Potential Plan Sponsor = Lambda
Potential Creditor = Novella
Potential Investor = Mesa
Potential Plan Sponsor = Novella
Potential Creditor = Lambda
Potential Investor = Mesa
Potential Plan Sponsor = Novella
Potential Creditor = Novella
Potential Investor = Novella
>---------- End of the Test ----------<

1 A
2 B
3 A
4 D
Reading 12B: Fundamentals of Ratio Analysis
• List and apply the financial ratios under U.S. generally accepted accounting principles (GAAP) that fall into each of
these four categories: liquidity, activity, leverage, and profitability
• Recognize and apply the ratios that are most important to health plans
Instructions:

Complete the Test

1. The traditional financial ratios that analysts use to study a health plan's
Go to
GAAP-based financial statements include liquidity ratios, activity ratios,
question
leverage ratios, and profitability ratios. Of these categories of ratios, analysts 2.
are most likely to use
liquidity ratios to measure a health plan's ability to meet its current
liabilities
activity ratios relate the returns of a health plan to its sales, total
revenues, assets, stockholders' equity, capital, surplus, or stock share
price
leverage ratios to measure how quickly a health plan converts specified
financial statement items into premium income or cash
profitability ratios to measure the effect that fixed costs have on
magnifying a health plan's risk and return
2. The Fairway health plan is a for-profit health plan that issues stock. The
following data was taken from Fairway's financial statements:
Current assets.....$5,000,000
Total assets.....6,000,000
Current liabilities.....2,500,000
Total liabilities.....3,600,000 Go to
Stockholders' equity.....2,400,000 question
3.
Fairway's total revenues for the previous financial period were $7,200,000,
and its net income for that period was $180,000.
From this data, Fairway can determine both its current ratio and its net
working capital. Fairway would correctly determine that its
current ratio is 1.39
current ratio is 2.00
net working capital equals $1,000,000
net working capital equals $3,000,000
3. The Fairway health plan is a for-profit health plan that issues stock. The Go to
question
4.
Total liabilities.....3,600,000
Stockholders' equity.....2,400,000
Assume that the healthcare industry average for the debt-to-equity ratio is
0.90. The following statement(s) can correctly be made about Fairway's debt-
to-equity ratio:
A. Fairway's debt-to-equity ratio is 1.50
B. Fairway relies less than most other healthcare organizations on

borrowed funds to cover future and current benefit payments, to pay
for ongoing business operations, and to finance growth
Both A and B
A only
B only
Neither A nor B
4. The Fairway health plan is a for-profit health plan that issues stock. The
Total liabilities.....3,600,000 Go to
question
Stockholders' equity.....2,400,000 5.
For the previous financial period, Fairway's net profit margin was
2.50%
3.00%
3.60%
7.50%
5. If the total asset turnover ratio for the Fjord health plan is 1.08 and the
Go to
total asset turnover ratio for the Grove health plan is 1.35, then a financial
question
analyst could correctly infer that Fjord has used its assets more effectively 6.
than has Grove.
True
False
6. A primary reason that a financial analyst would measure the Tapestry Back to
health plan's return on assets (ROA) is to determine the Top
amount of net income per share of Tapestry's common stock

rate of return on the book value of the stockholders' investment in
Tapestry
proportion of earnings paid out to Tapestry stockholders in the form of
cash dividends
efficiency of Tapestry's management
>---------- End of the Test ----------<

1 A
2 B
3 B
4 A
5 B
6 D
Reading 12C: Managed Care-Specific Ratio Analysis
• List and apply to the Annual Statement statutory ratios of liquidity, capital, financial leverage, and profitability (for
health plans that must comply with state insurance regulations)
• Recognize and apply the ratios that are most important to health plans
Instructions:

Complete the Test

Go to
1. In order to determine a health plan's quick liquidity ratio, a financial
question
analyst would divide the health plan's 2.
total assets not invested in affiliates by its total liabilities

liquid assets by its total liabilities
liquid assets by its contractual reserves
total assets by its contractual reserves
Go to
2. One true statement about capital and surplus ratios for health plans is that question
3.
this ratio is calculated by dividing a health plan's total liabilities by its
capital and surplus
a health plan's capital and surplus position would be likely to weaken
because of reserve valuation changes that reduce the health plan's
reserves
the primary purpose of these ratios is to compare a health plan's
obligations to its ability to meet those obligations
an increase in the value of a health plan's capital and surplus ratio most
likely indicates that the health plan's financial position has strengthened
3. In order to show the efficiency of a health plan's managers in using the Go to

health plan's investments to earn a return for stockholders, a financial question
analyst most likely would use a type of profitability ratio known as 4.
a net gain-to-total income ratio

an insurance leverage ratio
a statutory return on assets (ROA) ratio
a gross profit ratio
4. The medical loss ratio (MLR) for the Peacock health plan is 80%. Peacock's
expense ratio is 16%. Go to
question
5.
One characteristic of Peacock's MLR is that it
includes claims that have been paid but excludes claims that have not
yet been reported
cannot adjust for growth in the health plan's business
is the percentage of Peacock's end-of-period surplus to its earned
premiums
measures Peacock's overall claims levels
5. The medical loss ratio (MLR) for the Peacock health plan is 80%. Peacock's
expense ratio is 16%. Back to
Top
Peacock's MLR and its expense ratio indicate that Peacock
has a 4% potential profit margin
has a combined ratio of 64%
must increase its premium income in order to remain in business
must rely on investment income in order to avoid financial losses
>---------- End of the Test ----------<

1 C
2 D
3 C
4 D
5 A
Assignment 13: Management Control
Reading 13A: Management Accounting
• Explain the purpose of management accounting

• Identify the distinguishing features of a cost center, profit center, and investment center
• Discuss volume-related variances, cost-related variances, and revenue-related variances in a managed care setting
Instructions:

Complete the Test

Go to
1. The Danube Health Plan's planning activities include tactical planning,
question
which is primarily concerned with 2.
establishing standards of performance for Danube's cost centers

forecasting Danube's premium income
planning for the short-term, day-to-day activities of Danube
identifying the markets in which Danube should concentrate its
marketing efforts
2. The goals of Diane Tsai, the manager of the Oval Health Plan's accounting
department, and the goals of Oval are mutually supportive. Oval's accounting Go to
department is able to establish and achieve the appropriate objectives, but question
the department's costs of operation are too high. The following statement(s) 3.
can correctly be made about this situation:
Ms. Tsai most likely is the manager of a profit center.
The business goals of Oval are congruent with Ms. Tsai's goals.
Oval's accounting department is efficient but not effective.
All of these statements are correct.
Go to
3. One true statement about variance analysis is that question
4.
a price variance is the difference between the budgeted quantities to be
sold and the actual quantities sold, multiplied by the budgeted amount
variance analysis suggests solutions to a particular problem
positive variances generally are favorable, from a health plan's point of
view, for the plan's expenses but unfavorable for the plan's revenues
an effective variance system typically focuses on matters that require
management's attention
Go to
4. A health plan can use segment margins to evaluate the profitability of its
question
profit centers. One characteristic of a segment margin is that this margin 5.
is the portion of the contribution margin that remains after a segment
has covered its direct fixed costs
incorporates only the costs attributable to a segment, but it does not
incorporate revenues
considers only a segment's costs that fluctuate in direct proportion to
changes in the segment's level of operating activity
evaluates the profit center's effective use of assets employed to earn a
profit
5. The Puma health plan uses return on investment (ROI) and residual
income (RI) to measure the performance of its investment centers. Two of
these investment centers are identified as X and Y. Investment Center X
earns $10,000,000 in operating income on controllable investments of
$50,000,000, and it has total revenues of $60,000,000. Investment Center Y Go to
earns $2,000,000 in operating income on controllable investments of question
$8,000,000, and it has total revenues of $10,000,000. Both centers have a 6.
minimum required rate of return of 15%.
The following statements are about Puma's evaluation of these investment

centers. Select the answer choice containing the correct statement.
Investment Center Y's RI is greater than Investment Center X's RI.
The ROI for Investment Center X is 16.7%, and the ROI for Investment
Center Y is 20.0%.
Because Investment Centers X and Y are different sizes, Puma should
not use ROI to compare these investment centers.
According to the evaluation of ROI, Investment Center Y achieves a
higher return on its available resources than does Investment Center X.
6. The Puma health plan uses return on investment (ROI) and residual
$50,000,000, and it has total revenues of $60,000,000. Investment Center Y Go to
earns $2,000,000 in operating income on controllable investments of question
$8,000,000, and it has total revenues of $10,000,000. Both centers have a 7.
One likely way in which Investment Center X or Y could effectively increase

its ROI is by
focusing only on increasing its total revenues
increasing its controllable investments
increasing total revenues, accompanied by a proportionate increase in
operating income
increasing expenses in order to increase operating income
7. The Puma health plan uses return on investment (ROI) and residual Go to
question
8.
$50,000,000, and it has total revenues of $60,000,000. Investment Center Y
$8,000,000, and it has total revenues of $10,000,000. Both centers have a
One difference between the RI method and the ROI method is that
the RI method demands greater goal congruence from Puma's managers
than does the ROI method
the RI method favors Puma's small investment centers more than does
the ROI method
only RI can lead to decisions that improve Puma's short-term profits at
the expense of its long-term objectives
only RI is useful to Puma for comparing investment centers of different
sizes
8. The following statements are about a health plan's evaluation of its

Back to
responsibility centers. Select the answer choice containing the correct Top
statement.
When analyzing budget variances, a health plan's management should
pay attention to unfavorable variances only.
A health plan can reduce the problem of unattainable goals by involving
responsibility managers in the preparation of their centers' budgets.
One reason that a health plan would use cost-based transfer prices to
evaluate the performance of its profit centers and investment centers is
because, under this method of setting transfer prices, the selling center
has maximum incentive to operate effectively and control costs.
In responsibility accounting, all employees who have any influence over
a health plan's department are held equally accountable for the
operations and financial outcomes of that department.
>---------- End of the Test ----------<
1 C
2 B
3 D
4 A
5 D
6 C
7 A
8 B
Reading 13B: Cost Accounting
• Explain the primary uses of cost accounting in managed care

• Discuss various ways that costs can be accumulated
• Compare the three methods of analyzing costs: change analysis, functional cost analysis, and activity-based costing
Instructions:

Complete the Test

1. A health plan can use cost accounting in order to
Go to
A. Determine premium rates for its products
question
2.
B. Match the costs incurred during a given accounting period to the
income earned in, or attributed to, that same period
Both A and B
A only
B only
Neither A nor B
Go to
2. A health plan's costs can be classified as committed costs or discretionary
question
costs. An example of a discretionary cost for a health plan is the cost of its 3.
facilities
executive salaries
employee training
equipment
3. Costs that can be defined by behavior are most commonly classified as

Go to
fixed costs, variable costs, and semi-variable costs. From the following
question
answer choices, select the response that correctly indicates a fixed cost and a 4.
variable cost for a health plan.
Fixed Cost = depreciation on computer equipment
Variable Cost = selling expenses
Fixed Cost = premium processing expenses
Variable Cost = rent on a regional office
Fixed Cost = the cost for building maintenance
Variable Cost = the cost for electricity
Fixed Cost = the cost for electricity
Variable Cost = fire insurance on the home office facility
Go to
4. A cost for which a benefit is forfeited in choosing one decision alternative
question
over another alternative is known as 5.
a marginal unit cost

an opportunity cost
an incremental cost
a differential cost
5. The Sesame health plan uses a method of accumulating cost data that
enables the health plan to satisfy financial reporting requirements for
compiling financial statements and corporate tax returns. Although this Go to
method assists Sesame's managers in studying which types of costs are question
rising and falling over time, it does not explain which areas of Sesame incur 6.
each cost. This method, which is the most basic level of cost accumulation, is
known as accumulating costs by
cost center
type of cost
lines of business
function
6. In order to analyze costs for internal management purposes, the Banner Go to

health plan uses functional cost analysis. One characteristic of this method of question
cost analysis is that it 7.
enables Banner's top management to analyze costs as they apply to

workflow rather than to organizational structures
assumes that activities, not products, generate costs
cannot be used when Banner makes pricing and staffing decisions
identifies units of activity, calculates the costs of performing each unit of
activity, and then assigns the cost of each unit of activity to Banner's
products or lines of business
7. The Titanium health plan's product has a unit price of $120 PMPM and a
Back to
unit variable cost of $80 PMPM. Titanium has $100,000 in fixed costs per Top
month. This information indicates that, for its product, Titanium's
unit contribution margin is $80
unit contribution margin is $200
break-even point is 500 members
break-even point is 2,500 members
>---------- End of the Test ----------<
1 A
2 C
3 A
4 B
5 B
6 A
7 D
Reading 13C: The Budgeting Process
• Distinguish among top-down budgeting, bottom-up budgeting, and zero-based budgeting

• Distinguish among static budgets and flexible budgets, short-term budgets and long-term budgets, and rolling
budgets and period budgets
• Itemize the various components of a master budget
Instructions:

3. Click Complete the Test to score your answers and view a

Complete the Test
report.
1. The Landau health plan will switch from using top-down budgeting to using Go to
bottom-up budgeting. One potential advantage to Landau of making this switch is question
2.
that, compared to top-down budgeting, bottom-up budgeting is more likely to
require little time or labor to complete
enable Landau to incorporate key changes in regulatory requirements on a
timely basis
reflect top management's intentions for Landau
reflect the realities of day-to-day operations
2. One typical characteristic of zero-based budgeting (ZBB) is that this budgeting Go to

question
approach 3.
treats each activity as though it is a new project under consideration

applies only to income budgets
is the least time-consuming of all of the budgeting approaches
requires the input of top-level employees only
3. In the following paragraph, a sentence contains two pairs of words enclosed in

parentheses. Determine which word in each pair correctly completes the
sentence. Then select the answer choice containing the two words that you have
Go to
selected. question
4.
Budgeting approaches can be classified as static or flexible budgets, or as rolling or period budgets. A health plan
most likely would use a (static / flexible) budget when a budget's objective is to reduce or limit expenses, and the
health plan most likely would use a (rolling / period) budget if it would like to continually maintain projections for
a certain time period into the future.
static / rolling
static / period
flexible / rolling
flexible / period
4. Companies typically produce three types of budgets: operational budgets, cash

Back to
budgets, and capital budgets. The following statements are about operational Top
budgets. Select the answer choice containing the correct statement.
Expense budgets, a type of operational budget, typically describe fixed
expenses rather than variable expenses.
Operational budgets can only show information by department or by line of
business.
Operational budgets begin with a forecast of sales revenue and investment
income.
Revenue budgets, a type of operational budget, indicate the amount of
income from operations that a company received from the previous budget
period
>---------- End of the Test ----------<

1 D
2 A
3 A
4 C
Assignment 14: Cash Management and Capitol Budgeting
Reading 14A: Cash Management
• Discuss the fundamentals of cash inflows and cash outflows for a health plan
• Analyze a health plan's cash budget using the health plan's cash receipts and cash disbursements
Instructions:

Complete the Test

1. The following statement(s) can correctly be made about a health plan's
cash receipts and cash disbursements budgets:
A. To predict both the timing and the amount of its cash receipts, a Go to
health plan constructs the cash receipts budget using data from its question
sales forecast and investment forecasts. 2.
B. A health plan uses a cash disbursements budget in order to establish

the amount, but not the timing, of all of its cash disbursements.
Both A and B
A only
B only
Neither A nor B
2. A financial analyst wants to learn the following information about the

Forest health plan for a given financial period:
A. Forest's beginning-of-period cash balance

B. Forest's minimum cash balance Back to
C. The cash needs of Forest during the period Top
D. Forest's end-of-period cash balance
From Forest's cash budget, the analyst most likely can obtain information
about
A, B, C, and D
A, B, and C only
A and D only
B and C only
>---------- End of the Test ----------<

1 B
2 A
Reading 14B: Capital Budgeting
• Describe the purpose of capital budgeting

• Identify the characteristics of the payback method, the discounted payback method, the net present value method,
and the internal rate of return method with respect to a health plan's capital budgeting decisions
• Describe factors that affect a health plan's capital budgeting decisions
• Explain the function of sensitivity analysis in capital budgeting
Instructions:

Complete the Test

Go to
1. The process of converting the present value of a specified amount of
question
money to its future value is known as 2.
capital budgeting
compounding
capital rationing
discounting
2. In order to print all of its forms in-house, the Prism health plan is
considering the purchase of 10 new printers at a total cost of $30,000. Prism
estimates that the proposed printers have a useful life of 5 years. Under its
current system, Prism spends $10,000 a year to have forms printed by a local
printing company. Assume that Prism selects a 15% discount rate based on
its weighted-average costs of capital. The cash inflows for each year,
discounted to their present value, are shown in the following chart:
Cash Discounted Running
Year
Inflow Cash Inflow Total
1 $10,000 $ 8,695 $ 8,695
2 10,000 7,561 16,256 Go to
question
3 10,000 6,575 22,831 3.
4 10,000 5,717 28,548
5 10,000 4,972 33,520
33,520
Prism will use both the payback method and the discounted payback method
to analyze the worthiness of this potential capital investment. Prism's decision
rule is to accept all proposed capital projects that have payback periods of
four years or less.
After analyzing this information, Prism would accept this proposed capital
project under
both the payback method and the discounted payback method
the payback method but not the discounted payback method
the discounted payback method but not the payback method
neither the payback method nor the discounted payback method
3. In order to print all of its forms in-house, the Prism health plan is
considering the purchase of 10 new printers at a total cost of $30,000. Prism
estimates that the proposed printers have a useful life of 5 years. Under its
current system, Prism spends $10,000 a year to have forms printed by a local
printing company. Assume that Prism selects a 15% discount rate based on
its weighted-average costs of capital. The cash inflows for each year,
discounted to their present value, are shown in the following chart:
Cash Discounted Running
Year
Inflow Cash Inflow Total
1 $10,000 $ 8,695 $ 8,695
2 10,000 7,561 16,256
3 10,000 6,575 22,831 Go to
question
4 10,000 5,717 28,548 4.
5 10,000 4,972 33,520

33,520
Prism will use both the payback method and the discounted payback method
to analyze the worthiness of this potential capital investment. Prism's decision
rule is to accept all proposed capital projects that have payback periods of
four years or less.
Now assume that Prism decides to use the net present value (NPV) method to
evaluate this potential investment's worthiness and that Prism will accept the
project if the project's NPV is greater than $4,000. Using the NPV method,
Prism would correctly conclude that this project should be
rejected because its NPV is $3,520
accepted because its NPV is $5,028
4. The following statements are about a health plan's capital budgeting Back to
process. Select the answer choice containing the correct statement. Top
Under sensitivity analysis, a health plan ranks all capital project
proposals according to expected rates of return and accepts only those
proposals with the highest rankings.
A project that has a profitability index of 0.0 has an NPV of zero.
An underlying assumption of capital budgeting is that a health plan
should keep its investing decisions separate from its financing decisions.
Under the internal rate of return (IRR) method, if a project's IRR is less
than a health plan's weighted average cost of capital (WACC), then the
project's benefits should exceed its costs and the health plan should
accept the project.
>---------- End of the Test ----------<
1 B
2 B
3 A
4 C

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Assignment 1: Health Plan Financial Information

Reading 1A: Health Plan Financial Information

1. Select or enter the best answer for each of the 4 questions.

Complete the Test

• The independent auditors who review Fulcrum's financial statements

has only one potential source of funding: borrowing money

3. The Challenger Group is a type of management services organization Go to

>---------- End of the Test ----------<

Reading 2A: Types of Risk

• Distinguish between pure risk and speculative risk

1. Select or enter the best answer for each of the 6 questions.

Complete the Test

Healthcare coverage is designed to help plan members avoid pure risk,

2. The following paragraph contains an incomplete statement. Select the

3. The Health Maintenance Organization (HMO) Model Act, developed by the Go to

is a set of calculations, based on information in a health plan's annual

5. Provider reimbursement methods that transfer some utilization risk from a Go to

an increase the health plan's underwriting risk

1. Select or enter the best answer for each of the 4 questions.

Complete the Test

• 1-Allow Tower's utilization management decisions to override a

>---------- End of the Test ----------<

Reading 3A: Provider Reimbursement and Plan Risk

1. Select or enter the best answer for each of the 3 questions.

Complete the Test

issuing regulations pertaining to the Health Insurance Portability and

>---------- End of the Test ----------<

1. Select or enter the best answer for each of the 6 questions.

Complete the Test

3. Health plans sometimes use global fees to reimburse providers. Health Go to

5. The following statements are about various reimbursement arrangements Go to

A sliding scale per-diem charges arrangement differs from a sliding scale

6. Health plans seeking to provide comprehensive healthcare plans must

Reading 4A: Capitation in Provider Reimbursement

• Describe percent-of-premium capitation and PMPM capitation

1. Select or enter the best answer for each of the 9 questions.

Complete the Test

• The average number of office visits each member makes in a year is

B. Specifies that Cardigan will pay Dr. Meyer under an arrangement

is the most common type of capitation

5. The following statements illustrate common forms of capitation:

6. The following statements are about carve-out programs. Three of these Go to

In the type of carve-out in which entire categories of care are

8. A reconciliation is the process by which a health plan assesses providers' Go to

a reconciliation typically includes payment to the providers of any

9. With regard to capitation arrangements for hospitals, it can correctly be Back to

>---------- End of the Test ----------<

1. Select or enter the best answer for each of the 6 questions.

Complete the Test

One true statement about this specific stop-loss coverage is that

6. The sentence below contains two pairs of words enclosed in parentheses.

Reading 5A: Health Plan Funding

• Distinguish between fully funded and self-funded health plans

1. Select or enter the best answer for each of the 3 questions.

Complete the Test

>---------- End of the Test ----------<

• Distinguish between a contributory plan and a noncontributory plan

1. Select or enter the best answer for each of the 6 questions.

Complete the Test

• Category A—Those methods that primarily modify traditional fully

this arrangement prevents Harp from purchasing stop-loss coverage for

>---------- End of the Test ----------<

• Describe the new payment methodology for Medicare