- (Topic 2)
The Puma health plan uses return on investment (ROI) and residual income (RI) to measure the performance of its investment centers. Two of these investment centers are identified as X and Y. Investment Center X earns $10,000,000 in operating income on controllable investments of $50,000,000, and it has total revenues of $60,000,000. Investment Center Y earns $2,000,000 in operating income on controllable investments of $8,000,000, and it has total revenues of $10,000,000. Both centers have a minimum required rate of return of 15%.
One difference between the RI method and the ROI method is that

1. A. The RI method demands greater goal congruence from Puma's managers than does the ROI method
2. B. The RI method favors Puma's small investment centers more than does the ROI method
3. C. Only RI can lead to decisions that improve Puma's short-term profits at the expense of its long-term objectives
4. D. Only RI is useful to Puma for comparing investment centers of different sizes

Correct Answer: A

- (Topic 1)
Provider reimbursement methods that transfer some utilization risk from a health plan to providers affect the health plan's RBC formula. A health plan's use of these reimbursement methods is likely to result in

1. A. An increase the health plan's underwriting risk
2. B. A decrease the health plan's credit risk
3. C. A decrease the health plan's net worth requirement
4. D. All of the above

Correct Answer: C

- (Topic 2)
The following transactions occurred at the Lane Health Plan:
✑ Transaction 1 — Lane recorded a $25,000 premium prior to receiving the payment
✑ Transaction 2 — Lane purchased $500 in office expenses on account, but did not record the expense until it received the bill a month later
✑ Transaction 3 — Fire destroyed one of Lane’s facilities; Lane waited until the facility was rebuilt before assessing and recording the amount of loss
✑ Transaction 4 — Lane sold an investment on which it realized a $14,000 gain; Lane recorded the gain only after the sale was completed.
Of these transactions, the one that is consistent with the accounting principle of conservatism is:

1. A. Transaction 1
2. B. Transaction 2
3. C. Transaction 3
4. D. Transaction 4

Correct Answer: D

- (Topic 1)
The NAIC has developed a risk-based capital (RBC) formula for all health plans that accept risk. One true statement about the RBC formula for health plans is that it

1. A. is a set of calculations, based on information in a health plan's annual financial report, that yields a target capital requirement for the organization
2. B. fails to take into account a health plan's underwriting risk, which is the risk that the premiums the health plan receives will be insufficient to pay for the healthcare services it provides to its plan members
3. C. applies to all health plans in the United States
4. D. fails to assess the specific level of risk faced by each health plan

Correct Answer: A

- (Topic 1)
The Zane health plan uses a base of accounting known as accrual-basis accounting. With regard to this base of accounting, it can correctly be stated that accrual-basis accounting

1. A. Enables an interested party to view the consequences of obligations incurred by Zane, but only if the health plan ultimately completes the business transaction
2. B. Is not suitable for measuring Zane's profitability
3. C. Requires Zane to record revenues when they are earned and expenses when they are incurred, even if cash has not actually changed hands
4. D. Prohibits Zane from making adjusting entries to its accounting records at the end of each accounting year

Correct Answer: C