 Good morning, everyone. Welcome to your day two of our interview. And this one, we're going to welcome Michael Barber as the current officer and turn all of everything over to him. Thank you, Mr. Chair. Good morning, everyone. My name is Michael Barber, and I'm going to talk here to provide you with this hearing as a hearing officer. The purpose of today's hearing is to take evidence and argue on the 2020 Vermont Health Connect rate pilot submitted by Blue Cross, which is here for Vermont. Without the number of those cases, GEOCD-006-19RR. To be non-careful, we're going to ask Chair Sitchin over this matter to do Title 18 section 9375B6, that's not statute-sanitated, as well as Title 18 section 4062-8. For every single Blue Cross today, our final team operator, Reggie Macy, of the law firm's Christian Mayor, Phillip, President of the Office of the Health and Care Advocate, our J. Engel, Tyler Piper, and Eric Shortice. I also want to recognize the board's Associate General Counsel, Cameron Aberjaley, who will be the director at the examination of the board's tax authorities, Lewis and Ellis, and also Gavin Boyle, who is here in the Department of Financial Regulation, they don't cancel. We are recording today's proceedings. We also have a board recorder here to transcribe them. We will be providing the bodies with the transcripts as soon as they're available. If there are any members of the public in the audience today, we will be taking public comment. Those of today's proceedings, just sign what you've got set the door. For public comment, there's also a signed engine for a red-red news sign. If you don't want to stick around for that, it will be much more convenient, I think, to go to the public comment forum that the board is having, from 4.30 to 6.30 at the City Hall in Montpelier, that is dedicated exclusively to hearing from the members of the public comment spotlights. The board also takes public comments in writing. You can just submit public comments via the board's websites, by the way of the mail. You can call the board's office to leave public comments if you wish, and the board will be taking comments during July or something. Before we begin, I want to remind parties at the board that there are confidential materials in these binders, and Michelle says caution in discussing anything that is too much confidential, as those of you who can't be discussed in the center of the board. So at this point, I'd like to square in the witnesses, if we do that all at once. So if they can have a green hall show, it's standard garland binders. And I don't see a commission here. If I call your name, you can please stand and raise your right hand. Can you square or affirm that the testimony you were given this matter will be the truth, the whole truth, and not you, but the truth? Okay. Thank you. Now to explain what this is. We have two binders who exhibit here. The parties have stipulated two. They're label, binder number one, binder number two. Minder 10 is binder number one. These are blue cross exhibits, which are marked 117, binder number two. These opposite health care advocate exhibits, which are marked one through 22. And I understand that he has some additional exhibits here. If you're wondering what these are, yes, is the situation of those? Absolutely. You should have four new exhibits in front of you. Three of them are blue cross exhibits 18, 19, and 20. The party's stipulated to the fourth is HCA exhibit 23. The party's stipulated to the blue cross exhibits one. One exhibit reflects blue cross's recent analysis of the recently submitted hospital budget information and how that impacts the rate. The other two are summary tables, summarizing information sort of scattered around the filings that we'll discuss in our testimony. And the HCA, I'm sorry to speak for the HCA, but their exhibit is the DFR's Permanent Practice Board from February. And the parties have stipulated to add those four exhibits to the record. So parties have stipulated to the investigatory... I'm sorry? Parties have stipulated to the investigatory to the additional exhibits. Yes. Okay. And I'm going to submit all these exhibits in evidence. And if folks could please add exhibit 18, 20, to find their number one, and exhibit 23, to find number two. We'll discuss before we open these up. Do you like to make money? Yes, please. Thank you. Thank you, Mr. Barber. And good morning, board members, and everyone in attendance. My name's Mike Donafrio. I'm with the law firm of Schwissen-Lager. With me today is my colleague, Richard A.C., and together we represent who crosses the proceeding. And just to give you a quick roadmap of how our part of the proceeding will unfold, I'll present the direct testimony of Paul Schultz. Ms. A.C. will present Ms. Green and Mr. Garland's testimony. And at the end of the presentation, we'll provide some closing remarks. So we recognize that the board and staff face a difficult task this year. The requested rate increases are substantial. At the same time, it's very clear in the record that who crosses solvency is in decline and peril. So that puts you in a tough spot. And meanwhile, health care costs continue to increase. And as you well know, these are those underlying costs that primarily drive the cost of health insurance. In designing the rate review process, though, the legislature contemplated that we would face difficult days like this on the way to a more sustainable health care system. So it built this process to accommodate the push and pull among these sorts of factors. And you see that writing the words of 8BSA 4062. I'm going to quote it. The board shall determine whether a rate is affordable, promotes quality care, promotes access to health care, protects insurer solvency, and is not unjust, unfair, inequitable, misleading, or contrary to the laws of the state. And as you know, the board's rate review rule and federal law incorporate the actuarial concepts of adequacy and excessiveness into this mix as well. So what you have is a statutory construct where you're required to balance a bunch of factors. These factors are interdependent, not independent of one another. So each informs the other as you think this through. And as the board itself recognized in your most recent Blue Cross, large group decision, the failure to strike the right balance, and then these are your words, imperils for modern's access to care. And I think that's critical to remember as you review this year's rate fight. Against that backdrop, the rates currently proposed by Blue Cross hit that proper balance and must be approved. More importantly, any reduction of the rates under today's circumstances will upset that balance, continue to jeopardize the insurer solvency, and with that, access to quality health care and ultimately affordability. The Record Ampli supports that conclusion. And I want to highlight three overarching considerations that really put a fine point on it. First, you're going to hear a lot about solvency because the circumstances this year are unique among those that you've faced as a board. This is evident in the rate filing and the materials in the binder. Among other things, they show that Blue Cross's reserves sit at about $110 million, at least as of the end of 2018, and that's down about $24 million from the previous year. Lewis and Ellis in their actuarial analysis confirms this. They observed that only four blue plants in the country had lower risk-based capital percentages than Blue Cross did as of the end of 2018. And that the high end of the target range set for Blue Cross's RBC by the Department of Financial Regulation is lower than more than half of the RBC percentages of Blue's plans nationwide. And then DFR, the solvency regulator, again puts a fine point on it. Highlighting its report, that Blue Cross's RBC is at its lowest point since the board began doing this work. It's the lowest among comparable companies around the country. It sits at about half of the average RBC It's the only company in its peer group whose RBC has declined each of the last four years. And its RBC currently sits well below the low end of the range that DFR recently set on its February board. So in light of DFR's observation that it consistently made over the years, that solvency is the most fundamental aspect of consumer protection in healthcare, DFR concluded, and I'm going to quote, that any departure from the file rate should be made with great caution this year. So more than ever before, your decision has to be mindful of Blue Cross's solvency. The second overarching consideration that I want to highlight is that Blue Cross has lost significant market share in the individual and small group market over the last couple years down approximately 24% from 2016 to 2018. That gives Blue Cross the most powerful incentive to keep its rates as low as it possibly can without dipping into inadequacy. Because continued membership losses obviously will be highly detrimental for the company in many ways. Third, the third overarching concern. Underfunding insurance premiums does not reduce healthcare costs. The premiums are based on the cost of the underlying care. Those costs have to be paid and underfunding the premiums puts stress on the system like what we've seen at some of our hospitals over the past year. And it builds a debt for future policy holders that eventually will have to be paid and with great pain. So we recognize that these dynamics makes the board's job difficult this year. We also recognize, because we've read the public comments, that many Vermonters struggle right now to pay for their health insurance. The words in the public comments are compelling. And what they really show is that many Vermonters are struggling to afford the cost of their health care and as a result the cost of their health care. But at the same time Vermonters need to maintain access to care. And the board can't jeopardize that access by underfunding the rates. On a practical level, there are three places in the rates where you could potentially reduce them. And I want to just touch on the brief before I conclude. And the record shows that none is available to you this year as a viable option. First, administrative expenses. That pathway is unavailable because Blue Cross has continued to maintain best in class low administrative expenses. And Ms. Green and to some extent Mr. Schultz will testify about that. And it's clear in the material reported. And Lewis and Ellis confirms that, highlighting for example that Blue Cross's admin remains lower than about 80% of the 63 plans that the NAIC analyzed in 2018. The second pathway contribution to member reserves, for the reasons I've already highlighted, given Blue Cross's current solvency position, that is not a viable pathway with which to reduce the rates this year either. That would send Blue Cross further off course and further away from meeting the range that DFR has required to meet. And finally, the projected cost of claims. That pathway is also unavailable this year because Blue Cross has not overestimated those costs in its rate file. As is evident in the record we'll highlight through testimony. Lewis and Ellis identifies a couple of areas where it believes Blue Cross has done so. But again, we think that's contradicted by the record and we'll try to draw that out in our testimony today. And even if you were to conclude that Lewis and Ellis' recommendations sat within a reasonable range of outcomes under the current circumstances as I've outlined for you, you must proceed with the greatest caution if you were to make a choice between results that you view as reasonable, whether you were going to lean to the lower or not under the circumstances as they exist today. And again, the reason for that is there is a real risk of underfunding these rates which leads to a real risk of continuing the decline of Blue Cross's solvency. Now, there's a lot of information in the record. We will not attempt to cover it all today. We'll attempt to move as quickly as we possibly can and highlight the critical points. Mr. Schultz will be our first witness of Blue Cross' chief actuary. He'll describe the development of the rates and clarify some key points of disagreement between Blue Cross and Lewis and Ellis. Ruth Green, Blue Cross' CFO, will then testify about Blue Cross' financial position, administrative costs, and contribution to reserves. And current solvency position. And finally, Andrew Garland, Blue Cross' vice president of climate relations and climate affairs will testify about issues around Blue Cross' negotiations with providers, work with the ACO, and how that impacts the rates. So to conclude very briefly, the system can no longer afford to borrow from future ratepayers to reduce current rates. That's not sustainable. And so we're asking the board to approve the rates as currently proposed to avoid making reductions that will undermine Blue Cross' solvency and to maintain access to care that the folks in these plans need. Thank you. Mr. Engel, do you have anything to speak of? Yes, thank you, Mr. Chairman. Mr. Chairman, Mr. Board, I'm Jay Engel. I represent the Health Care Advocate. The theme of this rate fine, the concept underlying this rate fine is overreaching. That sounds harsh. It's not personal. Blue Cross' is well-represented, but this is a severely overreaching rate fine. I'd like to give you three illustrative examples, and then I want to talk in a little more detail about the biggest example. You remember we spoke yesterday about MVP assuming that because of the zero county for the individual mandate, the healthy people would leave the company. And MVP fought that. MVP's actual work was wrong. LB fought that. LB was wrong. Blue Cross' fought that. And he was wrong. Whatever MVP did was to say, we were wrong. We thought we should reduce rates because of the zero county. But it turns out that the zero county did not drive people away. So we're going to reduce rates. Blue Cross' doesn't do that. Blue Cross' comes out with some convoluted forced explanation as to why the zero county did not result in healthy people leaving. They should still keep most of that in the rain. Second, remember we spoke yesterday about the AHP issue, about how we fought a few months ago. The AHPs are going to be limited. So companies raised their rates to think account of people, again the healthy people, needed to go into AHPs. But because of the federal court decision and because of the DFR rate, more recently, it was made clear that no, the AHPs were not going to be permitted in Vermont in time to time. So MVP sent them back that amount that they had proposed to raise rates out of the rain. Blue Cross' does something different, though. Blue Cross says when they first thought when they thought they were going to increase, they said the continuation of the Vermont AHP market adds 1% to rates. That was reasonable then. But now it's clear that it's not going to continue in Vermont. So I would expect that 1% would not be in the rain. But no, they've got another convoluted explanation for why they should still leave to raise rates out of what's going on at the AHPs. You may remember yesterday that the first question I asked to the MVP representative was to explain to the board what IVMR is. And he explained that very accurately that there's a little bit of a flange running out that the company has no time for. And so they added 2.4% to the pay amount. That's perfectly reasonable. But they didn't have any fudge factor. They didn't have any factor for A for adverse deviation. What Blue Cross does, though, is they not only have this IVMR, which is legitimate, but they have a 15% additional fudge factor for adverse deviation. What that does is, among other things, it's artificially impressed their surplus amount that they report. That just went on many things. What they do is artificially suppress the surplus amount. So those are three of us two examples, but let me get to the big one, my father. Remember when I asked you when you talked about the $34 million that Blue Cross gets back is going to be back? Because of the Trump tax bill. Under accepted statutory accounting principles, that money is circling a majority of that money and arguably the whole thing should go into service. What Blue Cross has done is to fight like crazy to go through all kinds of machinations and convolutions in order to keep not just the real of that money, but every penny of that money out of service. And so one thing that we would be doing is to be going through with Blue Cross's witnesses is an explanation of what they report on their annual statement. And I believe the evidence will show that their surplus, the way they report it, is artificially suppressed. And it should actually be much, much higher as a result of which the contributions and reserve factors should be much, much lower. That's your number. We call Paul Schultz, I should just say, he went to three yesterday with one witness in the carrier. So we're a little concerned about time. If we could just all monitor it. Yeah, proceed. Yes. Thank you. Good morning, Mr. Schultz. Good morning. What is your current position at Blue Cross? Chief actuary of Blue Cross. As part of that, I've directed that you actuary on underwriting departments. Part of those responsibilities including preparing all rate items for Blue Cross. We should remind you of that before you get back. I should have asked you this first. Would you just state and spell your full name for the record? Sure. My name is Paul Schultz. S-C-A-G-L-T-C. Thank you. How long have you held the position of Chief Actuary? Since January 2015. And do you hold any professional credentials? Yes, I've been associated with the American Academy of Actuary since 2000. And the fellow of the Society of Actuary since 2000. And has all of that reflected in your CV, which was part of Blue Cross exhibit 12? Yes, that's right. Could you direct your attention to exhibit Blue Cross exhibit 1? Sure. And what is that? That is our rate file that has submitted. Are you familiar with that document? Yes, it was prepared for my direction. And I asserted by that it means that we're saying it's a practice and it's compliant with state and federal law and regulation. And you're familiar with the criteria that the Green Mountain Care Board uses to evaluate a rate file, correct? Yes, I do. I just want to talk about a couple of those before we dive into the file itself. Could you turn to page 19 of exhibit 1? Yes. And do you see about halfway down the page there's a section 1.8? Could you just read the title of that section? For my statutory review criteria. Okay. And do you see the statutory criteria just below that title on the issue there? I do. Can you read those criteria and tell me are there others in addition to those criteria that this filing has to meet? Yes, so the Green Mountain Care Board must consider whether a rate is affordable, provides quality care, provides access to health care, protects insured resolvency, and it's not just unfair and equitable misleading or contrary to the laws of the state. Additionally, the board must consider what we've in the past referred to as actuarial criteria, which are that the rate is not excessive, it's not inadequate, and it's not unfairly discriminatory. What does it mean for a rate to be inadequate? That's defined for the actuarial standards of practice. It's a case of number 8. And that defines a rate that's adequate if it provides for sufficient funds to pay for claims, administrative costs, regulatory fees, taxis, and a reasonable profit or contingency margin. So a rate is inadequate if it's less than the amount required to cover those items. Are Blue Cross's proposed rates adequate? They are adequate, yes. And what does it mean for a proposed rate to be excessive? A rate is excessive if it provides for more than what is needed to require those items that I just mentioned. Is that also defined in actuarial standards of practice? That's right, that's an A-soft number 8 as well. Are Blue Cross's proposed rates excessive? They are not excessive. Now is it possible to know with certainty whether a proposed rate is adequate or excessive at the time it's proposed? At the time it's proposed none of all rates by definition are essence. We have to wait to see what the experience actually brings to make it an absolute determination of whether rates are excessive or inadequate. And so can you evaluate whether a rate was adequate or excessive in hindsight? Yes, by observing what the actual experience was in terms of rate. Did you do that for past results as part of your rate development this year? We did. And what did that analysis, first of all is that analysis shown in the record anywhere? It is in the record, it's on the previous page of Exhibit 1, page 17, we put back under section 1.6 historical financial results. We've also updated that for information that became available after the time of the rate filing and that is, I believe in Exhibit 1. 20. And what was updated? What was updated was that the final risk adjustment considerable amount was determined for 2018 and that was higher than our original expectation by about $3 million. So the 2018 filing has been updated in terms of the actual contribution truth. Based on this information were blue process rates inadequate for any of the years reflected in Exhibit 20? Yes, they were inadequate for all five years it's clear to see the inadequacy in years 2015 through 2018 and that the actual contribution reserve was negative. That is to say that the shortfall between premiums and those things I talked about claims, costs, taxes, fees, et cetera, that shortfall had to come out of certain lesser number of policy-border reserves. In 2014, even though there was a positive return of 1%, those rates also turned out to be inadequate. In 2014, we crossed the subject that federal income taxes of 20% so the 2% of CPR is what was needed to maintain reserves, with an RBC at the level where it was. So again, we had to dig into into policy-border reserves in order to fund that shortfall to get the right, well, said differently, RBC went down. So we had to raise that. Thank you. So were the results of the rate review process for the years shown in Exhibit 20? Did those results yield inadequate rates for those years? Yes, you can see the comparison of the FIOA contributions reserve versus the approved contributions reserve. The average approved CTR was about 1.8%, lower than what was filed. So what that says is that if rates had been approved this file, rather than negative 1.6%, CTR over that time period would have been positive 0.2%. Still, it had to have been much less so. Now I'd like to turn more generally to how you've developed the proposed rates in this file. So can you describe how the rate filing Exhibit 1 was prepared? Yes, so the way to prepare really any rate filing is you're attempting to estimate what the cost of claims and the cost of insurance is going to be in some interview. For a continuing product like this one, the way we do that is to take a look at experience in this case in 2018 and to then project that forward to the 2020. And there are really two main ways where the experience in 2020 will differ from what we saw in 2018. One is that there's going to be a trend. So the unit costs are going to go up through the hospital budget to re-process them and other things like that. Utilization may also change. The number of services may change and the mix of those services will change from 2018 to 2020. So you have to determine how we're going to do that. The other thing that's going to be different is that we're likely to cover a different population in 2020 than the population we covered in 2018. So we need to use a set of population change adjustments in order to project that population. So really the starting point and the biggest component of the rate is a generation of allow claims costs projection. So we do that by taking again, taking a look at 2018 experience and a lot of money costs I should say that's the total cost of care that is provided to Vermonters that are in these plans. So the total compensation of providers for the care that they provide to Vermonters. We start with 2018 experience which is over 600,000 member months. We then trend that forward to 2020. We allow for any sort of population adjustments that we need to make and the result is a projection of allow claims in 2020. Once we're there we have to split that into two components. There's paid claims which is the amount that's paid by Blue Cross to providers to pay them for the care they provide Vermonters and a cost share. The member cost share is the other component of that. So the way that we develop that split is through a set of what's called allowable adjustments. And they include two main things. One is a pay to allow ratio. We look at a standard population. So for a standard population for a benefit design we are able to project with very high degree of accuracy what portion of those total costs will be paid by Blue Cross and what portion will be paid by the member. The other thing that goes into that is something called a benefit richness adjustment which is based on a set of federal factors that were developed to say that members in richer plans tend to use more health care and use more benefits. So we apply those federal factors in determining the rates for each. So once we apply those things we get to a paid planning projection and that is about 87% of the total rate of the total premium. To do that we need to add a number of things. First we add taxes and fees. That's about 4% of premium this year. That includes things like the reliant HCCA, the degree of amount of care where we go back, the federal insurer fee or the health insurance tax. Those are one of the same we used it in terminology for it. And that's the big difference this year. That health insurance tax is back in 2020 after a one year hiatus in 2019. So that 4% is quite a bit higher than it was in 2020. We then need to add items that I'll refer to collectively as the cost of insurance. And I'm thinking of that as administrative costs and CTR. So administrative costs we use a similar process as what we do for claims. We take a look at 2018 experience. We then project that forward. We use 3% as a projection for personnel costs. It's 0% for all other costs. We also, I should note, we've removed many non-recurring items from the 2020 administrative costs and that's about 7% of premium nationally. Finally CTR, contribution reserve at the direction of management. We add CTR. We also include 0.1% for something called the cost of bad debt that we've covered during the course of years now. So we include that 0.1% in this pipeline. This is a little bit of a non-profit in the company so there's zero profit. Can you summarize Blue Cross objectives in developing threats? To expand upon that a little bit allow us to make back the shortfall in 2018. I was trying to use assumptions and successfully so I believe. To produce premiums that would be only 1.5% of CTR. That's the amount that's necessary to keep RBC at a constant level with respect to the increase in healthcare costs. Can you explain how you develop your trend assumptions? You've already spoken about them a bit generally. Yes, so the development we can separate this into kind of two different components. We look at pharmacy trend, retail pharmacy trend separately. And for both of those we look at unit cost which is quite simply increases and non-providers are paid for even service. And there's utilization which sounds simple but actually has two different components. So utilization is both the number of services and also the mix of those services. Both of those things are factored into what we call utilization. So let's start on the medical side. For unit cost trend we can split that up into three categories. 50% or 51% of claims are for hospitals that are under your view. For that 51% we assume that hospitals will have the same increases in the future as were approved in the most recent around the possible budget. Now we know that's not going to be 100% accurate. Each hospital will not literally have the exact same increase. Some will go up some will come down. So that tends to be a pretty accurate assumption in the aggregate. 15% is for elbow network providers with which Blue Cross and the Shield of Vermont does not contract correctly. So for those unit cost trends we base those on confidential information from the Blue Cross and Shield Association. And that leaves about 34% of claims for other providers mostly in Vermont and in Hampshire with which Blue Cross and Shield of Vermont does contract correctly. For those we use a similar process to the hospital budget assumption we assume those increases will be the same moving from year to year. But we do augment that knowledge with any information we're able to get from ongoing contract negotiations. So that's the unit cost. For utilization we apply a number of statistical analyses. We pass experience and we also consider what's likely to happen in the future with these services. And in applying all this different analyses we're attempting to project utilization trends and how that might differ from the past. So we've projected a 4.1% utilization trend. That consists of a number of kind of components that we look at in the aggregate to make sure that the total makes sense what's in the pieces together. So typically we split this out into inpatient hospital, outpatient facility, professional and other time remaining categories. What we've seen recently is that pharmacy claims, prescription drugs that flow through the medical benefit have been having a very impact. So we split those out this year. We took a look at those at those drugs separately. These tend to be very high cost medications that are dispensed in a hospital, for example, a lot of cancer medications, unit addition medications. Very high cost of life saving drugs with a very high trend. So for this category we wanted to look very specifically at the drivers of what we observe the drivers of these, those trends in the past. So for 11 drugs which drove over half of the increase we specifically went drug by drug with our clinical team to think about, are these going to continue to trend at a very high amount or will that come down? I needed a couple of examples. There were some drugs that were, for example, released in late 2017. So they were only available for a couple of weeks in 2017 for the full year in 2018. So for this, it looks like that trend might be a thousand percent or something totally unreasonable like that. We brought that down on many cases to zero. There were some exceptions. There are some drugs on that list for which new indications have become available. So they will be prescribed for additional disease states moving into 2019 and into 2020. So for some of those drugs we kept a very high trend in some cases. We went up with those estimates and we've selected overall a medical pharmacy utilization trend of 15 percent. That's one component of the 4.1. It's not in addition to the 4.1 it's a piece of the 4.1. For the other pieces we selected zero percent in patient hospital utilization trend. Five percent professional trend and two and a half percent outpatient trend. This is a four percent for outpatient surgical procedures and two percent for all other outpatient procedures. So once we've applied all of our statistical methods, we've come up with our answer and believe the 4.1 percent is what we converge to and by applying a number of different statistical analyses if we're able to converge on a single point the same number tends to come up over another but that's a really good trend selection. So once we have that we're going to stop there and review that with our clinical team to make sure we understand the underlying drivers of that trend and how that's going to continue into the future. So in this case by way of example I already talked about the prescription drugs going through the medical benefit we also have things like mental health professional claims we saw an increase in both the percentage of the three preventive benefits and also the total number of preventive services. So both of those things help us to realize the rules of the all-hair model. So there are things that we support if they're going to increase trend in the short term but the vision of the all-hair model is that in the long term it's better for Vermont to go from a cost and from a quality and care perspective. Other things we saw are outpatient surgery procedures are up. We saw diagnostic procedures were out about 13% from 2017 to 2018. That would lead to an improvement about the increase in preventive visits. So we put all these things together and we confirmed with our clinical team that we expect all of these trends to continue into the future so we felt comfortable with the 1% utilization trend. Did you make any subsequent adjustments to trend to reflect any Blue Cross initiatives? Yes, we did. So there are a number of initiatives going on Blue Cross to reduce trend for 2019. We are working closely with both one-hair and our other provider partners and to accomplish two goals. One is to reduce ER visits by 5%. The other is to reduce possible admissions by 4% by reducing readmissions. So we're working closely with our partners to do that. Those two things combined reduce trend in 2019 by 1.1%. We're continuing to work with one-hair Vermont into 2020. We included a separate factor for that. It wasn't kind of faked into the trend, but we included an adjustment through ongoing data sharing and shared care management programs. We have one-hair except to be able to reduce claims by 0.4% for the attributed lives which has about a .2% impact across the entire population. Finally, we contracted with a lab benefit manager. So most of us are familiar with a PBM pharmacy benefit manager. It's a concept of her labs. We've also introduced a voluntary home confusion program and we believe the combination of those two programs and the lab benefit management is going to be a big move by far for those two. We'll further reduce trend by about a half percent moving into 2020. Can you develop your population morbidity assumptions reflected in the file? Sure. So this is the other kind of major set of assumptions that I refer to. We have kind of three typical or unusual categories in the absence of some sort of outside legislative change. We have people who left us since 2018. We have new members since 2018 and we have a continuing population. But thus, we can observe what their claims costs were in 2018. So we can see what it would be and how their departure changes the average bank cost as we move from 2018 into 2019. Those who left us were slightly healthier than the ongoing population. So their departure led to a 0.4 percent increase in banks. New members can be younger and healthier than the party members. So we take a look at we assess new members on the basis of of age groups of demographic adjustments if you're demographic adjustments that you experience with them. So we look at it at their age. The other thing we look at is kind of what statement of the market they came from are they from small groups, individuals, subsidized, etc. So based on those we were able to reduce claims by almost 2 percent for new members. Finally continuing numbers from 2018 to 2020 if you're still here, you're two years older. So again, we use sure this published by the society of actuaries to determine what kind of impact that's going to have in the two years that's a 3.5 percent impact on claims. So in addition to that we have some outside changes in legislation that impact the way we think about who's going to be covered in 2020. The first one is Vermont's Silver Solution. Because of the Silver Solution we have to make that we're going to place in 2019. We have some assumptions for 2018 in the future. How members are going to move from silver loaded plans to silver reflected plans. We made such assumptions and this finally had no impact on the overall premium rate. Secondly, the individual mandate as we know the federal government removed the penalty associated with that mandate. We talked about that last year and Vermont for its part also enacted its own individual mandate last year with the instructions of the legislature to determine the penalty in the next legislative session. So what we observed is that and we attribute a lot of this to the fact that Vermont enacted that legislation that we did not see a whole lot of movement out of these plans for the lack of a penalty. In 2019 the Vermont legislature decided there would be no penalty for the Vermont mandate either. So we're kind of back to the situation we were with the federal mandate. It exists, but there's no penalty. We therefore believe that there will be movement out of these plans that believe is supported by public comments that I've read. And we don't think the impact is going to be anywhere near as great as what a study in the Vermont care were published or what we put into race last year but we do believe that there will be an additional half percent impact for members of the community in the lack of a penalty. Finally, AHPs in the time of filing that the AHPs were alive and well and we're excited to continue into 2020. So at the time of filing we did believe there would be a one percent for members leaving and going to AHPs. Since the time of filing that market will not exist. However, the combined risk pool is not the only land in place for groups that are in the AHP market. They also have an opportunity to go to self-funded and we believe that some will take advantage of that opportunity which is why we don't think the one percent will come back in. We don't think all those members will return therefore we can't just put the one percent back. We calculated that the best result would be a .87 percent assumption so slightly down from the one percent. Finally, risk adjustment is closely associated with these population changes. For risk adjustment kind of our primary assumption is that the underlying the kind of slope or the distribution of membership for each carrier would remain similar to what it is in 2018, with the exception of a few of these specific changes and a few specific needs announced that we talked about. Risk adjustment was put in place to kind of level the playing field between a carrier that has all the kind of less healthy people and a carrier who attracted all the healthy risk. And that's exactly what we have going on in Vermont. As can be seen from our increasing risk adjustment transfer payments from MVP. And the key with risk adjustment is that it's a comparison. The thing that drives risk adjustment is a comparison between the two carriers. It's not the absolute risk of either one. It's how those compare to each other. So in the absence of specific groups moving from one to the other we believe that that comparison should save the system from your future. So that's an important assumption of how we develop risk adjustment. And could you remind the board what is the contribution to member reserves that you requested in this file? That's one and a half percent. And what was the average requested rate increase in the initial file? 15.6 percent. And finally can you detail the numerical components of the request? You've talked a lot about the trends and assumptions. Sure. So I'd like to actually do this and I'll try to do it quickly in two different ways. One is sort of the actuarial factor-based approach and the other one has nothing to do with what's kind of driving some of these numbers. So the quote-unquote actuarial way we start with what I'll call if we were to refile the 2019 rates at the time of the file in 2020 rates that file is higher. That consists of a few different things. If you look at specific 2018 experience that experience again at the time of filing was two and a half percent higher than what we had anticipated in the 2019 file. So that's the baseline we have to start with the correct baseline. Additionally, we changed trend assumptions from 2018 to 2019. And that includes the one percent affordability adjustment so moving to trend assumptions as we now believe are the best assumptions from 2018 to 2019 that had about another 2.2 percent to the premium. That's offset by certain things with the population adjustments most notably the impact of the individual mandate was much less than we expected. So altogether we'll be basing for 4 percent. To that we add another year of trend we have the trend from 2019 to 2020 based on the trends that I discussed earlier. And that is about an 8 percent increase due to trend. To that we added a couple of factors. We've talked a lot about population assumptions. When you put them all together they almost met out to you were at an increase of about 0.3 percent for all these population changes from 2018 to 2020. Another 0.3 percent benefit changes and how that's offset by the Dr. Bull and other face limit leverage. So for example $6,000 to Dr. Bull this year is worth less in two years from now as healthcare costs continue to escalate. So that drives benefit leverage. If we don't change the plan designs at all we would expect a greater portion of the company and every workload of premiums as opposed to pay through member cost sharing. So the benefit changes tended to offset that but not completely. That's about a 0.3 increase to the premiums. Finally a couple of items administrative costs are up this year and that drives about a 1 percent increase in premiums. We're still at 7 percent overall which is a great number. And finally taxes and fees I talked about there are some big increases there. It's driving about 3.2 percent of this premium increase. Again the biggest one is the health insurance tax and federal level coming back. That if you're following along and the increase is really quick from all of the patient you can get to the 18.5 percent for all of those items. So our 5 increase with 15.6 is lower than that. The reason for that are the initiatives that Blue Cross has in place to try to lower those numbers. So we continue working closely with our government to drive better discounts to drive better rebates and those efforts this year will allow us to decrease the rate by 0.9 percent. So earlier about some of the programs that the Blue Cross has in place with OneCare. Also with the lab benefit manager the voluntary home confusion program. Those sorts of things and that as well as some system enhancements gets us to an additional point to work because of OneCare 1.2 percent because of all these other initiatives. So all together we're increasing premiums by 2.5 percent due to the initiatives that we have in place. And quickly I also want to go through kind of the drivers. So when we think about really what's driving that increase 10.9 percent is due to increases in health care costs and that's almost entirely driven by all these other things. One is especially medications and I'm talking about both of those that flow through the medical benefit that I discussed earlier as well as especially medications that are part of the retail prescription benefit. These life saving drugs are extremely expensive. They make up almost all of the pipeline at the farm and it's extremely important that you provide access to these drugs for our members. They may be quality of life. They can cure previously curable diseases. So here's a case where affordability is sacrificed because we need to make these drugs available. We need to make sure that the access is there. Especially drugs around about 8 percent of the increase altogether is a very big number. About 2 percent is driven by preventive services. We are very excited about that and we want that making efforts to make sure that that continues. We're working closely with one care department to make sure that members are receiving the preventive care they need. We're also working with them to close gaps in care. We see these as positives even though they are driving two points of the rate increase is a very long term. This is going to improve quality. It's going to reduce costs. It's a goal that I think we all share. Beyond that we have some other health care costs that are almost entirely offset by the Blue Cross initiatives that I talked about and we're really left with just the 3.2 percent for taxes and fees and the 100 percent for administrative costs going on. That gets us back to 15. At this point I want to direct your attention to exhibit 19 new exhibits and I'd like to suggest to everyone following along your binders can I make your lives easier 19 and 20 and turn to exhibit 14 because we're going to kind of use them You should bring 18 along as well and we'll just save some flipping around the instructions through the letter Thank you Please describe what exhibit 19 reflects. Yes exhibit 19 is a summary of the recommendations of the Lewis and Ellis report essentially a summary of whether we agree with those recommendations or if we continue to propose something different And does it reflect additional Blue Cross proposed changes to the rate that have occurred since you filed the initial filing? Yes it also reflects certain items that were proposed during the questions and answers To make sure everyone is on the same page could you just point to the columns in which the L&E information appears and the Blue Cross proposals appear? So we have moving from left to right we have a description of each factor we have a column for the assumption that was originally filed Next to that is the Lewis and Ellis recommendation The next column to the right is the Blue Cross proposed factor and finally the last two columns show an impact versus file we've captured the L&E recommendation in the first of those columns and in the second we've captured the impact of the Blue Cross proposed rates And did you prepare this document and to our oversee its preparation? Yes that's right What is the average rate increase that would result from accepting Lewis and Ellis' recommendations as shown exhibit 19? Lewis and Ellis recommended a 1.4% rate increase plus or minus any new information that is received relative to unit costs and by that I believe they mean the hospital budget proposals that were recently submitted And what does exhibit 19 show as the average rate increase if you were to adopt, if the board were to adopt all of Blue Cross's proposed adjustments reflected 14.3% to 14.5% So is that the average rate increase that Blue Cross is in fact requesting? Yes Not with 15.6% Correct we do accept several of the Lewis and Ellis recommendations and as a result that figure has come down to 14.3% to 14.5% You anticipated my next question Could you identify on exhibit 19 the Lewis and Ellis recommendations that Blue Cross agrees with? Yes So the ones that are agreeing are recommendations that we flat out agree with for the AHP morbidity impact Lewis and Ellis recommended a 0.3% decrease in file rates and while we calculated something slightly higher we agreed that their recommendation is reasonable so we agreed to move to the 0.3% reduction from file rates We agree with their recommendation on the impact of selection so we moved that factor from one place to another within the filing with no impact on the increase we have no problem moving that to where they instructed us to do so Finally for the high cost member program information has come out since the time of filing that indicates that the charge back for that program will be less than what we put in the filing so we agreed to use 0.25% for the charge back for that high cost member program that appeared in our original line Finally there's a blue line which is to consider the second line down from the top to consider cost trend from 2019 to 2020 we agree with Lewis and Ellis that that information should be considered and we have calculated what the impact of submitted hospital budgets would be on the file rates What was Lewis and Ellis' recommendation with respect to that item? The recommendation is on the bottom of page 24 of Exhibit 14 that is if updated information about unit cost trends or the time of the board order Alan he recommends updating the assumed unit cost trends in the 2020 pre-project calculations Did such updated information become available during this process? Yes, since the time of filing it has been the last several weeks as Vermont Hospital has submitted budget proposals Can you look at Exhibit 18 and explain what that shows This is another document prepared in my direction The top box with some of the yellow highlighting which is just for use of reading summarizes the commercial rate requests information that we were able to take out of the hospital budget proposals The bottom box with the green headings is a calculation of the impact of those commercial rate proposals on rates on both medical cost trends and on rates So we have a number of columns here we have a column for data file which gives you the 15.6% rate increase we've been talking about Based on Lewis and Ellis' one of their very first inquiries identified a few kind of graphical errors in our unit cost trends spreadsheet when we fix those there's a very slight adjustment upwards so we include that as a baseline We then included information on Vermont hospital budgets that's submitted and there's a footnote that says we also consider any finalized New Hampshire contracts that have occurred since the time of filing I'll note that those New Hampshire contracts were in its downward direction so that serves as a partial offset to the hospital budget proposals being hired and anticipated So if we were to just accept the hospital budgets that is submitted will be a half percent increase on rates You can see that in the right-most column of that particular chart Finally, we have a line that reads with submitted to hospital budgets being reduced by 0.4% 0.4% has been actually fairly insistently over the past few years that the board has ordered with hospital budgets as opposed to the original submissions So we you know the board in deciding this matter I'm sure has a strong opinion as to what your practice would be relative to hospital budgets this year So we've supplied you with the math here and we're confident that your order will be well aligned with your intentions as to hospital budgets This is a range of 0.3% 0.5% So does that represent your best effort using the information available to take up Lewis and Ellis' recommendation to update the assumed unit cost trend in the face of new information Yes, that's correct Back on exhibit 19 there's an orange line called changes to risk adjustment Could you explain the information reflected in that row? Yes, so Lewis and Ellis on page 25 of their recommendation makes three recommendations relative to risk adjustment We agree with all three of those recommendations We intend to follow those However there's a fourth recommendation that we feel is missing from their analysis They asked a question and it disappears in exhibit 4 pages 3 and 4 where they posed a question to us So members in groups that are no longer women with gross wouldn't it be reasonable to assume since the overall group market actually increased very slightly from 2018 to 2019 wouldn't it be reasonable to then therefore assume that these groups move to MVP so therefore there would be a risk adjustment impact for that membership In this response we agree with their assertion that makes sense to us The result of that is that these groups are actually slightly less healthy than the typical MVP member So therefore the risk adjustment transfer again is the relationship between the two characters So if MVP is very slightly less healthy that relationship becomes a little bit closer together and the risk adjustment impact is a plus 0.2% So we believe that based on that Q&A we agree with the L&E analysis and we've expected that 0.2% to be part of their recommendation as well So that's reflected in the impact versus file L&E suggested 1.4 for the three things they recommend that we agree with relative to the risk adjustment We've done that calculation we actually get minus 1.5 But then we have this plus 2 for the recommendation that it didn't make its way into their opinion which moves this from minus 1.4 to minus 1.3 I'd like to turn now to medical utilization trend the top line on exhibit 19 Yes Explain what's reflected in that row of exhibit 19 Our originally filed medical utilization trend is that testified as 4.1% L&E recommends a move to 2.5% before cost containment initiatives which I believe is analogous to a 3.4% trend before cost containment initiatives So does the 4.1% L&E propose trend is that before cost containment initiatives? That's before cost containment initiatives after it's 3.2% Okay L&E disagrees with this particular recommendation Explain why? Yes The bulk of L&E's argument has to do with a concept called curational anti-selection and L&E is arguing that we fail to adjust for curational anti-selection I disagree with that We adjusted in a couple ways One is any groups that left us we removed from our trend analysis We also made aging and benefit richness adjustments to normalize over the full time period so that we don't pollute our trend analysis with this impact What curational anti-selection is is essentially that a group of people choose to use Blue Cross at the beginning of a series of years Those people over time may develop medical conditions while they're with Blue Cross and in the event that they do so they're much less likely than other people to switch characters to move to MVP to be specific So we agree that that's a factor It must be normalized for We believe we've done so appropriately As part of the Q&A L&E asks some questions about risk adjustment Is there another way to adjust for this Different from what we did is to adjust based on risk scores So we did that work, it appears on the L&E opinion on page 9 and we're left with trends utilization trends that are native Now that contradicts everything we're seeing on a year-to-year basis That conclusion didn't make sense to us and in fact L&E agrees that part of the reason we're seeing this is due to coding efforts So we further more performed an analysis to show what we believe the coding growth is in Vermont L&E disagreed with that is that we immediately need to look harder to see what is the right balance between what portion of the risk score increase is due to coding growth and what portion is due to people actually getting less helping Again, that's way back in section 4 of the binder So in section 4 so exhibit 4 I should say page 3 at the top of that box that I'd like to discuss we view coding growth as being perhaps as high as 7% in Vermont If that's the case, we end up so that's 7.3% that's in the box at the top Rightmost column next to the last row 7.3% If we believe that that is 7% coding growth and we think that's true we yield utilization trends 9.3% which is just as unbelievable if you will as the negative trends that we saw that we would be assumed no coding growth whatsoever L&E suggests we need to strike a balance between the two so we did some further work to do just that there's a report that's been published by Milliman which is a very well-respected actual consulting firm that suggests that even in the absence of specific efforts to improve coding and those specific efforts might be things that take place within an ACO for example as providers start to get paid on the basis of how they're performing relative to expectation risk adjustment becomes a very important thing so if we're trying to compare provider A and provider B we need to take a look at does provider A just have a sicker provider B if so it wouldn't be fair to judge them on the same number you need to risk adjust so as providers start to get judged based upon their performance and risk adjustment is part of that coding tends to get better we've seen that in Medicare management across the country and that's something that's true of any sort of payment reform initiative but let's set that aside and let's look at what a typical coding growth is even in the absence of those kinds of efforts because of things like new EMRs a carryover effect on for example Medicare advantage penetration is on the rise in Vermont and we expect that to have some carryover elsewhere within Vermont Milliman suggests that one three percent is a typical coding growth number so let's take two percent it's the middle of that and I'll ask you to I apologize for asking you to follow along with Matt early in the morning but if we take two percent and plug it into this chart for coding growth instead of the seven point three that's a difference of five point three percent the bottom number of the trend and I'm looking at the closed cohort column by the way closed cohorts the reason I'm doing that is because a closed cohort kind of takes all the use and outs out of them so we're looking at just this closed cohort obviously is aging so we adjust for that we normalize for all the things I talked about if we change coding growth to two percent the bottom number also comes down by five point three and yields four percent four percent is extremely close to the four point one percent that we proposed so we're using an entirely different methodology and it's resulting in extremely similar utilization trend beyond that I'm flipping back to the Lewis and Ellis opinion Lewis and Ellis is the service of performing a methodology that we would be unable to perform ourselves they looked at the overall market trend by combining our data with MPPs and what they can do on the top of page ten is that the twenty four month market wide estimate of four point two percent is substantially similar to the previously stated Blue Cross on the estimate of four point one percent that estimate is found like two pages earlier on page six that's the Blue Cross two year average four point one percent which is the average trend from twenty sixteen to twenty eight so we have yet a third methodology completely different from the other two methodologies yielding four point two percent based on the Lewis and Ellis calculations now they go on to say that the thirty six month estimate is materially lower than the Blue Cross's observation of three point one so again on page six we can find three point ones at the bottom of the chart on page six it's the three year average the difference between the two year average and the three year average is the inclusion of the year twenty fifteen to twenty sixteen so Emily is using this to say okay these long-term trends are much different so therefore there's durational anti-selection that's polluting it however they only become different when we start to include a year twenty fifteen to twenty sixteen in which Blue Cross experience very in fact I think a membership one very slightly up and risk adjustment which is Emily's indication that we're getting less healthy our risk adjustment transfer went down from twenty fifteen to twenty sixteen so in other words there was no movement of members away from Blue Cross in fifteen to sixteen there could not have been durational anti-selection from twenty fifteen to twenty sixteen I therefore disagree with the Emily conclusion that this is indicative that we've been indicative of us not adjusting properly for durational anti-selection again because when they look at the periods of members who are leaving Blue Cross from twenty sixteen to twenty eighteen Emily themselves include that their market-wide estimate of four point two percent is substantially similar to ours of four point one percent so now we have three different techniques that arrive within point one of each other centering on four point one percent so we we believe that Emily's concern about durational anti-selection is correct but we believe that we adjusted properly for that effect and that our answer is the better answer Mr. Schultz can you briefly describe what durational anti-selection is? Yes, so I think I did that a little bit earlier so that's if you have a population as that population develops medical conditions over time they're less likely to leave a certain carrier than a healthy member might be thank you take a look back at exhibit nineteen yes the fifth row is labeled individual mandate morbidity impact correct and that's another area where you disagree with Lewis and Ellis, right? That's right. Could you explain what's reflected in this row here and the reasons for your disagreement? Yes, I'm just looking for okay so L&E described their rationale on page sixteen of their opinion and there's a couple pieces of here with which I disagree but their last sentence of the whole of my individual mandate is about halfway down the page notes that L&E's expectation is that most numbers would leave most numbers who would leave the market due to the repeal of the individual mandate will have already done so in 2019 first of all I disagree with that expectation for the reason that Vermont law changed in 2018 when we were looking at this last year the legislature had passed law and advocated Vermont individual mandate with a penalty to be determined in 2019 that penalty has been determined to be zero so I believe the membership will continue to leave in 2020 due to the lack of a penalty and that belief is augmented by some of the comments that I read on this reply that some healthy members would be doing just that so beyond that let's just say that L&E's right now nobody's going to leave in 2020 what then can we conclude the bulk of L&E's argument on page sixteen has to do with what happens to members who have left Blue Cross or will continue to leave Blue Cross I want to note just to clarify the record on one thing the first sentence of the third paragraph on the school that reads that it is the company's position that whether these members left for MVP or left the market entirely is irrelevant to the rate setting for Blue Cross that is not an accurate depiction of our position our position is that if these members are going to leave in 2020 then it is not relevant whether they went to Blue Cross or MVP in 2019 what is relevant is that we expect them to leave the market in 2020 we completely agree that if members move from Blue Cross to MVP there will be a risk adjustment impact so I don't want to leave the impression that we don't agree with that we certainly do L&E goes on to argue that for members in 2019 who were observed to leave Blue Cross because again the overall market went up the individual market increased to 18-19 therefore these members must have gone from Blue Cross to MVP if we assume that's correct we also have to assume that's correct of all other individual members not just this small cohort of very healthy members so if we accept L&E's argument that these members moved from Blue Cross to MVP and there is therefore a risk adjustment impact we can calculate what that impact is we know what these members' risk scores are because they were all with us in 2018 in doing that math we calculate that the risk adjustment transfer would decrease because the individual members not just the healthy ones but all of them moving to MVP are less healthy for a different population risk adjustment goes down premiums on our side have to go up that would have a plus 1% impact on premiums so if we take L&E's arguments at face value the plus 0.5% that we have here should be a plus 1% we're not suggesting that's necessary we believe that the half percent will be sufficient to understand the mathematical conclusions of L&E's argument as you consider this item finally Mr. Schultz could you look at the last row in the main box on exhibit 19 that's labeled newborn morbidity adjustment yes first of all what does that term mean so that has to do with the fact that babies will continue to be born in Vermont and we have to account for that can you explain what's reflected in that row there and the reasons for your discovery on this point yes so this is addressed on page 17 third paragraph the bell needs to be and I think it's very well summarized they noted that in the course of L&E's review it was discovered that the calculation this has to do with demographic shifts does not reflect the impact of newborns born in all of the plant here so we do expect continued births in 2020 they noted that we estimated that if we change our methodology to reflect the newborn's claims go up by one six percent however they also noted that there would be an offsetting impact due to additional premiums that we would collect and changes in risk adjustment I agree with that on that but they did not calculate the value of those offsets in their opinion neither did they ask about the calculation of the value of those offsets since the time of the L&E opinion was issued we have performed those calculations what we found was that the premium offset would be 0.2 percent it's not surprising that that's a small number recall that we're on a family tiering structure in Vermont so really it's only the first child who's going to generate additional premium we also don't charge additional premiums for newborns for the first two months of their life so if a newborn's born during the year the premium offset is not going to fully offset the claims impact finally for risk adjustment and consider again risk adjustment is a comparison of the two carriers so as long as there is no change in the relative birth rate between Blue Cross and MVP as we move forward the risk adjustment transfer is a comparison of the two so as long as those relative birth rates are the same the population curve is going to remain the same the transfer amount is going to remain the same so our calculation of the offset is 0.2 rather than 0.6 that L&E implies without actually doing the calculation we therefore are proposing to include a 0.4 percent impact for newborns which is different from the L&E proposal with Blue Cross and Mr. Schultz that's also different from what Blue Cross had originally proposed with respect to this factor as L&E noted we had not included that in the original filing and that was discovered during the course of the Q&A back for would you please do exhibit one page nine section 1.8 which is the section of the actuary regarding the statutory criteria yes statutory criteria oh I'm sorry actuary on the memorandum yes yes yes thank you so to summarize in your professional opinion are the proposed rates very quick no they are not are they excessive no they are not are they unfairly discriminatory no are they reasonable in relation to the benefits provided yes they are are they unjust, fair, inequitable misleading or contrary to law no they are not are they affordable while promoting quality care and promoting access to care and do they protect solvency they do now to wrap up how do you understand the relationship among that last group of criteria and by that I mean whether the rates are affordable whether they promote access to care whether they promote quality care and whether they protect solvency solvency is really the framework upon which those other criteria can't be built the reason I say that is that in the absence of solvency and in solvency we cannot have affordability we can't have access to care we can't have quality care the reason for that is that if you're in a state of insolvency providers are no longer receiving the payments from the insurance company that they were promised so they keep their doors open they are going to have to make some very tough choices to tell to whom they provide care to provide those are going to have detrimental impacts on access to care and on quality care affordability is also impacted because many providers can turn to the policy orders to pay for these services that they need and are being provided so that would be far less affordable than the insurance that they're purchasing solvency is therefore really the underpinning of these other factors Mr. Schultz you mentioned earlier in your testimony that you read the public comments that the board has received during this proceeding and as those public comments reflect many providers struggle to pay for their health insurance in that context how are you able to conclude that these rates strike that appropriate balance among affordability access and quality so I conclude that because we have to assess those things on the basis of the community we can't do it on the basis of one individual because I can't provide a rate for one individual based on the structure that we're provided here in Vermont law I can't provide an affordable rate for the healthy 30 year old couple who's not going to use a lot of services that's different from a rate for an unhealthy 60 year old who might have several high cost medical conditions I'm not allowed to rate those things separately we've had a very long standing ideal of community rating in Vermont for many decades so the rating must be done at the community basis when I think about that we have to consider does this reflect quality care does it reflect access to care and does it reflect affordability and these rates strike the best balance available among the three for many reasons that you can find in the record most importantly is again this idea of the community it's a community rate we have kind of three pieces to the rates here one are taxes and fees these are things that are outside of our control they have to be included in the rates we don't really have any choice over those things second we have what I called earlier the cost of insurance and how can we think about the affordability of the cost of insurance well we know based on federal MLR and the loss ratio of guidelines that the cost of insurance is considered to be unaffordable if the MLR falls below 80% in other words if you're spending more than 20% on the cost of insurance insurers are required to submit refund checks to members because that is not an affordable amount Blue Cross has done a calculation that is included in this filing it's on page 98 of exhibit 1 and it shows the federal MLR calculation is projected for this filing it's 91.2% in other words Blue Cross's cost of insurance is 8.8% that's less than half of what the federal government and what the online and adopting those federal standards has to find as an unaffordable cost of insurance so we're very proud of that that leaves us with kind of the bulk of it which is the claims and again we need to think about the community for every nine Vermonters for whom they're not really using a lot of care and they don't get the benefit they don't get the return on these premiums that they're paying in there's their neighbor who has a high cost medical condition and it takes the premiums from all 10 of those Vermonters to cover what can be very a very high cost of care for the one same person so on a community basis we need to look at these and we believe that they strike the best available balance between these factors that are in tension between access to care and affordability thank you Mr. Schultz this concludes Mr. Schultz's direct examination Mr. Schultz I'd like to call him a bottle time for a minute thank you Mr. Schultz just a few good morning Mr. Schultz Mr. Schultz I'd like to start off by thanking you and what I'd like to thank you for is talking loud that's a huge difference but the first time you're my favorite witness you're quite welcome the first time I understand every word questions do you all agree with Ellene's risk adjustment methodology yes what is the difference between the risk adjustment methodology you all use the risk adjustment methodology they're using so two things one is after the time of filing we learned that the final 2018 risk adjustment amount would be so Ellene recommended that we consider that in building our projection for 2020 that was worth about $3 million that was a difference of $3 million the second thing that Ellene which we also support is that they were able to gather data in both carriers so that this type of analysis is not available to me as I don't have access to MVP's information Ellene does have access to that and they were able to assess how the model changes the risk adjustment model changes from 2018 to 2020 would impact the risk adjustment that added about another $3 million to the transfer we expect to receive so the Ellene risk risk adjustment methodology would reduce your risk slightly that's correct and Congress would raise MVP's rate because it's a zero sum system well I don't know what MVP filed so I can't really answer that question but yes it is a zero sum system you said something about a factor that you originally had which was 0.5 which you reduced to 0.25 and I forget exactly what that concerned do you remember? yes I do so that's the charge for the high cost risk pool so this is a national program that CMS put in place because there are a certain very very few claimants who can have claims of up to $20 million so to really be able to spread that across something that makes sense you can't even do it on a state level you have to do it nationally so this program includes a charge back to participate in the ACA CMS had put in their publication they do not expect that charge back to exceed a half percent of premium so that's what we put in our filing since the time of filing again the new information came out to say what that charge back was in 2018 Ellene took that into account since the 2020 we agreed that we can and should use that new information and we agree with the recognition and so is that the there's a 0.25 factor is that to pay for claims of above a million dollars? yes now on a national portion of claims above a million dollars yes so if you had across that claim you would get some of that back and so that would be a little less than 0.25 correct but do you anticipate a claim over a million dollars in 2020? no have you had claims over a million dollars since 2014? no ok you also said something to the effect that there's a certain methodology which you thought didn't make sense to apply that under that methodology a type of trend was negative could you explain what trend that was and what methodology produced that negative trend? I believe you're talking about if you adjust all claims experience if you normalize it for changes in risk score without assuming any coding growth at all you end up with an assessment that trend is negative ok and you think that's unrealistic? that's right that's because it's unrealistic to believe that there is no coding growth at all ok and why is it unrealistic to believe that there's no coding growth? coding growth has been observed kind of nationally I cited a millimount study that suggests that 1 to 3% is a typical amount of coding growth in the complete absence of any initiatives for risk coding specifically so based on that national study 0 is not within their range of reasonable results could you explain what you did last year what you assumed last year as to what the effect of having no penalty for the individual men that it would be? yes last year we observed a study that was published by the Green Mountain Care Board that suggested that there would be a 1.6 4% impact we did some analysis that admittedly we didn't have all the same data that L&E did when they did that analysis so our analysis was necessarily simplified and we agreed with that range so you assumed that what would happen and you assumed that what would happen to your members as a result of the zero penalty for the individual men? we assumed that some members would leave and the result would be an impact of about 2% on claims did you assume that all the healthy members all the people that did not use their insurance who were unsubscribed were to leave is that right? yes and if you're honest how many assumed essentially the same thing their methodology was very different but they arrived at a similar result yes so you both assumed that they were right they arrived at a similar result after our compliment now he's facing so you both assumed that the range should go up about 2% yes that's right and in fact what actually happened last year? we observed that not a lot of these members left us it looks like about 0.3% was the impact rather than 2% okay so are you reducing then right this year by 0.3% that is 1.7% no we're reducing it by we're reducing the file rate by 1.2% I speak that way because the Green Mountain Care Board ordered a reduction from our file rate last year for that assumption we're reducing the file rate by 1.2% rather than 1.7% as we believe that some members will leave in 2020 actually in light of Vermont passing a $0 penalty did you consider the possibility that the money be wrong that people just by the elimination of the zero by the elimination of the penalty yes I was influenced by the results to lower expectation to something much less than 2% I mean the penalty wasn't very good to begin with whether I wouldn't say that you have you have to be aware of any commentary by the industry or by actuaries to the effect that the individual mandate penalty just does not have cannot recently be expected to have a meaningful effect no just the opposite I've read commentary that it is expected to have a very meaningful event do you remember what the original individual mandate penalty was I don't that's right that sounds like the right answer however it increased significantly after that on a year-to-year basis it was much higher than that in 2018 but you will concede that not anyone is necessarily influenced by the elimination of the penalty absolutely could you explain to the board what you originally assumed would happen because to your members because of the continuation of the AHB market in Vermont in 2020 for this filing we originally assumed there would be a 1% upward impact you originally assumed that because of the continuation of the Vermont AHB market 1% of the attitude is correct and now we know that the AHB market is not going to continue in Vermont then isn't it reasonable to expect that if you say that the continuation of the Vermont AHB market has 1% of rates that if the market is not going to continue it's not about that 100% that's actually not reasonable okay could you explain that yes I can to do that I'm probably going to have to touch on confidential information which document are we talking about it will take me a minute to find that there was a Q&A without me about this particular you said that Mr. Attorney Officer in the interest of time I have a lot of questions okay it's a good question you've testified that the rates it's proposed by Blue Cross are not excessive in that order unfairly discriminatory correct okay and when you determine whether a rate is excessive in that order unfairly discriminatory you won't look at whether or not people can afford those rates correct that's true so you're not testifying that the proposed rate the interview is excessive not excessive in that order unfairly discriminatory and the fact that it is affordable I am testifying that it is affordable and it strikes the best balance between affordability and the other factor okay well the world is determining what strikes the best balance but you're not testifying are you that the rates which you are testifying upon not excessive in that order unfairly discriminatory are affordable I did testify yes what is the basis what research did you do to determine the individuals for this rate so if that could be a question the final question I answered in my direct testimony which is the rate consists of three parts taxes and fees that are things that are outside of our control the cost of insurance which the federal government has defined is not affordable if it is greater than 20% our cost of insurance is 8.8% it's a big difference from 20 to 8.8 and finally affordability needs to be considered on a community basis and as such I'm required to develop rates the way that I do on a community basis you are as I actually you look at the ASOP standards at any of those standards refer to affordability and you're not testifying that the NLR rule defines affordability in any way I think it does define affordability for the cost of insurance that's different from the full premium rate but I do think it does define for the cost of insurance you believe that the NLR rule uses the term affordability to define that it doesn't that's one of the questions I have thank you how many take I got scolded for not taking breaks yesterday I was just convening back here for board questions for sure okay so we are back on record a case of the months of 2020 just go down we're all starting to go down to lunch we have questions for Mr. Schultz yes, thank you do I need the mic or can everybody hear me you guys can hear me okay I can project pretty well thank you for coming this morning I wanted to start with some questions around a trend that you mentioned which was the about 7% increase in mental health visits did you talk to us a little bit about that trend and what you think is driving it so we think that's a movement of care so actually driving less inpatient care that's been moved more to a professional setting so you can see pretty big increase there that's the idea of the 0% inpatient trend which is great so we already have it and we have some evidence of that moving to a more appropriate setting so so that decrease that inpatient is reflected in the 0% trend thank you I also wanted to talk a little bit about your cost containment efforts this year I was quite excited to hear about some of your new initiatives around cost containment and to see that you had indicated an offset in your trend related to those if this is more appropriate to one witnesses please just let me know but could you speak a little bit more in depth to the shared savings arrangement with the lab benefit manager in terms of what the shared savings arrangement actually is yeah I'm hoping Andrew might have some of those details we'll follow up with you I will direct that question to you no that's okay you also talked about a convenient care program again this may be more Andrew's line of questions I can hear it at a high level so that's the home infusion that I discussed so it was completely voluntary and rather than going into the facility for infusion members can have that sort of this performance they're at home that has a significant cost savings for a member basis is about $50,000 so it can be impactful we're doing on a voluntary basis and we just haven't seen much uptake of folks taking advantage of doing that in their home we will continue to look at that program and that's something we'd like to think about how we can expand that in the future and so that would be moving from the outpatient hospital setting to home correct and I'll direct ACO for the big questions to Andrew as well um I did notice in your filing that there was no assumptions related to the ambulatory surgical center is that something that you can speak to yes I can so that at the time of filing I don't believe the new center was even approved they were approved but not yet okay so as of now my understanding is that we have completed contracting for one particular type of service obviously we have no means of really estimating utilization um and while there will be savings for members choosing that site for their care it's really not likely to be material to this rate by them for 2020 and could you explain that um why would it be material so we believe the number of services is going to be fairly limited compared to the like the entirety of the claims volume so even if you're talking about a decent number of savings of you know several hundred thousand dollars that's still really not going to move the needle when you're looking at $30 million of total spent testified earlier that there was an increase in the individual market from 2018 to 2019 overall is that correct that's my understanding yes also testify that there was a .3 percent decrease related to the individual mandate in your work of business is that correct yes that's on the basis of the modeling we perform so we were looking at it kind of modeling what the size of the impact might be by looking very specifically at particularly healthy families, particularly healthy subscribers so of those individuals we identified which came to a measurable .8 percent claims impact portion related to .3 percent claims impact have already left as of 2019 according to your modeling no we can actually observe those members didn't leave whether they left because of the individual mandate or for some other reason is something to put into question so you don't survey the members that leave to find out where they went necessarily correct except that if a member passes away sure we assume that they're 65 so there's some limited knowledge we don't survey to see exactly what they found where they went so they could for example have lost income and joined Medicaid yes thanks in 2019 did your company offer association health plans yes and do you know approximately what the membership is close to 6,000 and do you have any idea where those members who are currently in 2019 in those plans moved from yes we do and could you explain a little bit about where they moved from yes so both of them came from Blue Cross smaller plans in 2018 there were I don't have the splits at the top of mine but there were some members who joined from MBV as well a limited number of small groups who previously had not offered insurance to their employees at all and then we had a small I believe meaningful chunk of membership that came from signal level funded products and other self-funded opportunities that are available to small groups thank you and so those members will continue to be your clients until the end of this year so you testified earlier that you know that your rates and the prior rates were inadequate because the RBC levels went down is that right yes and RBC levels are a range within a range of groups by the department of financial regulation is that correct but within that range your company would target a specific level that meets your comfort level do I have that right sort of I mean so within the new range that is in order by the FR the consultant prepared that at a 5, 690 percent that's the optimal level in average in other words the level where we're at least likely to fall outside of the range within the next year but in the previous range yes we don't have to speak to because some of that could be confidential but we don't have to use a number but in the previous range did your company have a targeted level that you wanted to maintain so you also testified earlier that you included the 1 percent affordability reduction into your 2019 trend is that right so what I mean by that is that when I'm setting rates from an actuarial perspective I need to come off of what I think the cost is going to be so that 1 percent affordability reduction it kind of never really appears in my work so what I mean by that was we look for the trend from 2018 to 2019 the 2019 premiums themselves include that 1 percent affordability reduction but I don't include that in the work that I do so that's a difference it causes an additional increase from one year to the next are you familiar with any changes that your company made in 2019 to its business model 1 percent affordability target so I believe these are the things that we listed in here as we're continuing to work on so it's our ongoing collaboration with one character once from the time of the order to actual 2019 that gives us about four months to identify and try to implement something that's going to be impactful so that's really a time frame where we can accomplish something like that so my answer is that we continue to work that we already had in place and we continue to look for opportunities really frankly over the 2019 to 2020 in quick wins we might have in 2019 as they really do cost containment and then things like the lab as an manager is an opportunity that we identify now that's a good example of one that we try to work as quickly as we can to get that up and running couldn't do it by January 1, 2019 but that will absolutely have an impact on 2020 if something included that here Does your company do outreach to current clients? Yes And does your company work with current clients to choose what product they would enroll in the following year? Yes, it will be there Thank you Thank you So Welcome My first question has to do with the actual memorandum having to do with your administrative expenses and I think that's on page 52 of your timeline So rough numbers here I think you said that the administrative expenses were about 7% of premium And so if you do the simple math here you take the total administrative expenses of 79 million dollars and divide that by 7% you come up with a million dollars of premium which I don't think is what we're looking at So my guess is that this my question is is this an estimate of administrative expenses enterprise-wide It's a very good guess So following that bouncing ball I'd like to go to Exhibition 21 Page 21 Can you see the exit? Pardon me I am in Book 2 is the administrative expenses and I see that there is a net there which is the premium received from the uninsured population 33.4 million dollars I think that I'm guessing that the way that that's been done is to kind of take the uninsured to separate the uninsured population and assign them those revenues to their administrative expenses in order to get a net number here for the insured population and that is the 32 million 087 which you parry on this part of your annual statement as well as going if you have a day run you don't need to turn there but it's also the exact same number that's parried with your friends my question is do you actually separate the cost per member per month or cost per covered life of administration for the insured population from that of your uninsured population because they are significantly different Yes, so we I think Ms. Green will be able to speak to this in a lot more detail than I can but that's an exercise rather than an actual burial exercise so we use the results of that accounting exercise that you described in the screen and speak to as if you are actually burial exercise Okay, so how do you then actually get to the 79.7 million dollars? So that figure is that that's the total enterprise wide administrative expenses in terms of why those numbers differ from what's in these exhibits but that's a great question for Ms. Green Okay, so I just I can't find $79 million anywhere in the the so speaking to the actuarial number last year that number was $75,634 $75,634 $934 and this year it is that you can see the 79 million $712 that's a 5.4% increase for the prior year Can you explain that? Again, I think we will have more detail for you I can't tell you that there were certain non-recurring expenses related to an operating platform that we included in that number we did remove certain non-recurring in the prior year number the current year number, 2020 number in the 2018 number So the transition from 2018 to 2019 was 18% increase which seems consistent with new methodology but it does jump to a 5.4% increase in 2020 which is it is what it is but yeah so the my other question is in your responses to the non-actuarial questions it was stated that the 2018 MLR the CNS July 31st which we're close to any indication as to whether you're in good target for 2018 2018 which was 9.2.5 I don't know what that relation is going to do I do know that we lost money in 2018 so I suspect a lot of them will turn out to be higher than 30 thank you so the 5% I think you're looking at on page 52 also that's a 2-year trend projection so I just want to point you to the exclusion of non-recurring expenses that's the money that I discussed that's a $1.6 reduction so that 5% the year over year increases 2018 over 2017 to 1% that's a 1 year 2018 is 1 year is it a 2% number 2020 over 2019 2020 or 2018 is a 2-year number so in other words the trend projection we have on this page is just over 5% that's 2 years worth of money next how are you this is your favorite day right so first as we've been hearing about yesterday and today is about market share and how that's changed over time so as you testified if you cross the shows market share it's shrunk markedly over the past 3 years and in one of the documents in your filing it's referred to pricing advantage of the competitor I'm wondering if you could speak from an actual perspective what do you think is driving that pricing advantage that's a great question so I think that the bulk of it maybe even the entirety of it is that the risk adjustment program in Vermont is not even on our clients I've seen national numbers from actuaries who have looked at this who believe that it's 70 cents on the dollar another thing I can tell you is that the model is based on national data so it's going to work on average if you have an environment where providers are very very good at capturing diagnosis information both in their charts and on the claims themselves then that risk adjustment number is probably going to more to compensate for the claims impact if on the other hand if you provide an environment where the opposite is true where they're not very good relative to the average of capturing risk adjustment is going to be even worse than average across the country for that particular market in Vermont we have very low Medicare advantage penetration of Medicare advantage risk adjustment is a really big deal of Medicare advantage so carriers who are involved in that product spend a lot of time and money on provider education trying to get those risk orders to where they should be to accurately reflect the health of the population and they do that because the revenue they get from the federal government is based directly on those risk scores so they have to pay a lot of attention to it Vermont has the third lowest Medicare advantage penetration of the country and if you compare for instance risk scores in Vermont to risk scores of neighboring states if you're with me in New Hampshire for example we're about 10 to 12 points behind them on the Medicare population so this finally is in full Medicare population but for me that's strongly indicative along with the very low Medicare advantage population is strongly indicative in Vermont providers just haven't been they haven't had the need to code to the full extent as they may have had in other states so if you have a risk adjustment program that's supposed to work on it that works to balance on a national level even though some actuaries don't believe that he does that when you come to a state like Vermont with a different set of coding patterns the risk adjustment numbers just aren't going to be high enough based on some analysis I've done for internal work to think about what can we do about this or their opportunities here I believe that if we were able to get risk adjustment kind of where it ought to be or where it was an efficient to be when the ACA was passed they would eliminate most or all of the rate difference between us well that's actually interesting question so as you're losing market share and if that time continues two questions one if you're losing market share how does that impact your ability to cover your fixed costs administrative costs largely and is the deviation of the administrative cost between you and your competitor to grow and what we expect in the future and then second of all if you continue if the crossbow shield continues to lose lower risk count of your people then the risk adjustment doesn't fully one-to-one match that increased risk what is the impact on solvency and what has been the impact in the three years on your growing administrative costs and your declining solvency because of the loss in market share you put your finger on the issue I can't speak to what I think B is going to do in the future so I don't know how the relativity might change but yes if we continue to lose membership there will be upward pressure on our administrative costs we do look at membership from a enterprise Y basis when we make those adjustments in the final we don't look at it specific to QHP so but if the enterprise Y membership goes down then yes there will be an upward impact on administrative costs on fixed costs and the second part of your question is also right on the money so if we use healthier numbers and risk adjustment doesn't make up for it then yes there is an impact on our financial results and ultimately an impact on our solvency so to some degree the solvency issues that have been raised are to some degree a result of loss in market share to some degree yes okay well I guess on that I don't have some other questions for related to that as a vision for your future but I won't ask you to do that but you brought a coding group and I'm wondering I mean coding group has come up in multiple contexts now in this in this hearing and I'm thinking ahead about as we move from deeper service to caprication as we are all hoping to do as a whole parent model what happens to providers incentives to code accurately and my sense would be that actually we see coding shrinkage because if you're getting paid a capricated amount which is less incentive to code for every single item that you may be paid deeper service for how does that my assumption there correct incorrect what should I think about that interesting question I see it as the opposite so when you're in one of these parent reform type models and particularly in ACO the ACO has been doing a lot of work to kind of compare providers their contract with us is such that they've shared savings they get a check they need to figure out what to do which providers are responsible for generating those savings or the opposite if they don't meet the targets which providers were really driving that result so in typical models such as that you will see the ACO itself will do a lot of comparison of different service areas with the providers and this is a key component of those comparisons when you start to get to like really small populations it's very important to be able to assess if you have two different providers their panel might look the same but one might have a much thicker population or much more mean they both have the same number of diabetics the severity of one provider's diabetics might be much different so I understand nationally I can't speak specifically to what one parent is doing but nationally what is typically done is there is a risk adjustment component to that kind of outflow of how we take that overall result and then send it out to specific providers so because of that providers are judged based in part on active coding because if you have a population that's less healthy then you just don't reflect that in the coding that you're doing you don't get credit for it in that financial orientation whereas if you capture everything appropriately then you know you're getting full credit for it and you can feel that you're getting the right share of that saving service well that'll be interesting because we're from providers less incentive to code but I hear what you're saying I think it's an empirical question we'll see as we move that way this is actually related to Robin's question last year as we've talked about we referred to the board cut the rate request by 1% for affordability it looks like from what you described what I mean from the filing you are baking in that 1% reduction into the rebase for 2019-20 trend so it's as if there was no reduction there were no cost-shaving measures done by Blue Cross Blue Shield in 19 to 20 but then it looks like from 19 to 20 rather sorry 20 to 21 your prediction is that you're going to have 2.5% cost reduction so in fact the board wasn't too far off in an estimate of what the potential cost savings could be generated by initiatives taken by Blue Cross Blue Shield because you got 2.5% and we only asked for one would that be right? I agree with all your facts but so I just want to make it clear that when I'm preparing these rates I do so on the basis of programs that are in place so as it relates to whether that 1% is in or out when I'm coming up with 2020 premium rates and my team is helping me with that that's on a stand-alone basis all of this rate increase stuff that we do is kind of after the fact right because we're comparing what were the 2019 rates compared to the 2020 rates first I can help with 2020 rates based on programs that are actually going to be in place by 2020 and all the assumptions that we talked about step two is compare that to what happened in 2019 and calculate this percent change that's kind of a construct what I'm really trying to do is what's happening in 2020 so when the board the board's 1% for affordability was an additional 1% into the 2018 to 2019 right so when I prepared the 2019 rates last year that already had a number of cost savings majors as well and I don't remember the number I think was actually bigger than 2.5 and all those programs that were going to be in place by 2019 were already baited into rates so when the board said find another 1% you didn't say find another 1% for 2020 you said find it in 2019 for a program that doesn't already exist that's really really hard to do because we are in a competitive position as you noted and these rates are lower than ours we're already doing trying to implement everything the reason that we can it does not only reduce access to care and will result in lower premiums so if you would say find another 1% by 2020 last year we would say yes we would be glad to do that and a matter of fact we have about 2.5% additional for 2020 got it my last question to you has to do with the unit cost and utilization assumptions that you're making so in part this relates to remat and care board regulated versus non remat and care board regulated providers so what I heard today which I don't think I saw in the pilots which was interesting to me was the 51% was the remat and care board but then you broke out the non remat and care board the 51% being providers that you contract with but are outside of remat and care board regulatory process and then 15% is out of the network don't contract with directly so I'm wondering if you might be able to if you don't have it right now in front of you that's fine but maybe you can follow with the breakdown of the unit cost assumptions for those three categories and the utilization assumptions for those three categories the understanding is that there's been a growth in expenditures outside of the remat and care board review and also if you happen to know about that I'd love to hear about why you think that's happening what's driving that and what is the cost structure outside of the remat and care board review yet another very interesting question so first the 15% I just wanted to clarify a term you can mention that was out of the network so it's still within our network those providers are within our network we don't contract with them directly members are able to access those providers through blue card which is an iteration of all the other blue players playing in the country we're able to piggyback also the contracting efforts that they do in their own states this is like I'm on vacation in Florida and I break my leg and I go to Blue Cross Blue Shield network provider yes we're not a blue cross we're not a network provider and what we've seen we have a specific breakout 41 in utilization but we are definitely seeing increased utilization of out of state providers we actually saw a lot of care go to Massachusetts within the last year much of that looks like it's appropriate we have some cancer cases that are really better treated facilities in Boston than it can be here so you have some very high cost patients moving down to Massachusetts that would like a bigger driver when we go into it because that is something that we noticed in preparing this year's files we wanted to really again understand if that was what's going on there is that appropriate? Is it not? Is it going to continue to be a driver? You know the status of an ongoing driver trend so we're not assuming there's going to be continued increase because of that but we've certainly seen an increase in in care taking place outside of Vermont for this population so do you think you'll be able to follow up with those breakdowns is that a possibility? Unicost? Absolutely utilization is a little bit harder just because it's so the way we looked at that out of network carriers it's kind of embedded in all the other factors we didn't necessarily break down and say well that went on by 40% and we think that's good so essentially our utilization assumption is that everything both in Vermont and outside will be going up at similar amounts so I can't really give you a specific utilization number but I could definitely give you a constant assumption That's fantastic and that's it Thank you Good morning Just looking at your information here on page 19 of exhibit 1 of exhibit 1 when you looked at the impact of changes on benefits and you looked at you've removed claims of about $500,000 what about using a different threshold that you've used $100,000 or $250,000 I mean how would that impact and guess why $100,000 that seems to be pretty high and do you have many problems over $500,000? The reason we chose that is we looked at the distribution of claims kind of a year over year of your basis and claims under $500,000 tend to be distributed pretty similarly from year over year but then when you get to the $500,000 above mark you start to get these sort of bizarre lumps and outliers and one year we might have a handful of claims between $500,000 and $600,000 then actually we don't have any but we have a high number of claims at $750,000 so the progression is smooth up to $500,000 and it gets lumpy afterwards it seems like if we looked at $250,000 it would be like a high number too if we get claims of $250,000 it could be so one thing to keep in mind is for our re-insurance or over re-insurance we said that at $800,000 we're doing re-insurance and should we answer your other question if we change that from $500,000 to $400,000 to $300,000 it's not going to be extremely impactful on the actuary of that there will be some subtle differences but it wouldn't be hugely impactful looking at page 32 it's really interesting this impact of the enforcement of the Medicare fee and it looks like in the prior periods and I don't know how far back this goes you've been absorbing costs that really should have been occurring in going through Medicare fee it was like $2.5 million and your systems are now able to pick this up and I guess a couple of questions would be are there anything else out there like this that we can expect in the future why didn't we know about this in the past and you know it's something that the shareholders the policy holders are born and $2.5 million is pretty significant on $300 million in claims and just can you talk a little bit more to it and what happened sure it's about a point something my understanding of how this came to light is that we had a paper clerk who went to the other carrier and quickly he came back and it started differently and he did so that's what showed the light on it and it's also something we've thought about the operating platform transition to the platform so it's something we're also able to see as part of that transition that this is something that the world platform kind of felt sure on so I agree this is $2.5 million about $0.7 rates and that's happened a year over a year so it's been something that's been ongoing and just never picked up so I guess I would just question make sure we look for anything like that in the future because that was obviously something that was impacting your numbers and how did that then reflect in the new rates so you have a 0.7% reduction because it's based in your correct so that $2.5 million was in the experience period so when we project out to 2020 we wanted to remove that because it won't take place in the projection period and I agree with you we want to make sure that nothing else like that exists and we we did go through this OPT process that really went through absolutely everything in terms of how we administer the money so we don't believe there's anything else left to do in outstanding but of course we will continue to do hard work to make sure that we're painting accurately and appropriately it seems like when you're in a network of blues too that one of the blues would say hey make sure you're looking for this or hopefully you guys told everybody else make sure you know you're looking for these things so that you can capture that okay on page 37 when you talk about the fraud release you know what other I guess if you had to make an estimate how much fraud release do you think is out there if you're getting back about a percent of you know what's out there how do we get more of it you know because we don't know if it exists I know those efforts are underway we recently contracted with a national firm to take a look specifically at our fraud release and abuse efforts to see if we could get more out of this program I'd like to think and providers would say the same thing that we know there's not a whole lot of this out there but there probably is some small opportunity and we will continue to work with outside consultants to make sure we're maximizing our understanding and then on the next page page 28 would you look at the utilization trends and inpatient at zero percent and the past three years it's 1.5% 0.1 and minus 1.3 those are a lot of the efforts to get people out of inpatient and so we're seeing the professional go off to the 5% why wouldn't we assume that trend would continue to go down and rather than average it at zero went for the past three years it's progressively gone down and that's the intent of a lot of work that's being done is that that would be lower but the flip side we're just professional going up yes question yeah it's a good observation we applied a whole bunch of statistical methods to this so we've also produced a positive trend we've also produced a very slightly negative trend some of the numbers were larger really if you take a look at an average of all the ways we've looked at it it really honestly is very closely about zero so I think zero is a good answer for their opinion agreed to zero is a good answer for an inpatient trend do you have any further read on 2019 that's going on? I'm afraid I don't we haven't really talked about the ANT before and we did bring that up obviously last year in discussions of the 2019 assuming you would be most likely getting $17,000,000 what's the confidence level now that you will get that and how does that reflect in your CTR and passing that through so I guess how do we look at this $35 million and before there was a month or two that we received but now we're getting close to we're getting close it's not yet a done deal but we will be filing that surely in order to receive these funds in terms of how it's considered that is on the record and I think we'll be testifying this directly then I can probably expand upon my answer to your question but I'm looking at page 128 of our original filing so it's exhibit 1 page 128 and it's part of the chart as in the middle of the page you can see that we are improving the $17.9 million which means the $8.7 million expected to be received during 2020 as part of our movement to get into the range that's been ordered by BFR so we looking at that kind of the outshot of this is that by using those AMT credits we don't have any to increase CTR to try to get into surplus if we were trying to get to the same position by using CTR we wouldn't have any CTR of 7% kind of a scary number but because of the AMT credits they are able to be included in our plan to get into this into the RDC range as well and then because you're on this page this may be some important for Ruth but can you, the RDC position as of December 31st was $4.95 and what was your target range at that time it was $500 to $7 some efforts we're going to do internally and outward facing the biggest one is we need to find a way to really do effective provider education it seems pretty clear that we have a much less healthy and far older frankly population than our competitor so if we're able to make coding better for everybody even if that also impacts the competitor that's going to reflect itself on a much larger risk adjustment number so we're still kind of working through a lot of the details of our plan to tap but one of the main components is TESTV and education and outreach to try to make sure that all the appropriate information is captured these efforts aren't they're not maximization efforts it's really optimization to make sure all the right conditions are captured and none of the wrong things are captured so it does go both ways but we think looking at the data that these efforts could be very very impactful naturally it's going to take a little while to kind of change the way the providers are tracking information in the state so we don't think there's it's going to take years to kind of get to where we need to be and we'll try to accelerate that as best we can but that's kind of enough okay my follow up I appreciate on your chart exhibit 18 we're looking at the public hospital budget and then kind of give an indication of what it doesn't accept it as real in behalf of the point and then try to backpack to actuarially value our input and that it comes down to a point three but I'm still worried about looking at things in the future when most of your presentation is about things in the past and nailing those down as solidly as you can and then projecting them forward for example in the hospital budgets 35% now of the revenue in the hospitals comes from Medicare the CHP population has no Medicare people engaged in it has no Medicaid people engaged in it and the share of Medicare Medicare has been growing as a percentage of the total almost by a percent a year so it just seems to me that it's a stretch to kind of reach forward into the future that doesn't exist yet with hospital budgets that are much different than the CHP population and I'm just wondering how deep is your dive then into those hospital budgets so the hospital budgets do all include a commercial rate increase so I'm less worried about what their total revenue target is is item of those commercial rate increases and when those are approved we find that hospitals are not willing to move off of that so that's been a really good invitation over the last several years of what the unit cost increases will be in those facilities so we I want to be clear we didn't do any analysis about what's the growing or should be percentage of the government programs and the cost shift and things like that but we would anticipate that the hospitals would have done that analysis in coming up with their commercial rate ask and that the board will do a similar analysis in deciding whether or not to approve that those commercial rate asks so the difference, the point 4 the factor that we've observed in the past again that's a factor on the commercial rate it's not necessarily the factor on the revenue target because to your point that may not affect us but the commercial rate absolutely does develop on this exhibit and past experience has shown that we this is a very good indication of what the final answer is going to be now you as the board may decide you're going to be even more aggressive than in cutting possible budgets we're less aggressive than you have been in the past and I'm confident that you'll be able to express that or to use that information in what you order us in terms of cost increases can you read it? not at this time, thank you excuse me what is your position I'm the treasurer at the CFO at Lucros will shoot a month and I've been in that position for about six and a half years what are your responsibilities in that position I'm responsible for overseeing all the financial management functions of the company including the treasury financial reporting and controls actuarial analysis as well as the premium pricing is your safety attached to exhibit 13? yes it is we'll skip over the background information what is Lucros and Blue Shield Vermont's mission and vision at Lucros Blue Shield and Vermont are committed to the health of the moderates outstanding member experiences and responsible cost management for all the people whose lives we touch our vision is very much for a transformed healthcare system in which every promoter has healthcare coverage and receives timely and effective affordable care can your view on based on your experience is Lucros and Blue Shield and Vermont's business guided by its mission and vision it is very much so is it a for-profit company no it is not when Lucros and Blue Shield and Vermont submit to file a rate for approval does that rate include any profit it does not include any profit in your role as treasurer at CFO are you familiar with Lucros and Blue Shield and Vermont's overall financial health I am familiar with Lucros' overall financial health would you please describe that for the board I would like to do that and I can refer to the ZIPP 21 in order 2 which is the 5-year history so that's on page 68 of the 5-2 exhibit 25 yes and it's the 5-year historical data as submitted by Emily as part of the historical I would like to take a few observations about the financial health of the company start with line 9 which shows the net underwriting gain where 3 out of the last 5 years we've had underwriting losses which as Paul Schultz testified earlier when we price and set premiums for the products that we offer we target a contribution of reserves of 1.5% and we can see that in the actual results of the last 5 years we've had 2 years of positive results and 3 years of negative results and the negative results have been minus 3% of premiums so instead of having a 125% contribution to reserves in both 2016 and 2018 we've actually depleted reserves by 3% a couple of other observations I've shared is our total adjusted capital on line 14 this is the statutory label for what we refer to as member reserves or in similar reports included in the records referred to as surplus that surplus has gone down 20% compared to the 8-0 and we've also seen a slight reduction in member months which is shown on line 17 added comments earlier about declining market share especially in the QHP market is developed like that and then finally I'll just point out that despite the reduction in members we still have had an increase in the total revenues on line 5 which is a function of increasing premiums and that is the function of the premiums that we insure for the market so overall the financial position of Blue Cross Bush Hill in the grand scheme of things in terms of the solvency has reduced over the last 5 years Based on Blue Cross Bush Hill do you say that the losses experienced in the past 5 years are significant? I would say that they are significant it's not unusual in health insurance to have some years where you're higher or lower than your assumed prices and premiums in the market but to have 2 years in the last 3 that were exceeding a million dollars it is unusual I will note that in the 2016 column the 15 million 492 if we were to reflect the 2018 risk adjustment number that Paul mentioned and testified to that loss is reduced to 7 million dollars but still it's significant to have 3 years with that level of loss and duplication of reserves you referred to the duplication of member reserves could you please describe briefly first what the member reserves are Blue Cross Bush Hill in the law is required to pay claims no matter what so we're going to lead cell policy to our health health plan members please promise to pay claims no matter what so member reserves this is a label to religious capital those member reserves are funds held to make sure that we can do that when Blue Cross suffers a loss such as the underwriting losses that you've just described where does that money come from it comes out from the reserves what's the importance for an insurance company like Blue Cross package reserves member reserves are a very important element of being sure that we can pay those claims no matter what there will be situations where our estimates of the claims cost in a brief filing turn out to be different than we projected if there's an increase in utilization that's unexpected need to be funded by reserves if we have an unexpected change in those which we've experienced in the past those reserves would also provide that installation if we will to we also have to make sure that there are any other unexpected events such as food pandemics or other types of costs to be incurred as we pay our members of the customer claim explain the term risk-based capital and its connection to member reserves risk-based capital is a measure it compares the total reserves that a company has to what's required so it's a measure as to whether or not insurance company has enough reserves and is that figure based on methodology from an NAIC yes it is it's a national association of insurance commissioners sets out for all insurance companies what they're required to hold for a minimum level of reserves and the risk-based capital ratio compares your actual reserves to that level and the various stakeholders in their financial strength association or the department of financial regulation that ratio is something that can be used to determine whether the company has enough reserves and are you familiar with the current risk-insured areas yes that minimum number is also included on page 68 of the Exeminence Line 15 it's called offers control level risk-based capital with that $22 million is the calculation that's dictated by the national association of insurance commissioners and then does Blue Cross have to meet regulatory requirements with respect to that overall risk-based capital measure? yes we do in February of this year the department of financial regulation issued an order and that our risk-based capital ratio should be managed to a range of 590% to 745% to the extent that we do not fall in that range we are required to submit a plan to the department to outline how we will get back within a range that are within a reasonable time frame as of the end of 2018 what is Blue Cross at the Shield of Vermont risk-based capital measure? it's 495% is that within the required range? no it's below the range what was the dollar amount Blue Cross at the Shield of Vermont reserves as of the end of 2018? $110 million if you could put that figure in some context how long did Blue Cross pay claims out of those reserves? Blue Cross did that $110 million Blue Cross could pay claims for a little less than 3 months can you put that number in context of your reserves per member? yes another way to look at that would be for every member we have about $550 of reserves at the end of 2018 please explain why Blue Cross's reserves have dropped to this point Blue Cross at the Shield of Vermont reserves have dropped over recent periods mainly due to the underwriting losses we have as I mentioned earlier three out of the last five years with underwriting losses and the reserve that comes straight out of the reserves and so that would reduce the number of reserves that's used in the RBC calculation we've also been unable to have fully funded rates over the last several years and that combined the environment of increasing utilization trend has really depleted the reserves do you have a figure for the loss in the individual on the small group for the next 24 years? yes the information included on page 68 historical data it's for the entire company in the exhibit 1 exhibit 1 the other binder of the actual reserve is on page 17 this is the exhibit that Paul provided to update but before the final 2018 RISC adjustment the calculation was included since inception this year on page 17 the individual on the small group segment lost over $30 million if we were to take the $8 million that Paul mentioned earlier it's still a cumulative loss of over $20 million $22 million and has that had an impact on the process number of reserves? yes it has excuse me the $30 million loss has depleted the reserves that's where it comes from the screen in your role as treasurer did you direct Mr. Schultz to include a contribution to reserves of 1.5% in the final grade this year? yes I did is the basis for that decision discussed in binder 1 tab 1 binder 1 exhibit 1 page 126 to 129 and also your export report which does that exhibit 13? that's correct in your view is a 1.5% contribution to reserves adequate and non-accessive? yes the memo to Paul on pages 126 to 129 we outlined our rationale for 1.5% CTR CTR 1.5% non-accessive in some amount that is intended to maintain reserves in the normal period of growth and cost trend we from a financial perspective would cross the shoulder for one believe that if we maintain the consistent the modest and consistent CTR contribution to reserve one more time and not sort of increase it based on the previous results that we would avoid adding further rate situations so we use a 1.5% contribution to reserve across all of our lines of business some companies might have higher CTR to their call right now friend or exchange business because of a perceived higher risk but we choose not to do that we use the 1.5% CTR for smaller lines of business finally that is the CTR for the pre-shared reserve level that we included in the plan to move our currency into the range required by the Department of National Regulation looking at the exhibit one and in the binder one on page 128 does that page set forward the process plan to move in the target RBC range yes that's the plan on page 128 yes are there any updates to this plan that are based on information that was received after the filing consistent with Paul's testimony earlier where he updated the 2018 individual and small group results for the final 2018 risk adjustment payment the exhibit on page 128 if we were to include that new information it would add about 36% points to the RBC and so the position end of 1231 December 31, 2019 instead of being 579 it would be 615% otherwise if it flowed that through to the projection for the expected RBC position as of December 31, 2020 that 620% would be 650 it's notable that in the footnote to this plan footnote 2 that the consultant who did the RBC study did indicate that the point in the target range where we least likely fall outside of that range in one year period is 690% so that's 656 expected that the end of the footnote does the plan move across the plan that you've been describing or coming back within the RBC range account for expected federal tax refunds instead of been discussed today yes it does as a long note page 228 the 2019 AMT refund of 17.9 is expected to add 78% of points as the Q&A earlier noted and in 2028 we expect to receive another 8.7 million in AMT credit refund for that 36% RBC and it's fortunate that our members have the benefit of these AMT credits such that we are able to move towards the order range without adding CTR, higher CTR to the premiums as Paul testified earlier it's included as a top of page 129 but in the absence of those credits our CTR had to have been as high as 7% Mr. Schultz alluded to this earlier but just to be clear has Blue Cross received even a dollar of these AMT refunds yet? We have not we target to file our tax return by the end of this month and then the IRS will forward us the actual AMT refund that's evident in that tax return by adding the AMT refunds to reserves does that protect against future rate increases? Yes it does if we were not able to have the AMT credit refunds move us towards the new range the premium rates would have to go up in order to achieve the new RBC range Mr. Schultz can I ask you to take a look at Exhibit 23 from Binder 2 which was an exhibit from today Sure I have that Are you familiar with that Mr. Schultz? I am familiar with that Mr. Schultz Mr. Schultz can you describe that Mr. Schultz please This is an order from Department of Management but it was received a pilot request to provide good practice relating to the deferred tax asset resulting from the elimination of the AMT and can you describe can you describe to the board why this order was issued by DMR? The order was issued by DMR as it says in the document but I'll draw attention to a couple of key points one is when the tax cut and jobs act was passed in 2017 it took the unprecedented action of eliminating the AMT and I put in place a program if you will to refund the AMT credits to businesses over 5 years statutory accounting principles specifically SSAP number 4 requires that we record only assets that are available for paying claims in our annual statements at the end of the year so paragraph 6 you can see it summarizes pretty clearly that we are required the ability to meet policyholder obligations is predicated on the existence of readily marketable assets available for both current and future obligations and it goes on to say that any assets that are not cannot be used to allow policyholder obligations can be recognized in the balance sheet so it was deemed that the alternative minimum tax refund credits were over 5 years and the community practice adjusts the annual statement requirements such that those credits will be recognized when they're received Miss Green are you familiar with the DMR Solvency which is in binder 1 and I know it will speak to that but just briefly do you agree with the urgency conveyed by DMR regarding the impact of non-actuarially justified downward adjustments to blue crossing trades I do and do you agree with the conclusion of that report that given the level of blue crossing preserves and current circumstances a downward departure from the file bridge to be made with great caution yes I agree with that are you familiar with the factors that the board has required to consider in reviewing blue crossing rates I am familiar with the factors in addition and again Mr. Schultz testified to this earlier briefly that in addition to adequacy and solvency the board considers whether rates promote access to care access to quality care and are affordable yes the rates as file satisfy and start from the appropriate balance with all of those factors and as mentioned earlier most of these factors cannot be taken in isolation interdependent and have to be taken together in your view if a right is not adequate and the rate that's not adequate means that the cost of care and the cost to administer that care exceeds the amount of premiums that are being collected to fund that care and so an inadequate premium rate means that the contribution to reserve will be not met or in some cases will be negative and it will ducally reserve some of the an underfunded premium rate by definition will ensure solvency will by definition not support affordable care and quality of care and access to care because the ability for that to ensure for my access to care is undermined and is eroded over time are you able to address briefly for the board steps that Blue Cross pollution Vermont takes to promote access to quality care and blue cross pollution Vermont already went through many building examples of that where we take numerous steps beyond the items already mentioned we also have quality improvement program which can be hard to focus on member safety we also have high quality care management programs we also work very hard to maintain a cost efficient organization our administrative costs are very low my industry standard and we believe that also contributes to quality care Mr. Schultz also testified earlier about affordability and the standard for affordability and the balance between affordability and the other standards of the board could you provide your view on the relationship between affordability and access to care and quality care so there's an inherent tension between affordability of care and access to care Vermont policy has very high standards when it comes to access and quality of care and so to the extent of affordability and access there's a inherent tension in those two criteria and so any great reduction that's not actually sound or justified in the name of affordable actually there's nothing to reduce the cost of care so the access and the affordability play together in your view do the proposed rates meet the criteria the board must consider in reviewing rates specifically the factors of solvency, access to care quality care and affordability yes they do during Mr. Schultz's testimony some questions about administrative costs were referred for years so I'd like to turn to that what percentage of the file opinion reflects administrative costs? 7% of previous administrative costs has that compare with other insurers? when we do benchmarking of our enterprise costs with other insurers for the 2018 benchmark indicated that there was on average about 10 to 11% of premium administrative costs so our 7% is very favorably the L&E memo that is in Zipit 14 they outlined some work analysis that they performed it's outlined at the top of page 22 of Zipit 14 they compared our administrative costs on a percentage of premium basis with 63 other plans based on that comparison we ranked 50th out of 63 which meant that we had lower expenses for approximately 80% of those plans analyzed so we worked very hard to maintain competitive administrative costs and these we have a number of programs internally we have a grassroots program called Blue Ideas where all employees can make suggestions for safe money we've had hard dollar savings of $1,000 in the last four years from that program we also are very focused on maintaining or retaining and training our staff so they can perform their roles as efficiently as possible recognizing that Blue Cross's administrative expenses are low does however do you want to speak to the needs that Blue Cross does have for administrator play sources and staff yes I would like to do that administrative costs are the resources and technology that is required to achieve many of the results that were discussed in Paul's testimony so to the extent that we have to find to let the management program or work with the pharmacy benefit manager to improve or find better ways to address mental health services our members getting them access to the right care all of those activities require expert staff and qualified staff well trained staff and technology even the risk adjustment risk coding work that Paul talked about earlier does require that we spend time and money on achieving those results does the figure for administrative costs in the proposed rate assume a 3% cost of living increase for Blue Cross employees yes it does why is that increase justified the cost of living increase for staff is an important tool for Blue Cross to retain the qualified staff we find that at a higher turnover rate it becomes very costly to retrain people and build that expertise summertime the cost of living increase is very much something that is dictated in large part by the competitive labor market and we need to attract talent to some people to do important work we have a look at the impact that in order to reduce the 3% merit increase or cost of living increase to 2% it would have a very small impact on rates in fact it would have .036% impact on rates which is less than 1.1% so we eliminated the merit increase altogether and this had 0 it would have an impact on rate you mentioned that the employment market is competitive to have any examples of situations where Blue Cross had difficulty in filling a position we do have as a matter of fact in Paul's area we have been recruiting for a letter of actuary for over 6 months now and we are finding very difficult to find or candidates to consider we also have recently we have in the last couple of years been managing our total workforce to the level of about 440 staff members most of whom were working really up the hill here and recently we are now to about 15 staff members and we have a number of agencies that are working for we also as an illustration of how important it is for us to retain staff even the customer service representatives that are world class and do a great job they require a minimum of 8 weeks of training before they are even able to take a call you also mentioned retention as being important to Blue Cross's mission do you know how Blue Cross will show the Vermont's retention rate compares to other blues yes our maternal rate I guess is what we use internally is about 8% so that would be our retention rate of 92% and that compares a little bit more favorably than some of our other national plans which report the survey that their maternal rate is about so staying on this topic of administrative costs board member Kellan raised a question with Mr. Schultz regarding comparing the figure in binder 2 exhibit 21 on page 21 if the figure isn't violent for administrative costs is that something that you could address sure I can take that now and then if there's further questions to be able to respond to so this is exhibit 21 in binder 2 and I think the question is comparing the expenses that are on that exhibit to the actual or the random that is in tab 1 of the other binder on page 52 my notes as Paul testified when we do the rate filings we look at our total enterprise costs and how that's allocated to each of the segments and the 79 million dollars on page 52 near the top of the page is the total cost that we recognize as 2018 enterprise cost the costs that are reflected on page 21 of the exhibit 21 in the other binder is the statutory basis cost and I think Tom mentioned that the the piece of that but there's also a few other differences between the exhibit on page 21 and it also includes the federal insurer fee but also includes broker commissions and a few other differences so I'm happy to follow up with an exhibit after the fact if it would be helpful but I can cross reference the I think it's $57 million of expenses on that exhibit back to the enterprise exhibit enterprise costs would also include the cost for all of our entities not just the costs of Blue Shield and Vermont and the exhibit on page 21 is just the cost of the Shield and Vermont so the two numbers are online it's just from the statutory perspective there's things that are relevant for example they add in rent but we don't pay rent but the statutory counting rules require us to include rent as if we were living in a home office so that would be an example of something that is a reconciliatory so we can certainly provide a wish for that Ms. Greenard, you're probably with AMBest I am with AMBest what is AMBest's connection with Blue Cross and Blue Shield and Vermont AMBest is a rating company they produce financial strength ratings so people might be more familiar with either the four or movies as a financial strength rating company that will look at the financial performance of a particular company a rating that's recognized in the marketplace in terms of how financially strong is a Blue Cross Blue Shield and Vermont required to have a rating at the time? we are required to have a rating Blue Cross the Shield Association requirements for us to license the brand is having financial strength rating why does the association require these independent assessments? the association in their role where they're ensuring that all of the new compliance nationwide are spawned to pay claims this is a requirement to ensure that even if a long term is in North Dakota you know that the North Dakota Blue Plan is strong enough to the claims payments for those services provided that's one of the mechanisms that the association has in place to make sure that the Blue Provider Network or the Blue Heart Network is robust and has strong financial claims. what kind of investigation does A&S do to support its rating and outlook for Blue Cross? A&S performs a thorough review of our financials they send to us each year a long list of everything they'd like to hear about both in terms of our financial plans our financial results our corporate insurance our product development and our future business strategies we provide that information to them and annually they spend a whole day walking through all of that with us usually in November of December each year and then in they look at the end of year results and then in late New York early spring they will issue their updated crawl financial strength rating is that rating an independent review? yes it is based on your experience in this field is A&S generally recognized as having its expertise in this field? yes A&S is generally recognized they tend to specialize in insurance company financial ratings do financial services entities like banks and lenders rely on their opinions? yes they do I could refer you to exhibit 16 in binder 1 A&S rating an outlet for blue cross yes exhibit 16 is the announcement A&S anytime they make a change to a rating they're required to issue a press release was there a change this year in A&S evaluation of the blue cross usually Vermont? yes there was a change in the press release they changed our long-term issuer credit rating to the outlook they changed from stable to negative to negative from stable to your knowledge has this happened before? we've had this financial strength rating processing since 2003 this is the first time we're just going to change did A&S explain the basis for its decision? it did and as outlined in the note it was mainly partly known it talks about reflects A&S expectation that our risk adjusted capital will remain under pressure when leading to long-term and capitalization security they go on to talk about fluctuation in underwriting losses referring to the sharp losses during the writing results and at the top of the second page they specifically said the underwriting results over the past few years have been caused primarily by blue cross ownership of Vermont being unable to receive adequate rate increases of food through the state's rate review process in other words, premiums are being too low correct was that a conclusion that A&S reached independently of blue cross? so just to wrap up I want to just go back to where we started the file grade this year assumes a 1.5% CTR yes it does in your opinion if the board makes downward adjustments to the file grade they're not actually really justified it will happen to the CTR when the actual results are knowing the CTR would be a low target low and it may well lead to concerns so for example if the board approved a rate that on its face assumed a 1.5% CTR but reduces other assumptions in a way that turns out not to match experience will blue cross be able to make the contributions to reserves? it will not have contributions to reserve because after paying for health care services and for members and cross-reviewed clients there won't be any money left to contribute to reserves so it will in fact be a lower or a rate of possibly negative CTR and to put some specific numbers on that what would be the results of a 1% underfunding agreement? a 1% underfunding of premium translates to about a 3% completion of reserves and the reason for that to start comparisons is that the individual and small group business is a significant portion of our corporate insurance business and so 300 plus million of premium if we were to reduce that by 1% is a much larger number of $210 million to serve us for the number of reserves that is on the end of the year. that concludes Ms. Green's direct testimony Blue Cross will reserve the right to be covered in your bottle of time for minutes. I would like to question Ms. Green about is it at him which is labeled as a response dated June 14th when I came in fact on the day June 28th 2019 and also although it's not my confidential I've heard some discussion to the effect that Blue Cross would like to be in confidential and I'm happy to do it your way. Is it at 10 of binder? Binder 1 the June 28th 2019 letter from Spicer Monterey this one is not confidential we used that one submitted as a public document no part of it was identified as confidential so I don't see any issue in the questioning Ms. Green would you please turn to agenda 10 and would you please turn to page 5 of agenda 10 and would you please start reading on the last paragraph of forward bullet on page 5 beginning with the caps test and the jobs act the tax cuts and jobs act had two specific impacts on the Blue Cross which would have amounts to 2017 reserves that resulted in a net reduction of reserves of 4.1 million corresponding to current RBC first the tax law repealed the corporate AMT and made accumulated AMT credits refundable and therefore affordable as a deferred tax asset the AMT credits were previously assumed to have no economic value so this initially added 33.2 million to reserves could you please explain what a deferred tax asset is deferred tax asset is a reflection of the tax law that says that there may be some future tax benefit but it's not recognizable in the current years results well under under steps toward accounting principles but the deferred tax asset is recognized on the balance sheet it's on the balance sheet but it's not in the operating results and then you said in the next bullet that there's any I said out of this 33.2 million in under the tax threats under any I see times blue cross was required to not have 13.3 million you see that I'm not seeing that on the bottom of page 5 on the top pages under this formula blue cross should have amounted to I'm sorry any of you under this formula blue cross should have amounted to non-finite or new for reserves 13.3 million tax asset attributable to anti-crime you cite for the board but that any I see guidance is it's the statutory accounting principles that have special rules around how to value deferred tax assets in the any I see blanks and that formula how much value you can recognize in the statements can you tell the board where I find that guidance it's in the statutory accounting practices I don't have that here with me have you provided it I have not I could will you and can you explain then the formula pursuant to which this 13.3 million of the deferred tax asset balance is required to be non-advanced can you explain how that's calculated the calculation looks at the nature of the deferred tax asset and calculates the amount that's allowed and that determines the asset that's looked and then separately statutory principles require that portion of that be non-admitted because it's not available to pay for claims to policy holders and when you talk about the nature of the tax asset what do you mean the what gives rise to the tax that will come to you in the future so some tax codes we have tax experts that we use to calculate this specifically but each of the codes in the tax code will attribute reliability or an asset to a certain taxable piece of our business and that's all accumulated into the net deferred tax asset at the end of any given year is there any question in your testimony I didn't hear the very last one you said it's all accumulated into the net deferred tax asset at the end of any given year is there any place in your testimony or attached to your testimony or in any document provided by the public trust that explains how this 13.3 million is calculated there's a number of footnotes in the annual statement that show the various deferred tax asset calculations after refreshment memory of the details what's in there to see if the formula itself is shown in that footnote I don't want to put you on the spot it's unfair for me to ask you to do that now so that we can all understand how that 13.3 million is calculated so the 13 I don't know the the relevancy of the 13.3 when the tax cuts and drops act was implemented it required us to both address the existing deferred tax assets and that's what this relates to as well as it created new deferred tax assets in the form of these amt credit refunds so there the 13.3 is not the same item as the amt credit refunds so I don't know if that helps clarify so that 13.3 million that is not admitted you say is not all amt credit money it's amt credit money plus something else the statutory reporting rules there's deferred tax assets before the tax law change occurred and so 13.3 relates to those deferred tax assets outside of an amt credit refund and I hate to ask you this but can you try to be a little bit more like Mr. Schulz and talk a little louder sure thank you very much are you sure that the guidance requires the non-emission of this 13.3 million rather than provide discretion for its non-emission it's a formula you're sure about that now what about the other none of you see the first bullet on the top of page 6 yes that has to do with the 19 or 9 million of amt credit right the balance and that's not required to be non-emission right because the formula requires a certain amount to be non-emission that the remaining is an asset that's right but that remaining 19.9 million you didn't reflect on your annual statement right you did not include that 19.9 million in your surplus for your end 2018 correct that is correct and why is that it's because the we requested a permitted practice of financial regulation one that we mentioned earlier and the request was to not limit the balance of the amt credits because they were not they're not assets available for the use of paying claims until we receive the tax refunds okay is it fair to say if there's some question about the ultimate receipt of the tax that should be admitted I'm going to phrase that under such strong county principles is it fair to say that if there is a reasonable question about the ultimate receipt of the asset that the commission has discretion to establish a permitted practice allowing for the non-emission of that asset it's less to do with the probability of it being received without is it an asset that's available to be used to pay claims and since it's not cash in our door yet the permitted practice allows us to not admit that asset but under statutory accounting principles without the permitted practice allowed you would reflect this on your balance you would reflect that 19.9 million unbalanced sheet as part of the circles correct without the permitted practice yes and by the way there's no confusion about the language what you all refer to as reserves is what the NEIC in its annual statement blank and to my knowledge both insurance departments refer to as surplus right insurance departments refer to it as surplus and the NEIC point of calls it total-adjusted capital capital and surplus online exhibit 21 on the 5-year history is how total-adjusted capital okay and you agree with me that on page 5 of the annual statement they essentially use it it's called capital and surplus sure you will cross us for permitted practice to not admit the 19.9 million in the end amt corrects the as I testified earlier the elimination of the amt was unprecedented and it had a 5-year time horizon attached to it and the statutory accounting principles require us to only reflect assets in the annual statement if they are available to pay policy holder claims and funds and so since the amt credit refund is not an asset until we receive it we requested the permitted practice to remove that from the surplus well it's pretty clear isn't it that Blue Cross is going to get the 17.9 million in October 2019 that's what you say I expect that correct and then also it's pretty clear isn't it Blue Cross is going to receive the additional 8.7 million in October 2020 correct that's our expectation okay and I suppose there's not going to be an election until after October 2020 correct national yes that's true nor a congressional or statutory election so it's reasonable to conclude isn't it that those two years are pretty certain that is that the amounts that you're going to receive in those two years is pretty certain that's true that's why we included it in our RBC plan right but under statutory accounting principles without the permitted practice you would have to include that on your balance sheet today as part surplus with you 19.9 million okay and I and you wouldn't agree that you would have to include the 2020 amount the formula allows only a portion to be admitted and so without the permitted practice it's the balance whether that relates to 2020 2021 or 2022 the formula doesn't necessarily break cleanly with the year the yearly split but in a sense it's the same concept when 19.9 would be on the balance sheet without the permitted practice okay so you agree about the 19.9 when you argue about the remainder correct that is when you agree that by 4 the permitted practice the 19.9 million would be admitted and would be reflected on balance sheet and included in surplus yes and the other part the remainder you're unsure about the 19.9 between the 13.3 and 19.9 it is the total we're sure that according to the rules the whole 34 million is going to come to us it's a question of when and when will it become available to use to make claims could you turn please to page page 2 in exhibit 10 and you see there the bottom it's not a chart it's just a list of the amounts in the years of the AMB refunds okay and then you can read the sentence right after that so could you explain to the board what you've been on doing then is it fair to say that even when you do receive these anti credit refunds you don't plan on putting them in surplus rather you plan on using them to offsets of seniority liabilities it says that in the few years above we've made estimates our tax position is by definition a consolidated enterprise tax liability so when we calculate how much we care with all of our taxable entities in our tax return and that's what that's referring to the Blue Cross parent is not a taxable entity right we have a we have a taxes because we have a special section in 33 of the tax code that speaks specifically to new plans and is through that tax tax regulation that anti credit came to be the first place under the Trump tax bill going forward I'm sorry I didn't mean to interrupt you go ahead going forward Blue Cross in Vermont has a zero federal income tax rate say again please going forward Blue Cross in Vermont has a zero percent federal income tax rate that was my understanding what are the seniors in Blue Cross we have the Vermont Health Plan we have Vermont Collaborative Care we have CBA Blue these are all sub-seniors we have account amount of insurance services these are all companies that make up the entire operating entities of the Consolidated New Cross will shield the Vermont tax return okay and that is fair to say that your intent is to use the anti credit refund refunds to offset the tax liabilities of Blue Cross of city areas the nature of our tax return is such that any tax liabilities that arise out of the related entities will be first the anti credit refund will be first used to cover those liabilities and that is the balance that comes to us from the IRS I think that was a yes yes could you explain to me the difference is a relatively moderate difference but why there is a difference between the 34 million in anti credit refunds that you use in question 2 in your answers question 2 and the $3.2 million number that you use in your answer to question 6 let me amend that question so we can maybe resolve it all at one time and then in your answer to the last question question 8 you use a $35.8 million number these are not huge differences but could you explain why the differences depending on how the question was asked we answered in the context of the exhibits that were being asked about so depending on which exhibit and the statutory statement you're looking at one of the 34 is a going forward view of 33.2 is how it was reported at the end of the year could you please turn to the exhibit 21 who crosses annual statement for 2018 okay and I think I heard you say when you were being questioned by council that the property of your surplus is mainly due to underwriting losses is that correct? yes okay could you go through with us on page 5 of the annual statement page 6 of the exhibit 6 the various entries there to explain how surplus went from $134 million in the 135 million in prior year to $110 million there down on line 49 so just so I'm fair you're on exhibit 21 page 6 of the exhibit 21 page 6 of the exhibit page 5 of the annual statement we're starting to see on top of $134 million for the current year okay and then there's a net income in this case a net loss of $6.7 million then down on line 36 there's a change in net unrealized capital gains less capital gains test of $4.6 million could you explain what that is? the net unrealized capital gains related to the asset portfolio that we have that backs the reserve surplus and to the extent that the capital gain position in the market goes up and down in a given year that will increase or decrease surplus okay so does that mean then that you lost $4.6 million well let me rephrase that you have to realize these gains and losses right? correct that means that the value of your portfolio went down by $4.6 million? correct okay there are on their statutory or regular regulatory requirements that require a blue cross and hold no more than a certain type of asset correct okay and what is the requirement with respect to equity holdings? off the top of my head the the state regulations excuse me the state regulations have a a garden rail for the amount that can be invested in equity which is very small some of the bonds will also fluctuate in terms of on your life's gains and losses as well the experience and insurance companies are required to hold pretty safe securities holdings that's true and when we benchmark against peer companies and look at our we review our asset portfolio every year with our board and we have a relatively conservative asset position and we have somewhere between 50 and 20% of the consolidated entity and equity position and the rest would be in high quality fixed income bonds high quality fixed income bonds do you know that 15 to 20% is relatively high for an insurance company? it's not very high in industry terms what about for a non-profit blue cross company? do you know whether it's relatively high for a non-profit blue cross company? if the many insurance companies use equity securities to back their surplus because it's a long-term growth and you'll get a longer term a creative growth to surplus out of equity securities and a lot of other types of securities on line 48 it says changing that deferred income tax what does that mean? so that's a change in all of the deferred tax assets that we were just referring to so that means that you have the assets increased in between the end of 2017 and the end of 2018 the net deferred tax income income tax increased between the end of 2017 to the end of 2018 and changing non-grid assets on line 39 what's that? those are the assets we were just referring to earlier that to the extent that statutory accounting rules require us to remove assets from the balance sheet that are not immediately available for paying claims those are required to be taken out of our balance sheet does that include some of the amt credibly fine money? it does and you can see in the prior year that the major driver of the 46 million was the removal of the non-grid amt deferred I'm sorry I'm having trouble hearing you the major driver could you say it again to get it out of the major driver? I'm saying yes the alternative minimum tax credit refund that creates the deferred tax asset was removed through this change in non-admitted assets from reserves and then finally then on line 47 when it says aggregate ratings for gains of losses in circles could you explain what that is? yes it's usually in our case it's the change in our pension valuation so at the end of each year the pension plan is valued both the liabilities in the assets and to the extent that the assets are lower than the liabilities that we create a reduction in member reserves as outlined in 2018 in the current year on this exhibit of 5 million so your pension plan assets decline in value correct? at the end of 2018 they did and that's in addition to the decline in value that we talked about up here on line 36 right? correct so that's about just about almost 10 million declining in the value of your portfolio it's great that there are other practices across engages in that I think it's so close to appear to be lower than it really is would you turn please to pay to 2017 that in the first first time well let's say first turn to page 37 of the exhibit page 13 of the acting health department's report and the acting health department's report this is a report that you all committed correct? yes you see the heading in the middle of the page reserving process and accuracy yes I see that could you please read that paragraph AHP discussed the process with its certifying actuarial capsules it was confirmed that reserve estimates are calculated with a benefit of one month of paid run out and then an explicit provision for adverse deviation of 15% which is usually held in the year end reserve estimate and when could you go to page 14 and just read the last line of the top paragraph the incomplete paragraph there read which part of it read which part of it the last sentence of the first paragraph which is starting with AHP consultants ok AHP consultants believe that blue cross blue shield Vermont could potentially lower its explicit level of provisions for adverse deviations which would result in both higher surplus level and higher army C ratio do you agree with that statement by the consultant that you commissioned I do agree with that and I go on to say that the decision was made at the end of 2018 to change the approach that we've been taking for that provision for adverse deviation such that it's applied to just the incurred but not reported portion not the to reflect the fact that we have a one month's planned run out we are required to have a provision for adverse deviation again as required by the Cali principles could you turn down to page 15 of the same exhibit which is page 10 of the Oliver Wyman sorry could you repeat that in the same exhibit 17 could you turn to page 10 of the exhibit I'm sorry page 15 of the exhibit which is page 10 of the Oliver Wyman what was your from earlier I'm there thank you and could you read the last two sentences of the third bullet reserve in the process the two sentences beginning with Blue Crossville Shield of Vermont Blue Crossville Shield of Vermont holds an explicit margin of the percent on top of their best estimate which is conservative as a result from 2007 to 2016 Blue Crossville Shield of Vermont with margin has never been deficient with the lowest reserve of sufficiency being 13.6 and the highest being 24.9 percent paying between to not including the initial charge for the serving process risk and you agree with me don't you that if that reserve redundancy of the first year of sufficiency were included in service the Blue Crossville service would be higher if we eliminated the explicit margin reserves policy over reserves would be lower and so plus would be higher yes and similarly your RBC ratio would be higher correct yes could you go now on this same page page 10 of the Oliver Wyman to a quarter page 15 of the exhibit you see the bullet from the bottom provided reimbursement you see that yeah I do okay and you see at the end of that bullet that Oliver Wyman notes that Blue Cross reimbursement levels are on par with its competitors and better in some markets you see that I do and by better they mean higher you know they they said they don't mean lower do they no they mean lower you mean this is what the provider reimbursement is the amounts that we take providers right and you're saying that you believe that what they mean there is Blue Cross when Oliver Wyman says Blue Cross is reimbursement levels are on par with its competitors and competitors and better in some markets what it's really saying is Blue Cross is reimbursement levels are lower in some markets lower reimbursements yes well that does that make sense though given the first sense in this paragraph the first sentence the provider reimbursement risks are considered to be potential that Blue Cross for children will need to increase provider reimbursement to maintain provider relations does that make sense yeah I mean it isn't fair to say that Blue Cross doesn't have additional provider reimbursement risks because they're already paying providers enough and it isn't that well I know you're not Oliver Wyman it would be better if I asked him but it isn't pretty clear that what they're saying is Blue Cross because they pay to provide them so well we don't have any risk about providers to whom else we're now this is I think this is speaking to as the Accene reports spoke to as well that if if we were providing if we were paying providers more than what other payers were paying our rates would be less competitive so they're saying that we don't that there was they did not include an additional charge meaning an additional risk to reflect that because we reimburse on par with competitors and better i.e. lower in some markets alright let's move on are you familiar with Blue Cross's statutory obligation to ensure that subscriber benefits are provided at minimum cost under efficient and ironable management I am familiar with that thank you Ms. Gray Mr. Schultz earlier if your company had a preference for where you would be in your RBC range and he indicated do you agree with that I do agree with that I would like to add however that the utility of having an RBC range is such that results will go up and down over time and you would find the Blue Cross and Schultz are not RBC at different places within that range so it would be as in the subsequent study from Maxine we identified our risk tolerances and one of the risk tolerances that we have is that in any given year we are going to fall outside of the range so that risk tolerance implies that we want to be higher in the range than necessarily on the bottom of any given range because if you are talking on the bottom in any given year you have much higher on the outside of the range so you actually would prefer to be higher in the range than lower in the range given your risk tolerance on average speaking of your consultants and the range could you turn to exhibit 17 please yes and as you noted the consultant had targeted a particular level yes and that 690 is that correct the 690 is the place within the desired range of 590 and 7.5 that is likely to fall if we were at 690 we would be at least likely to fall outside of that range in any given year and that recommendation was based on Maxine's understanding of your company's risk tolerance among better factors it has less to do with risk tolerance and more to do with the analysis they did on this and the volatility of results in our business and our ability to respond to great changes in the case of volatile results so their statistical analysis resulted in a range of 590 to 7.45 and it did incorporate our risk tolerance since yes but you would agree with me that on page 40 of that exhibit under risk appetite the consultant indicated the selection of the surplus range is ultimately a management decision and that their recommendation is based on an understanding of your tolerance of risk and uncertainties in a business environment etc could we turn to exhibit 690 this is the and best press release and I believe that you were asked by your council if this was and best independent conclusions contained in this release and you indicated it was is that right? and do you know the basis for their independent conclusions? they through their analysis and looking at the CTR and the end writing results and the performance of each of the lines of business that's how they come to their conclusions but it indicates on page 2 it talks about that Blue Cross being unable to receive adequate rate increases improved through the state's rate review process how would they have formed that opinion? they look at the rate filings and the decisions and like anyone else we would also look at the writing results so they're looking at in fact the rates have been inadequate in recent history and then through our rate review discussion when they come to meet with us it is something that we've talked through with them about the results of the decision orders so you've met with them to speak about the process? yeah they come they go through and they request a variety of information and you can provide that to them great thank you everyone has a question? I'm going to try to give you this there's a lot of like different definitions of administrative costs from all of this to two or three variations of it in the National Association of Insurance Commissioner documents but let's just start and hopefully finish on an exhibit of page 21 which we've been there before and I appreciate your comment I'm asking this question not to get certainly clear answers today but I appreciate your comment earlier that you take a look at this so that you can respond to it appropriately so my basic question is again looking at this page which covers cost and expenses to adjustment expenses in general administrative expenses it comes to a total of $57 million as you noted earlier and but it includes credit of $33 million for $39,917 that comes from your uninsured book of business so to combine them out there is almost $91 million in total what I'm interested in also in the annual supplement is an allocation year by year of the covered lives by book of business and I'll take a quick look here if we go to again the five year summary of these numbers that the entire book of business enrolled in exhibit one total numbers at the end of the period $198,448 and that is you'll find elsewhere in the supplements the split is $111,404 covered lives including uninsured book of business and $87,041 for the insured book of business just because I've had a couple of conversations people get confused by this you're uninsured are where you basically have the administrator functions for those policies but you're not at risk for the claims as a simple kind of understanding so that's what uninsured means so if I do the simple math here and this is my question if I do the simple math and take the $33,439 for these three categories of expenses and divide that by the covered lives it comes to $300 and $0.16 for the uninsured and then I take the insured amount the remainder of that $57.5 million divide that by the insured population covered lives which is $87,041 I get $661 per covered life and so my basic question is can you explain that difference as to why why the kind of per covered life amount for insured folks it's much richer almost by twice than the insured one of the things that I can provide to as a follow up as well when you talk about different definitions of administrative costs one way to simplify would be to have the same total of administrative costs but many of these sort of whole segments of that into different sum totals so there's not it's not like we categorize administrative costs sometimes it's always categorized that way but it's reported often what I liked about this is that it's very explicit it's cost-containment expenses other claim adjustment expenses and you can go back into the NAC documents and see that fight the individual plans by the small group by your Medicare folks so it allows you to go into the weeds a little bit but you still can't find an answer yet that that says why one group should be almost twice as costly as the other the main driver for the main driver the main driver for each of our lines of business requires different types of services to be offered one of the large differences between the individual's longer book and the uninsured is that the uninsured or we call it self-funded those clients tend to be much larger clients so there's one group that has many many uninsured members within that group and that becomes very much more efficient for us to administer because when we're administering individual by individual or each small group we have to set up different benefits for each of them and this is voices multiple times and smaller groups and in the larger groups we'll have to do one for example so the major driver between the cost uninsured business versus uninsured business will have to do with the size of the clients that are in that book we do have Medicare supplemental business has a much different cost profile it's the premium that we're collecting from Medicare supplemental it's a much smaller premium but the uninsured cost is very similar to another type of policy so the percentage of premium prevents will be much higher we look at our benchmarking we'll actually look at the benchmark by one of the business as you can show us I appreciate it I just know that the population was concerned about here I think exploring that would be helpful