Premium Development Case

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New England Health Maintenance Organization (HMO) is a regional not for profit managed care company that has its headquarters in Boston, MA, with over 500,000 enrollees within 25 different plans including Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. A consortium of employers has shown interest in bidding on a managed care contract to be offered to the consortium’s 75,000 employees whom are locate in and around Nashua, New Hampshire. The consortium of employers includes companies such as IBM, Ford, and Prudential Insurance.

The approach that New England has to the premium development is that the premiums received from the employers must cover the cost of the providing required healthcare services, also known as medical costs, and the costs of administering the plan and of establishing reserves, also known as other costs.

Reserves are necessary to ensure that funds are available to pay providers when medical costs exceed the amount collected in premium payments (3901-3-13 Health Insurance Reserves, 2010). Due to New England HMO being a not for profit corporation, there is not explicitly include any type of profit element within the premium. A requirement to the reserve is set sufficiently high in order to ensure there are enough investments available to fund product growth and expansion. Therefore, part of the reserve requirements does constitute a profit. (Premium Development Case Study, 2007)

A base per member per month (PMPM) is used in setting premiums by estimating the PMPM for each aspect of the plan’s coverage benefits. Setting the premiums also utilizes historical utilization as well as cost data. The co-payments are used a source of revenue to decrease medical cost and lessen the premiums.

New England HMO adds fifteen percent to the total medical PMPM to cover any administrative costs that may incur and an additional five percent added for the reserve. The Individual Rate Factor is set at 1.216 and the...
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