Question 1 of 50

The type of profitability ratio that helps financial analysts to determine an MCO's overall success in generating returns
to the MCO's stockholders is the
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insurance leverage ratio

return on capital ratio

medical loss ratio

investment yield ratio

Question 2 of 50
The sentence below contains two pairs of terms enclosed in parentheses. Determine which term in each pair
correctly completes the statement. Then select the answer choice containing the two terms that you have selected.In
analyzing its financial data, an MCO would use (horizontal / common-size financial statement) analysis to measure
the numerical amount that corresponding items change from one financial statement to another over consecutive
accounting periods, and the MCO would use (trend / vertical) analysis to show the relationship of each financial
statement item to another financial statement item.
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horizontal / vertical

common-size financial statement / vertical

horizontal / trend

common-size financial statement / trend

Question 3 of 50
Variance analysis directs a manager's attention to the differences between expected results and actual results. With
regard to the significance of variances, it is correct to say that negative variances are typically considered
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favorable for both revenue items and expense items

unfavorable for both revenue items and expense items

favorable for revenue items, but unfavorable for expense items

favorable for expense items, but unfavorable for revenue items

Question 4 of 50
The Kingfisher MCO has negotiated a straight per-diem charge of $800 per day with the Tangerine Hospital. When
Jeremy Cohen, a Kingfisher plan member, was admitted to Tangerine, he incurred billed charges of $4,800 and total
allowable charges of $4,500 for the five days he was hospitalized. This information indicates that the amount
Kingfisher was obligated to pay Tangerine was
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$3,700

$4,500

$4,800

$4,000

Question 5 of 50
The physician self-referral law prohibits physicians from making a referral to another provider entity for designated
health services if the physician, or an immediate family member of the physician, has a financial relationship with the
entity. In order to bill for a service that falls under the physician self-referral law, a physician's financial relationships
with an entity must meet one of the exceptions provided in the law. One general exception for prepaid plans exempts
from the physician self-referral law services provided by A. Medicare-contracting health maintenance organizations
(HMOs)B. Organizations with prepaid Medicare demonstrations
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Neither A nor B

A only

Both A and B

B only

Question 6 of 50
Mainline uses the following ratio to measure how efficiently it has used its total assets to generate revenues: Total
Revenues / Total Assets In this situation, Mainline is calculating a type of ratio called the
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return on assets (ROA) ratio, which is a profitability ratio

return on assets (ROA) ratio, which is an activity ratio

total asset turnover ratio, which is a profitability ratio

total asset turnover ratio, which is an activity ratio

Question 7 of 50
Over time, MCOs and their underwriters have gathered increasingly reliable information about the morbidity
experience of small groups. Generally, in comparison to large groups, small groups tend to
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generate lower administrative expenses as a percentage of the total premium amount the group pays

have less frequent and smaller claims fluctuations

follow actuarial predictions regarding morbidity rates less closely

expose an MCO to a smaller risk of antiselection

Question 8 of 50
Management at the Lanier MCO is examining the MCO's exposure to contingency risks, usually referred to as Crisks, which are general categories of risk that have direct bearing on both cash flow and solvency. One example of a
C-1 risk, or asset risk, that Lanier faces is the risk that
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Lanier's experience with morbidity or expenses will differ from the assumptions that were used in pricing its

products
Lanier will lose money on its investments in stocks, bonds, mortgages, or real estate

Lanier's actual expenses will exceed amounts budgeted for those expenses

financial losses will result from ineffective business management decisions made by Lanier

Question 9 of 50

One type of financial ratio compares an MCO's cash and other readily marketable assets to its contractual reserves.
This ratio is known as the
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statutory return on assets ratio

financial leverage ratio

quick liquidity ratio

gross profit ratio

Question 10 of 50
Two years ago, the Boswell Managed Care Organization (MCO) paid $1,000,000 for an office building. The building's
current market value is estimated at $1,150,000. The accounting principle that requires the value of the building to
remain at $1,000,000 in Boswell's accounting records is called the
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relevance principle

cost concept

measuring-unit concept

full-disclosure concept

Question 11 of 50
An MCO that establishes an activity-based costing (ABC) system must identify the activities and the activity drivers
within the MCO. For example, if the activity is claim processing, the activity driver would be the

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costs associated with claim processing

processed claims

unprocessed claims

employees who process the claims

Question 12 of 50
Health insurers and MCOs may use either accrual-basis accounting or cash-basis accounting. The characteristics of
accrual-basis accounting are such that a company records revenues when
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the company receives payment and records expenses when they are incurred, even if cash has not actually

changed hands
they are earned and records expenses when they are incurred, even if cash has not actually changed hands

the company receives payment and records expenses only when the company remits payment

they are earned, even if cash has not actually changed hands, and records expenses only when the company

remits payment

Question 13 of 50
The theory of vicarious liability or ostensible agency can expose an MCO to the risk that it could be held liable for the
negligent acts of providers. One step an MCO can take in order to limit its exposure under the theory of vicarious
liability is to

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imply that an agency relationship exists between the MCO and its providers

require providers to supply their own office space

employ nurses and other healthcare professionals to support providers

be solely responsible for maintaining providers' medical records

Question 14 of 50
Several federal agencies establish rules and requirements that affect health plans. One of these agencies is the
Office of Personnel Management (OPM), which is primarily responsible for
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issuing regulations pertaining to the Health Insurance Portability and Accountability Act (HIPAA) of 1996

administering the Federal Employees Health Benefits Program (FEHBP), which provides voluntary health

insurance coverage to federal employees, retirees, and dependents

administering the Medicare and Medicaid programs

administering the Employee Retirement Income Security Act (ERISA), which imposes various documentation,

appeals, reporting, and disclosure requirements on employer group health plans

Question 15 of 50
The financial arrangement between the Lombard MCO and some of its providers allows Lombard to delay payment of
20 percent of the providers' reimbursement until the end of a financial period. At that time, Lombard evaluates the
budgeted costs and the actual claims for care during the period. If the providers held costs below the amount
budgeted, then Lombard will distribute that 20 percent of reimbursement to the providers. If claims exceeded

budgeted costs, then Lombard will pay the excess claims from that 20 percent of provider reimbursement, and any
remaining funds are distributed to the providers. This information indicates that Lombard uses the provider incentive
method known as a
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no balance billing arrangement

sliding scale arrangement

withhold arrangement

retention arrangement

Question 16 of 50
In financial records developed according to GAAP, the matching principle holds that an MCO should recognize
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expenses only when the MCO receives cash for the revenues related to those expenses

expenses when the MCO earns the revenues related to those expenses

expenses when they are budgeted

revenue when it is received

Question 17 of 50
Sometimes MCOs use a policy attachment that excludes from healthcare coverage any loss that arises from a
specified medical condition, a disease or disorder of a specified body part, or both. This policy attachment is known
as

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an essential plan rider

a moral hazard rider

an insurable interest rider

an impairment rider

Question 18 of 50
When filing an Annual Statement with the state insurance department, an MCO applies a capital and surplus ratio to
its financial data in order to
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determine the factors that cause significant changes to the MCO's capital position

measure how effectively the MCO earns adequate or higher returns on its investment portfolio

measure how efficiently the MCO is employing capital and surplus to earn a return for its owners

measure the MCO's financial strength

Question 19 of 50
The following statement(s) can correctly be made about the underwriting of small groups: A. The majority of states no
longer allow MCOs to set participation levels as a requirement for coverage of small groups. B. Except in states that
require guaranteed issue, MCOs generally retain the right to reject small groups because of the nature of the
business in which the small groups are engaged.
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Both A and B

B only

Neither A nor B

A only

Question 20 of 50
External users of a health plan's financial information typically have either a direct financial interest or an indirect
financial interest in the health plan. One example of an external user with a direct financial interest in a health plan is
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an external auditor

a regulatory authority

the health plan's providers

a rating agency

Question 21 of 50
The following statements are about fully funded health plans. Three of the statements are true, and one statement is
false. Select the answer choice that contains the FALSE statement.
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The premium rates for fully funded health plans typically are not guaranteed and may increase each month.
Typically, fully funded health plans require group plan sponsors to prepay monthly premiums for healthcare
services.

An insurer or a specific type of MCO assumes the financial responsibility for healthcare services rendered to or
for health plan members in fully funded health plans
In fully funded health plans, if the dollar amount of services rendered to plan members exceeds the dollar
amount of premiums collected, then the insurer must make up the difference.
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Question 22 of 50
The National Association of Insurance Commissioners (NAIC) has developed a risk-based capital (RBC) formula for
all MCOs that accept risk. One true statement about the RBC formula for MCOs (MCO-RBC) is that it
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is a set of calculations, based on information in an MCO's annual financial report, that yields a target capital

requirement for the organization

fails to assess the specific level of risk faced by an MCO

fails to take into account an MCO's underwriting risk or its business risk

applies to all MCOs in the United States

Question 23 of 50
One component of an MCO's annual report is the cash flow statement, which provides information about an MCO's
cash inflows and outflows during a given accounting period. An MCO's cash inflows increase when the MCO
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makes payments on a loan

issues shares of common stock

repurchases shares of its own common stock

purchases an asset with cash

Question 24 of 50
An MCO's financial planning activities include tactical planning, which is primarily concerned with the MCO's
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long-term objectives and the broad, overall courses of action that the MCO will take to achieve those objectives

short-term, day-to-day activities

overall investment strategy and its allocation of capital

product development over the long-term, such as five or ten years

Question 25 of 50
Where state laws allow, managed care organizations (MCOs) sometimes use an underwriting method called pooling
when underwriting small groups. By definition, pooling is a method of
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placing limits on the spread, or difference, between the highest and lowest premium rates that MCOs charge to

small groups
determining a group's premium by which underwriters treat several small groups as one large group for risk

assessment purposes

setting participation levels in order to prohibit a significant number of employees from declining the coverage

determining the employer's contribution towards the cost of the employee's healthcare coverage

Question 26 of 50
The Montrose MCO has three subsidiaries. Montrose's management considers each subsidiary a separate economic
unit and maintains separate accounting records for each subsidiary. By maintaining separate accounting records for
each subsidiary, Montrose is adhering to the accounting concept known as the
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time period concept

measuring-unit concept

cost concept

entity concept

Question 27 of 50
Employer-sponsored benefit plans that provide healthcare benefits must comply with the federal Employee
Retirement Income Security Act (ERISA) of 1974. Provisions of ERISA include
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requirements for the disclosure of plan provisions and funding information to plan participants

the requirement that healthcare coverage for certain individuals and for both small and large groups be

guaranteed renewable

provisions to ensure that prospective or current enrollees in a group MCO are not discriminated against based

on health status
the requirement that plan sponsors allow qualified beneficiaries to continue their group healthcare coverage for

a specified period of time following a qualifying event that causes the loss of group healthcare coverage

Question 28 of 50
The Wexford MCO prepared a budget that provided an alternative set of projections for premium income for a new
product that the MCO considered introducing to the market. The budget covered a period of one year and showed
three columns of possible premium income based on a pessimistic sales figure, an expected sales figure, and an
optimistic sales figure. This information indicates that the type of budget Wexford prepared is a
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continuous budget

rolling budget

static budget

flexible budget

Question 29 of 50
The following statements are about an MCO's evaluation of its responsibility centers. Select the answer choice
containing the correct statement.
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One reason that an MCO would use cost-based transfer prices to evaluate the performance of its profit centers

and investment centers is because, under this method of setting transfer prices, the selling center has maximum
incentive to operate effectively and control costs.

When analyzing budget variances, an MCO's management should pay attention to unfavorable variances only.

In responsibility accounting, all employees who have any influence over an MCO's department are held equally

accountable for the operations and financial outcomes of that department.

An MCO can reduce the problem of unattainable goals by involving responsibility managers in the preparation of

their centers' budgets

Question 30 of 50
Changes in an MCO's cash flow occur as a result of three activities: operating activities, investing activities, and
financing activities. Two typical business transactions in a publicly owned MCO include selling healthcare benefit
contracts and issuing common stock. From the answer choices below, select the response that correctly identifies
these types of transactions as an operating, an investing, or a financing activity.
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financing activity operating activity

operating activity financing activity

investing activity financing activity

operating activity investing activity

Question 31 of 50
The Allstar MCO has purchased a new information system, hoping that the initial investment in the system will result
in an increase in both operational efficiency and the level of customer service. There is a possibility that the new
system will not work as hoped, and that Allstar will incur greater expenses and fewer benefits from the system than
anticipated. There is also a possibility that the investment will neither lose nor gain a significant amount of money.
This information indicates that, by purchasing the new information system, Allstar experienced the type of risk known
as
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1) pure risk

2) speculative risk

Question 32 of 50
MCOs have access to a variety of funding sources depending on whether they are operated as for-profit or not-forprofit organizations. The Verde MCO is a for-profit MCO and the Noir MCO is a not-for-profit MCO. From the answer
choices below, select the response that correctly identifies whether funds from debt markets and equity markets are
available to Verde and Noir. Funds from Debt Markets Funds from Equity Markets are
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available to Noir only available to Verde only

available to Verde and Noir available to Verde only

available to Verde only available to Noir only

available to Verde and Noir available to Verde and Noir

Question 33 of 50
The qualities of accounting information include reliability, relevance, consistency, and materiality. With regard to these
qualities, information that is reliable means that
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the information contained in financial statements is useful, timely, and likely to affect an interested user's

decisions about a company

the information contained in financial statements is accurate, objective, and free from bias and

misrepresentation
a company's financial statements use the same accounting policies and procedures from one accounting period

to the next, unless there is a sound reason for changing a policy or procedure
a company discloses in its financial statements all significant information-information that, if a company omitted

or presented in a misleading manner, could substantially affect an interested user's opinion of the company

Question 34 of 50
The Elfton Corporation provides healthcare coverage to its employees through a self-funded health plan. Elfton also
has specific stop-loss coverage, which was provided by the Pierrot Insurance Company through May 31, 1999, when
the contract year ended. Since June 1, 1999, Elfton's stop-loss coverage has been provided by the Aqueduct MCO.
The contracts with Pierrot and Aqueduct are identical and provide for the settlement of claims on an incurred basis.
On May 2, 1999, an employee enrolled in Elfton's health plan was injured in an accident and required extensive
medical treatment. The cost of the treatment was large enough to trigger Elfton's stop-loss coverage. On June 12,
1999, Elfton paid the medical expenses associated with the accident. With regard to which stop-loss carrier is liable
for expenses covered by the contract and the date on which that carrier became liable, this information indicates that
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Pierrot became liable on May 2, 1999, for paying its share of the expenses

Aqueduct become liable on June 12, 1999, for paying its share of the expenses

Aqueduct became liable on June 1, 1999, for paying its share of the expenses

Pierrot became liable on May 31, 1999, for paying its share of the expenses

Question 35 of 50
The primary purpose of Mainline's balance sheet is to measure Mainline's
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financial position as of a specified date

operating efficiency

cash flow

profitability

Question 36 of 50
A reconciliation is the process by which an MCO assesses providers' performance relative to contractual terms and
reimbursement. With regard to this process, it can correctly be stated that
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an MCO typically should conduct a reconciliation immediately after the evaluation period has ended

most agreements between MCOs and providers require reconciliations to be performed quarterly

a reconciliation typically includes payment to the providers of any withholds or bonuses payable to them

an MCO typically cannot conduct a reconciliation for a provider until the plan has received and settled all claims

or other documentation of services that the physician provided during the evaluation period

Question 37 of 50
The Heritage MCO calculated the cost of collecting renewal premiums associated with its preferred provider
organization (PPO) product by gathering cost data from all departments involved in the collection process, as well as
by determining printing and postage expenses, machine costs for mailing premium notices, and the indirect costs of
other departments involved in premium collection. In this situation, Heritage is using the method of cost analysis
known as
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break-even analysis

functional cost analysis

fixed cost analysis

change analysis

Question 38 of 50
The Crystal MCO pays a capitation rate to its providers on a monthly basis. Crystal has determined that the average
number of services used by a member in one year is 2.5 and the average fee-for-service (FFS) rate per office visit is
$60. Members pay a $10 copayment for each office visit. This information indicates that Crystal would correctly
calculate that the PMPM capitation rate it pays to its providers should be approximately
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$20.00

$10.42

$12.50

$14.58

Question 39 of 50
The following statements are about the underwriting risk factors associated with groups seeking healthcare coverage.
Select the answer choice that contains the correct statement.
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A group with a large proportion of young females is likely to have higher healthcare costs than does a group with

a large proportion of young males.

Antiselection risk tends to be lower in multiple-employer groups than in other types of groups seeking healthcare

coverage.
Compared to small groups, large groups present higher overall risks to an MCO

Public employers-federal, state, and local government employers-generally present to an MCO a lower

underwriting risk than do private employers

Question 40 of 50
In fee-for-service (FFS) and discounted FFS systems, excessive services can take one of three forms: churning,
upcoding, and unbundling. Churning is defined in this context as the practice of a provider's
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billing a plan member for amounts that exceed the payment made by the MCO for the service performed

billing for a procedure that pays more than the procedure actually performed by the provider

either seeing a plan member more often than is necessary, or providing more treatments and tests than are

necessary
billing for multiple components of a service that were previously included in a single fee, when the total

reimbursement for the multiple component services would be higher than the single fee

Question 41 of 50
For this question, if answer choices (1) through (3) are all correct, select answer choice (4). Otherwise, select the one
correct answer choice. The following statement(s) can correctly be made about an MCO's pricing of healthcare
products:

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The estimation of claims costs is a key element in pricing traditional indemnity benefits.

To develop the expected claims costs for a preferred provider organization's (PPO's) in-network plan, the MCO's

actuaries adjust the base indemnity claims costs to reflect pertinent characteristics of the plan, including the provider
discount arrangements and the impact of cost-containment procedures.
Cost sharing features in a traditional indemnity plan often include deductibles, coinsurance, out-of-pocket

maximums, and plan maximums.

All of these statements are correct.

Question 42 of 50
An MCO desires to price health plan benefits and other products in such a way that the rates for the MCO's products
are adequate, reasonable, equitable, and competitive. An MCO's premium rates are said to be adequate if the
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MCO charges different prices to different covered groups on the basis of factors that have a direct impact on
utilization rates
rates are low enough to achieve the strategic objective of obtaining or retaining a specified share of the market
in which the MCO conducts business
rates do not exceed those that are needed to cover the MCO's costs and provide the MCO with a fair profit
rates are high enough to ensure that the MCO has enough money on hand to pay operating expenses, including
healthcare benefits and provider reimbursement, as they come due
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Question 43 of 50
With regard to the Medicaid program in the United States, it can correctly be stated that
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a state's payment to MCOs for providing Medicaid services cannot be more than it would have cost the state to

provide the services under Medicaid fee-for-service (FFS)

the federal government provides none of the funding for state Medicaid programs

states are prohibited from carving out specific services from the capitation rate that MCOs receive for providing

Medicaid services
federal Medicaid law is different from Medicare law in that the federal government explicitly sets forth the

methodology for payment of Medicaid-contracting plans but not Medicare-contracting plans

Question 44 of 50
The following statements are about solvency standards established by the National Association of Insurance
Commissioners' (NAIC's) Health Maintenance Organization Model Act (HMO Model Act). Select the answer choice
that contains the correct statement.
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Plans meeting the net worth requirement through the percent-of-premium method must maintain a higher

percentage of the premium revenues that exceed $150 million than of the first $150 million in premium revenues.
HMOs that receive more premiums than other HMOs generally are permitted to have a lower net worth than the

other HMOs.
The HMO Model Act is prospective in its assessment of risk in that it uses expected expenditures and expected

premium income to estimate future risk.

The net worth requirements in the HMO Model Act set a minimum fixed level of capital and surplus for all HMOs.

Question 45 of 50
One approach to evaluating capital investment alternatives employs the following decision rule: If the proposed
investment's time-adjusted rate of return exceeds the company's weighted average cost of capital (WACC), accept
the proposal. Otherwise, reject the proposal. This decision rule is associated with the capital budgeting method
known as the
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net presence value (NPV) method

basic payback method

internal rate of return (IRR) method

discounted payback method

Question 46 of 50
One piece of information that a financial analyst would typically find in an MCO's cash budget is the
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amount of the MCO's liabilities

amount of earnings retained by the MCO

types of assets the MCO owns

effects of the MCO's financing activities

Question 47 of 50
The following statements are about the variations in capitation arrangements based on the type of providers and
medical services covered under the capitation contract. Select the answer choice that contains the correct statement.
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Global capitation payments cover all physician services and associated diagnostic tests and laboratory work, but

do not cover any other inpatient or outpatient services that the health plan offers.
Under a full professional capitation arrangement, a provider entity that receives per member per month (PMPM)

capitation must subcapitate its individual physicians using PMPM capitation.

Most primary care capitation arrangements make the provider financially responsible for the cost of major

diagnostic tests that a primary care provider (PCP) might order.

Under a specialty capitation arrangement, a specialist who experiences even a small number of very expensive

cases risks very high losses, even if the population utilization rate is low

Question 48 of 50
For this question, if answer choices (1) through (3) are all correct, select answer choice (4). Otherwise, select the one
correct answer choice. Mandated benefit laws are state or federal laws that require MCOs to arrange for the financing
and delivery of particular benefits. Ways that mandated benefits have the potential to influence MCOs include
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decreasing the cost of an MCO's health plan

requiring MCOs to contract with providers with which the MCOs would not have contracted otherwise

eliminating uniformity among health plans of competing MCOs in a given market

all of the above

Question 49 of 50
The Aster MCO's capital structure consists of 30% debt and 70% equity. Aster's average after-tax cost of debt is 6%
and its cost of equity is 10%. This information indicates that Aster's weighted average cost of capital (WACC) is equal
to
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8.00%

4.80%

8.80%

7.20%

Question 50 of 50
Many states have enacted small group reform laws to increase small employer access to affordable healthcare.
Provisions of these small group reform laws typically
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require each MCO that participates in a small group market to issue a contract to any employer who requests

healthcare benefits, as long as the employer meets the statutory definition of a small group

permit an MCO to elect not to issue a contract to a particular group if the group has had poor claims experience

or has a member who is suffering from a catastrophic illness or injury that would result in substantial healthcare
expenses
prohibit an MCO from using community rating to determine a group's premium rate

define a small group as an eligible employer with between 10 and 100 employees