Welcome to:Self-Funding, Doing it Right

TX Course #98737

Two Hours CE Credit

Housekeeping:

1. Please put your phones on silent or buzz.

2. Please sign in and print legibly

3. Presentation – There will be a 10 minute break at the 50 – 55 minute mark.

4. Please feel free to ask questions for discussion during the presentation.

5. Quote/Actions & Quiz Questions

6. Please complete an Evaluation Survey

o Self-Funding: What is it?o Self-Funding in the Marketplace Todayo Fully Insured Model vs. Self Funded Modelo The Mechanics of Self-Fundingo Self-Funding Scenarioso The Pros and Cons of Self-Fundingo PPACA: Impact on Self-Fundingo Prospecting and Retention

Introduction to Self-Funding

DISCLAIMER

This presentation is for educational purposes only.  It does not constitute legal advice, nor does it constitute advice about any particular set of facts or issues.  If you have questions about a particular set of facts or issues, consider independently consulting an attorney or other professional.

© TRIFLEX Corporation, all rights reserved

Pop Quiz:

1. Self-funded health plans are almost always governed by:

a. ERISA

b. The IRS

c. The state insurance commissioner

What is Self-Funding?

When an employer group wants to offer health benefits to their employees but does not want to pay an insurance company. Instead they take the place of the insurance company and “self insure.”

Two levels of Self-Funding1. Fully Self Funded

• Group retains all the risk – they do not purchase stop loss• Usually reserved for “jumbo” cases• Examples: Microsoft, Walmart, General Motors

2. Partially Self Funded• Employer purchases insurance policy to take part of the

risk• On a smaller scale a HDHP with an HRA is an example• Traditional self funded plans purchase stop loss coverage.

The numbers of employees in self funded medical plans has increased from 44% in 1999 to 60% in 2012.

Self-Funding in the Marketplace Today

Increase in % of Covered Workers Participating by Size:•3 - 199 Workers 13% to 15%•200 - 999 Workers 51% to 52%•1,000 - 4,999 Workers 62% to 78%•5,000 + Workers 62% to 93%

Quote/Action

"In the middle of every difficulty comes opportunity.”

Albert Einstein

Your action is to take one of the challenges you are currently facing and look for the opportunity it presents you.

Pop Quiz:

2. Using Disease Management or Wellness Programs to help control claims exposure are commonly referred to as:

a. Price Fixing Strategies

b. Cost Containment Strategies

c. Cost Shifting Strategies

Fully Insured Model vs. Self Funded Model

Fully Insured Self Funded

Employers pay a monthly, pre-determined amount to the insurance company.

Employers reserve a monthly, pre-determined amount in an interest bearing account.

The insurance company accepts all of the risk associated with medical claim costs by its enrolled members.

The employer accepts all of the risk associated with medical claims costs by its enrolled members.

In an effort to reduce their risk, insurance companies utilize tools to help minimize medical claims: - Pre-determined Plan Designs - Capitation/Network Re-pricing of Claims - Managed Care - Large Case Management - Reinsurance (pooling point)

In an effort to reduce their risk, employers and their brokers utilize tools to help minimize medical claims: - Customized Plan Designs - Network Re-pricing of Claims - Managed Care through UR/UM - Large Case Management - Stop Loss Insurance

The insurance company receives the excess profit when a group experiences good health and lower than expected utilization.

The employer retains the excess profit when a group experiences good health and lower than expected utilization.

Mechanics: Benefit Design

Plan Document and Summary Plan Description (SPD)

In a self funded health plan, the employer, with the assistance of their broker, creates, defines and establishes a benefit plan for its employees.

For groups that are currently fully insured the new plans are normally modeled after their current fully insured plans.

Self funded plans are governed by ERISA (Federal law) and are not subject to State mandates.

Groups have great flexibility in plan design

Who are the Players

1. The Plan Sponsor

2. Consulting Services

3. Legal Services

4. Actuarial Services

5. Accounting and Auditing Services

6. Stop-Loss Insurer

7. Third Parties Providing Administration Services

8. Third Parties Providing Specialized Plan Admin. Services

9. Provider Networks

Mechanics: Paying Claims

Self-insured employers can either administer the claims in-house, or subcontract this service to a third party administrator (TPA). TPAs can also help employers set up their self-insured group health plans and coordinate stop-loss insurance coverage, provider network contracts and utilization review services.

Third Party Administrators (TPA)An Important Distinction: Bundled ASO vs. Unbundled Independent TPA

Mechanics: Paying Claims

TPAs provide many services to the employer including:

1. Claim and premium administration

2. Reporting

3. Plan Document Creation

4. Stop Loss Integration

5. Cost Containment Features/Vendors (in house or sub-contracted)

6. PPO Access

7. COBRA/HIPAA administration

Quote/Action

"The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails." Writer: William Arthur Ward

Your action is to think of a problem or challenge you're facing. Are you approaching it in a pessimistic, optimistic or realistic frame of mind?

Pop Quiz:

3. The availability of competitive stop-loss coverage is one of the most critical components in determining an employer’s willingness to self-fund.

a. True

b. False

Mechanics: PPO Networks for Medical Claims

Physician Networks (PPO)

Self funded health plans will typically “lease” a PPO network in order to provide their employees access to physician and hospitals, as well as reduce the risk to employer’s claim fund by taking advantage of established PPO network discounts.

Items to consider:• Robust and easily accessible to its members• Discount structure and payment timeline• TPA integration• Accurately priced by the stop loss carriers

PPO Network Service Type Charge Allowable % Off Billed

PPO A Outpatient Hospital $1,614,407 $607,264 63.4%

PPO B Outpatient Hospital $1,614,407 $757,724 53.1%

PPO C Outpatient Hospital $1,614,407 $957,724 40.7%

Referenced Outpatient Hospital $1,614,407 $386,021 76.1%

Mechanics: PPO Network for Rx Claims

Pharmacy Benefit Management (PBM)A PBM is essentially an Rx TPA married to a Rx PPO network.

• Provide access to most major pharmacies• Negotiate discounts on a employer’s behalf• Manage formularies on behalf of employer (provide

recommendations)• Many offer mail order and specialty drug programs

Examples: Express Scripts (Medco), CVS Caremark, OptumRx, Med Impact, RestatMost TPAs contract with numerous PBMs and are willing to integrate the Rx claims information in their monthly reporting and stop loss filing.Cost saving opportunities: Rebates and Plan Transparency

Mechanics: Cost ContainmentEmployers can also add numerous features to help manage both the frequency and severity of claims. These programs are typically called cost containment.

1. Disease Management2. Utilization Review and Management3. Case Management4. Bill Audit and Review Services5. Out of Network negotiation6. Patient Advocacy7. Tele-Doc Services8. Specialty Care Vendors: Dialysis, Hemophilia, etc.9. Wellness Programs

TPAs and PPO networks will typically provide some of these features.

Mechanics: Stop Loss Insurance

Since the employer is accepting the financial responsibility for the medical claims there are two main concerns.

1. Large Claimants

2. Over Utilization

Stop Loss insurance provides protection against both scenarios.

1. Specific stop loss coverage covers catastrophic claims

2. Aggregate stop loss coverage covers against “over utilization” by providing a maximum out of pocket for the employer’s collective claims.

The availability of competitive stop loss coverage is one of the most critical components in determining an employer’s ability to self fund.

Mechanics: Stop Loss Insurance

Specific Stop Loss (Individual)1. Employer is responsible for all claims on every member until the

deductible is met.

2. Carriers can provide various deductible options to suit a group’s risk tolerance.

3. The higher the deductible the lower the price for the insurance.

4. Occasionally, specific individuals will be subject to a higher deductible known as a laser.

Aggregate Stop Loss (Group)1. Claim maximum (aggregate attachment point) is normally set

25% higher than expected claims (25% corridor)2. Aggregate can be difficult to secure due to lack of claims data3. Aggregate coverage is cheap (“sleep insurance”), historically a

group has a 2% chance of hitting their maximum.

Mechanics: Specific Stop Loss Coverage

Specific Stop Loss Insurance (Individual)Specific stop loss coverage provides protection from catastrophic losses on each individual insured under the plan.

Example: An employer group with 250 employees selects a $75,000 specific deductible. Employee John Smith has a heart attack and the total claims incurred during his hospital stay totaled $195,000. The employer is responsible for the first $75,000 in medical claims incurred by John Smith. The stop loss carrier then reimburses the employer for the $120,000 that exceeded the specific deductible.

$75,000

100% Stop Loss Carrier’s Responsibility

100% ABC Group’s Responsibility (up to stop loss deductible)

20% Patient Responsibility

80% ABC Group Responsibility (This is known as coinsurance, where the patient and health plan co-insure the

risk.)

Individual Deductible & Copayments (Patient Responsibility)

$500-

$3,000-

$75,000-

Specific Stop Loss Claim Accumulation – ABC Group

Frequency & Severity of Claim Utilization

Individual Claim Range % of Claimants

$0 to $999 80%

$1,000 to $4,999 14%

$5,000 to $9,999 3%

$10,000 to $24,999 2%

$25,000 to $59,999 1%

$60,000 or more <1%

Total 100%

Mechanics: Aggregate Stop Loss Coverage

Aggregate Stop Loss Insurance (Group)Aggregate Stop Loss Insurance provides a second layer of protection for self funded health plans intended to limit the plan’s maximum financial exposure. The aggregate “deductible” is determined by the insurance company and is regularly set at 125% of the expected claims for the group.Example: A stop loss carrier evaluates a 250 EE company’s data and develops an expected claims attachment point of $2M. They then adjust it by 25% to arrive at a maximum claims attachment point of $2.5M. Items to consider:•Aggregate coverage can be difficult to secure due to a lack of claims data.•Aggregate coverage is not always purchased since medical claim costs rarely exceed 125% of expected claims.

Aggregate Attachment Point: Maximum Claims per Group (125% of Expected)

$2,000,000 Expected Claims (100%)Specific Deductible:

Maximum Claims per Individual

John Smith

$75,000

$2,500,000

Mechanics: Specific & Aggregate Stop Loss Insurance

Quote/Action

"To acquire knowledge, one must study; but to acquire wisdom, one must observe."

Writer: Marilyn vos Savant

Your action for to observe yourself as if you were a third party watching you.

Pop Quiz:

4. Stop loss protection for each individual covered under the health plan is referred to as:

a. Specific Stop Loss

b. Aggregate Stop Loss

c. Cost Shifting Strategies

30

Mechanics: Stop Loss Contract Options

Standard Stop Loss Contract OptionsSince all claims are not received and paid within the Plan Year, stop loss is sold with various “contracts” offering coverage for claims incurred prior to the effective date (run-in) and claims that are paid after the policy year is over (run-out). Two important terms:

1. Incurred (first number)• Incurred date refers to the date the member receives care.• This number designates the number of months qualified claims

can be incurred.2. Paid (second number)

• Paid date refers to the date the claim is paid by the administrator.

• This number designates the number of months a qualified claim can be paid.

Typical turn around time from incurred to paid is 6-10 weeks.

12/12Claims must be incurred and paid in the same 12 month

period.

1/1/2014 12/31/2014

|-------------------------------------------------------------------|

INCURRED|-------------------------------------------------------------------|

PAID A 12/12 contract has no Run-In or Run-Out protection. Sometimes sold with a Terminal Liability Option (TLO). This contract can be used to help a group transition to

self funding.

Mechanics: Stop Loss Contract Options – 12/12

12/15Claims must be incurred within 12 months and paid within 3

months following the end of the coverage period.

1/1/201412/31/2014|-----------------------------------------------------|INCURRED|-----------------------------------------------------|-----------------|

PAID 3/31/2015

This type of coverage is called Run-Out. It is also available in contracts on a 12/18 and 12/24

basis. Fully insured policies are on an incurred basis and

typically offer a 12/24 or greater.

Mechanics: Stop Loss Contract Options – 12/15

15/12Claims must be incurred within 15 months and paid

in the 12 month coverage period.

|-----------------|------------------------------------------------| 10/1/2013 1/1/2014 INCURRED 12/31/2014

|-----------------------------------------------|

PAID

This type of coverage is called Run-In. It is also available in contracts on an 18/12,

24/12, and paid basis.

Mechanics: Stop Loss Contract Options – 15/12

Self-Funding: A Fully Insured Prospect

A prospective client currently offers (3) health plans to its employees: HMO, Low PPO and High PPO. All plans are currently fully insured through a major insurance company. The CEO and CFO of the organization believe that the insurance company is making money on an annual, consistent basis off of their workforce’s good claims’ utilization and costs. They also desire the cash flow benefits and plan design control that self-funding offers.

The broker and the client work to secure claims data, enrollment information, plan designs, etc. so that the stop loss carriers will have enough information to make an appropriate evaluation of the risk. After working with multiple stop loss markets, the group receives their stop loss quote(s) and now have the ability to determine total cost scenarios including potential claims liability, stop loss premium and plan administration.

Real Life Scenario: A Fully Insured Prospect

Fully Insured Premium

$2,750,000

$1,800,000

$200,000Plan Administration

$400,000Stop Loss

$65,000PPO Access Fees

$35,000Ancillary Vendors

$450,000

Expected Claims

Risk Corridor

$2,950,000Maximum Liability

Self-Funding: Disadvantages & Potential Exposures

1. Securing competitive stop loss – group size, location, available claims data

2. Potential claim liability – claims can come in above expected

3. Not building claim reserves – claim reserve underfunded

4. Looting claim reserve for other expenses - can lead to insolvency

5. Over-generous employers – exceptions are not covered by stop loss

6. HIPAA Compliance (“hands-on”)

Self-Funding: Advantages

1. Control of the plan design

2. Ancillary service flexibility

3. Collection of health plan data

4. Lower administrative costs

5. Cash flow benefits

6. The ability to build reserves

7. Elimination of carrier profit margin

8. Reduced premium tax

9. Avoidance of Health Insurance Industry tax

Quote/Action

"You always pass failure on your way to success."

Actor: Mickey Rooney

Your action is to think of three failures that were stepping stones to success.

Pop Quiz:

5. Self-funded health plans are not subject to the Health Insurance Industry Tax

a. True

b. False

Real Life Scenario: 200 Employee Company

A 200 EE Company was partially self funded through Principal Financial Group on a minimum premium plan.

Late in 2010 Principal decided to exit the health insurance market and offered a renewal using UMR (UHC) and BP, Inc. as the stop loss carrier.

Broker, TPA and the Stop-loss provided stop loss quotes from 6 carriers utilizing HealthComp and the Blue Cross network.

Through an unbundled approach we were able to drop the group’s maximum liability from $2,698,000 with Principal to $2,092,000.

Since that time the group has grown but the PEPM costs have remained steady. They are now entering their fourth year being unbundled.

200 Employee Company – Unbundling

In 2011 Principal Financial decided to get out of the medical business. Moving to an unbundled self funded plan with HealthComp and

Anthem, the employer was able to reduce their PEPM maximum costs from $1,128 to $908.

Employer’s overall PEPM trend over the last four years is 0.7%.

XYZ Corporation – Comparison of Administration Costs

ABC Group – Building Reserves

Over a 5 year period ABC Group’s reserve grew to almost $1.2M. Over a 5 year period ABC Group’s claims came in at 91.2% of expected. For all 5 years the actual paid claims came in under the expected

claims. ABC Group’s effective trend was only 7.7% on claims per year.

XYZ Corporation – Building Reserves

Over a 5 year period XYZ Corporation’s reserve grew to $215K. Over a 5 year period XYZ Corporation’s claims came in at 94.3% of

expected. During the 2011-12 plan year, XYZ Corporation’s claims exceeded the

aggregate attachment point by $9,336. XYZ Corporation’s effective trend was 12.3% on claims per year.

Quote/Action

"It is not because things are difficult that we do not dare; it is because we do not dare that they are difficult."

Philosopher: Seneca

Your action is to do something daring!

Pop Quiz:

6. Administrative Costs associated with a self-Funded Plan are more costly than those within a fully insured arrangement?

a. True

b. False

PPACA: How It Affects Self-Funding?

Interest is mounting because..It historically has been even before PPACA. In 1999, 44% of all employees were covered in a self funded environment. Today, that number has grown to 60%.PPACA requires employers with 50 or more employees to pay or play. This may leave employers looking for health benefits and self-funding is one of the more long term, cost effective approaches.

If Massachusetts tells us anything…The % of employees in self-insured plans with 50 or more employees rose from 54.6 in 2005-2006 to 67.2% in 2010-2011.

Better strategic position to adjust benefits to control increased provider costs.Fully insured premiums expected to jump to accommodate new provisions as a result of PPACA.

PPACA: How It Affects Self-Funding?

Interest is mounting continued..Other considerations:Limited exposure to MLR rulesGuarantee issue rule, not applicable to stop loss carriersStop loss premiums will not likely be subject to all the ACA feesSome additional advantages-

o “Essential Health Benefits”o Avoidance of Health Insurance Tax (HIT)o Most premium taxeso State mandated benefits

PPACA: How it affects Self-Funding?

PCORI Fee & Transitional Reinsurance Fees will apply to fully insured and self funded health plans, however self funded health plans are exempt from both the Risk Adjustment Fee & Health Insurance Industry Tax due to ERISA law.

What do the fees equal in savings for the self funded client versus fully insured?Group Size: 250 EmployeesAnnual Premium: $2,750,000Estimated Renewal Trend: 5%

1/1/2014 1/1/2015 1/1/2016 1/1/2017

Renewal Premium $2,887,500

$3,031,875

$3,183,469

$3,342,642

Estimated HIT Fees

$66,412 $98,536 $103,463 $133,706

HIT % 2.3% 3.25% 3.25% 4.0%

*For illustrative purposes only. Fee Estimates taken from the Oliver Wyman Study.

Reduced Premium and ACA Taxes

Fully Insured Self Funded Self Funded

Annual Premium Premium Tax Health Ins. Industry Tax Total Premium Tax Savings

$1,000,000 $25,000 $23,000 $48,000 $5,000 $43,000

$2,000,000 $50,000 $46,000 $96,000 $10,000 $86,000

$4,000,000 $100,000 $92,000 $192,000 $20,000 $172,000

$6,000,000 $150,000 $138,000 $288,000 $30,000 $258,000

$8,000,000 $200,000 $184,000 $384,000 $40,000 $344,000

$10,000,000 $250,000 $230,000 $480,000 $50,000 $430,000

$40,000,000 $1,000,000 $920,000 $1,920,000 $200,000 $1,720,000

Note: Self funded premium tax assumes stop loss premium is 20% of fully insured premium.

Prospecting and RetentionTalk to both your current groups and prospective groups about self funding.

1.If a group is fully insured offer to do a viability study to evaluate the competitiveness of self-funding. Request the following: Current & Proposed Plan Designs Census: DOB, ZIP, Coverage Type/Tier 2-3 Years Rate History (Renewal if available) 2-3 Years Paid Claims Experience 2-3 Years Large Claim Experience

Prospecting and Retention

2. If a prospect is currently self funded, offer to do an audit of their self funded plan: Review the Plan Document and Stop Loss

policy for gaps Review eligibility language Review plan exclusions Analyze claim trends Review high dollar individuals for cost

containment options

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© TRIFLEX Corporation, all rights reserved

Please Complete the Evaluation

Don CooperFounder – TriFlex Corporation

don@triflexcorp.com469-518-5000