ELTZER GROUP BENEFITSnfp.meltzer.com/wp-content/uploads/Self-Funding-TMG-May-2014.pdfReality: Unbundled Services with a Consolidated Bill Administering a partially self-funded plan

MELTZER GROUP BENEFITS SELF-FUNDING – MYTHS AND ADVANTAGES

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TODAY’S AGENDA

I. Summary

II. Common Misperceptions of Self-Funding

III. Advantages of Self-Funding

IV. Stop Loss Contract Terms and Options

V. Stop Loss Contract Underwriting

VI. Self Funding Terminology

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SUMMARY

Employers have a choice in how they want to fund their medical benefit

plans:

Fully Insured: employer pays a fixed monthly premium covering expected

claims, administrative costs and risk charges. If actual claims are lower

than expected the insurer keeps the difference. If actual claims are higher

than expected the insurer pays the difference.

Self Insured: employer pays a fee to a plan administrator who performs

claim processing and securing discounted services from providers. The

employer takes the risk of claim fluctuation. If actual claims are lower than

expected the employer keeps the difference. If actual claims are higher

than expected the employer is liable for the difference.

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SUMMARY – RISK CONTINUUM

Employers need to understand the continuum to prioritize and balance their

risk tolerance, financial flexibility and degree of control when selecting the

appropriate funding mechanism.

The left side of the continuum represents higher fixed costs with low risk /

reward while the right side of the continuum represents lower fixed costs

with higher risk / reward.

Fully

Insured ASO

Minimum

Premium

ASO w/

Stop Loss

Fixed Monthly Cost

Minimum Risk

Maximum Cash Flexibility

Maximum Risk

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MISPERCEPTIONS OF SELF-FUNDING

Small employers have been hesitant to self-fund their health plan because

they perceive it as appropriate only for large companies (> 500 Ees)

Within the last two years there have been many new and innovative

products specifically designed for employers with fewer than 250

employees. These products enable employers of all sizes to enjoy the

benefits of self-funding while limiting the associated risk.

Common Misperceptions

1. Significant Financial Risk

2. Budgeting for Claims

3. Administrative Burden

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MISPERCEPTIONS OF SELF-FUNDING – SIGNIFICANT FINANCIAL RISK

“What happens if we have a large claimant or an employee or dependent

with a serious ongoing health issue?”

Reality: Individual Stop-Loss (ISL) Insurance

Individual stop loss insurance limits the employer’s liability to a set dollar

figure per individual per policy year. Additional claims for that individual for

the remainder of the plan year would also be reimbursed by the stop loss

insurance carrier.

Example: Employer A has $40K specific deductible

Employee A has $85K hospital claim

Employer A is reimbursed $45K

Considerations:

Choose the appropriate ISL dollar limit ($20K - $150K+);

ISL reimbursement provisions under the contract

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MISPERCEPTIONS OF SELF-FUNDING – SIGNIFICANT FINANCIAL RISK

“How do we budget for claims expenses that change each month?”

Reality: Aggregate Stop-Loss (ASL) Insurance

Aggregate stop loss insurance limits the employer’s liability to overall claim

fluctuation. The liability is expressed in terms of a percentage of total

expected claims (e.g. 125%). If paid claims exceed expected claims by

more than 25% the ASL will reimburse the employer the difference.

Example: Employer A has Expected Claims of $1M

Employer A has Maximum Claims of $1.25M

Employer A has Actual Claims of $1.27M

Employer A is reimbursed $200K

Considerations:

Choose the appropriate ASL limit (110% - 125% of Expected);

ASL reimbursement provisions under the contract

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MISPERCEPTIONS OF SELF-FUNDING – ADMINISTRATIVE BURDEN

“Dealing with different entities will be confusing, cost more and coverage

gaps may occur?”

Reality: Unbundled Services with a Consolidated Bill

Administering a partially self-funded plan is no more difficult than a fully-

insured program. The carrier or TPA issues a consolidated bill for fixed

costs, establishes account for claim payments, and coordinates services of

outside vendors.

Considerations:

Is the Plan Administrator independent?

Will timely plan services be available?

What range of benefit services are available through the Administrator?

Is the cost of plan services both reasonable and affordable?

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ADVANTAGES OF SELF-FUNDING

Companies with fewer than 250 employees can self-fund but will typically

purchase stop-loss insurance. Stop-loss insurance limits the amount of

claims expenses the employer’s self-funded health plan is responsible for

per covered individual per plan year. If claims are lower than predicted,

the employer can save money directly compared to paying the set monthly

premium of a fully insured plan. Stop-loss insurance policy puts a ceiling

on the maximum amount the employer would pay in claims.

Advantages

1. Pay for actual claims

2. Know what and where you are paying

3. Offer consistent benefits nationwide

4. Custom plan designs

5. Experience fewer surprises

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ADVANTAGES OF SELF-FUNDING – PAY FOR ACTUAL CLAIMS

The ability to pay only for actual claims incurred by the employee is often

the primary motivation for an employer to choose a self-funded health plan.

If a smaller employer also invests in employee wellness programs and

adopts consumer-driven health plans they have a greater opportunity

to save more by helping to improve employee health and reducing overall

claims.

Advantages Explanation & Value

Opportunity to realize claims

savings

Self-funded solution that includes strategies and programs to

reduce overall claims can create and opportunity to realize claims

savings quickly and directly

A benefits administrator can provide access to a large network of

hospital and health care professionals with competitive discounts

without sacrificing quality or availability

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ADVANTAGES OF SELF-FUNDING – KNOW WHAT YOU ARE PAYING FOR

Companies with fewer than 250 employees now are able to review client

specific reports to assist them in understanding exactly where their

healthcare dollars are being spent and the impact of wellness programs.

This allows for more informed decision-making when considering benefit

changes and provides clear direction in what to include in employee

messages about health, wellness and any upcoming health plan changes.


Client-specific claims

reporting

Client-specific claim reports that contain actionable information

enabling health plan design to meet the unique needs of the

population today and into the future

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ADVANTAGES OF SELF-FUNDING – OFFER CONSISTENT BENEFITS NATIONWIDE

Most self-funded health plans are not subject to state insurance coverage

mandates. This allows an employer to offer the same coverage to

employees in different states, allowing for consistency and easier

administration. Also, self-funded health plans pay state taxes on stop-loss

insurance premiums, compared to the full amount of premiums collected

under a fully insured health plan.


Same plan nationwide A self-funded benefits administrator with a national footprint

enables employers to offer the same coverage.

ACA allows self-funded plans to select any State for minimum

essential benefits.

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ADVANTAGES OF SELF-FUNDING – CUSTOM PLAN DESIGNS

Another advantage of a self-funded health plan is the greater opportunity

for smaller employers to tailor the health plan for their specific employees.

State-mandated benefits are not required and an employer can tailor a

plan design beyond what most fully insured carriers have available “off the

shelf.”


Tailored health plans An expansive portfolio of health plan products each with numerous

plan design options (benefits, deductibles, copays, annual limits,

etc.) from which to tailor the health plan.

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ADVANTAGES OF SELF-FUNDING – EXPERIENCE FEWER SURPRISES

With a fully insured health plan, it is typically 60 days prior to the effective

date when the carrier delivers the renewal, before anything is known about

current and future health care costs. For smaller employers (< 100 Ees),

data to explain or justify renewal increases is typically not available. A self-

funded health plan allows the employer to see how the health plan is

performing throughout the year, so renewal changes are not a surprise.


Experience fewer surprises Accurate data through reports and financial statements about how

the health plan is performing compared to expectations available on

an ongoing basis.

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STOP LOSS CONTRACT TERMS AND OPTIONS

Coverage is often labeled based on the number of incurred months

covered followed by the number of paid months covered. For example,

with a 12/12 contract only claims that are both incurred and paid during the

12-month policy year will be covered. Due to provider billing and medical

claim processing delays this is considered an Immature Policy.

Run-In Contracts such as a 15/12 would cover claims incurred up to three

months prior to the effective date.

Terminal Liability contracts extend the paid period by a set number of

months in the year of termination only, covering claims paid after the

termination date.

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STOP LOSS CONTRACT TERMS AND OPTIONS – RENEWAL OPTIONS

When renewing a Stop Loss policy, contracts are usually written on either

a Paid or Rolling basis.

Paid Stop Loss Contract covers all claims paid during that policy year,

regardless of incurred date, as long as the claims were incurred since the

policy date.

Rolling Stop Loss Contract limits coverage to a defined number of paid

and incurred months each year. A 12/18 contract covers claims incurred

during the 12-month policy period that are paid during the 12-month policy

period or in six months directly following.

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Example of a 12/12 First-Year Contract with a Paid Contract Renewal and

Terminal Liability Coverage executed in Year Three

• Employer begins on a 12/12 basis in Year One

• Upon renewal the contract becomes a Paid Contract

• In Year Three, they terminate and paid dates are extended for three additional

months at the end of the policy year.

Jan-Mar Apr-Jun Jul-Sep Oct-Dec Jan-Mar Apr-Jun Jul-Sep Oct-Dec Jan-Mar Apr-Jun Jul-Sep Oct-Dec Jan-Mar Apr-Jun

First Year

Immature 12/12

Second Year

Paid

Third Year

Paid + 3 month TLO

Incurred

Paid

Incurred

Paid

2014 2015 2016 2017

Incurred

Paid

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Incurred Stop Loss Contracts are an alternative to the typical paid

approach. Due to the lag in provider billing and claim processing it is

possible to have claims incurred within one policy year and paid partially in

that policy year and partially in the following policy year.

Incurred contracts accumulate claims based on incurred dates eliminating

claim payment timing from the Stop Loss equation. The Incurred contract

also provides built in terminal liability protection in the final year of

coverage.

Incurred contracts match the Stop Loss liability with the way employers

think about their medical liability, thus it is a natural choice for an employer

converting from a fully insured plan to self insured.

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Benefits of Incurred Contracts (e.g. 12/18 Contract) • Accumulates claims towards the pooling point based on the year the claims were

incurred, rather than the year they were paid;

• Once the member hits the pooling point in a given year, all other claims incurred by

that member (paid within 18 month period) within the year will be covered;

• Provides built-in Run-Out protection;

• Eliminates the need for future Run-In protection;

• Eliminates the first-year maturation adjustment;

Jan-Mar Apr-Jun Jul-Sep Oct-Dec Jan-Mar Apr-Jun Jul-Sep Oct-Dec Jan-Mar Apr-Jun Jul-Sep Oct-Dec

IncurredFirst Year

Second Year

Paid

Incurred

Paid

2014 2015 2016

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STOP LOSS CONTRACT TERMS AND OPTIONS – COVERAGE VARIATIONS

Stop Loss should not be viewed as a commodity where pricing is the only

variable. Stop Loss coverage has many nuances which can have a

dramatic affect on how a claim is covered under the Policy.

In order to assess the true value of a Stop Loss Policy it is important to

understand where gaps in coverage may exist:

Unique Lifetime or Annual Maximums

Unique coverage limits may be applied to specific conditions or in

exclusions applied to individuals. Stop Loss coverage that contains

separate maximums can result in increased claim liability for the employer

Run-In Claims Caps

Some Stop Loss policies limit the new carrier’s liability for claims incurred

prior to the new effective date.

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STOP LOSS CONTRACT TERMS AND OPTIONS – COVERAGE VARIATIONS (CONT.)

Medical Plan Inconsistencies

Stop Loss contractual provisions, eligibility rules or definitions that differ

from those contained in the underlying medical plan can result in claim

reductions or denials under the Policy for claims that are paid under the

medical plan.

Disclosure Requirements

Some Stop Loss carriers may impose strict disclosure requires and

contingent quoting that can be costly in the long run. Disclosure is a

process whereby the carrier requires completion of a disclosure from

identifying all known and emerging claims. Claimants not properly

disclosed may result in unexpected claim liability.

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STOP LOSS CONTRACT TERMS AND OPTIONS – COVERAGE VARIATIONS (CONT.)

Contingent Quotes

Contingent quotes require updated claim information within 15-60 days of,

or sometimes after, the effective date. Based on updated information rates

may be revised and exclusions or lasers may be imposed.

Accountability and Service

When choosing a stop loss carrier it is important to understand the

required reimbursement process. It is also important to know who will be

there to provide support, answer questions and make decision impacting

your coverage.

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STOP LOSS CONTRACT - UNDERWRITING

Self-Insurance Feasibility and Cost Analysis – NFP Actuarial Services

The purpose of the analysis is to estimate whether an employer would

have been better off financially had they become self-insured over the last

24 – 36 months as opposed to fully-insuring their plan(s). The report is

used as a framework for investigation into self-insurance going forward

with quotes for network discounts, reinsurance, third-party administration

and other factors.

Information required to evaluate this approach include:

• Current Census

• Detailed past, current and proposed benefit plan summaries

• 24-36 months of claims and premium data by month

• Large Claim (> $20K) data for last 12 months with diagnosis,

prognosis and current status.

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SELF FUNDING TERMINOLOGY

Checklist Item Explanation & Value

Fixed Costs Consists of Administration Fee, Commissions, Individual Stop Loss

Premium and Aggregate Stop Loss Premium. Paid monthly based

on enrollment.

Specific Stop Loss Individual stop-loss insurance provides reimbursement in the event

an individual plan participant has claims that exceed the ISL level

during the contract period

Aggregate Stop-Loss Aggregate stop-loss insurance provides a maximum claim liability

for the entire group

Expected Claims The dollar amount of claims that anticipated to be paid based on

the plan’s characteristics

Maximum Claims The maximum liability for the plan based on enrollment, expected

claims and a pre-determined risk margin

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Immature Rate A reduced pricing structure reserved for the first 12 months of a

plan. The rate is possible due to reduced claims liability in months

one and two of a first year plan because of the claim lag.

Arrangement typically results in a maturing factor added at renewal.

Mature Rate Reflects a full 12-month claim liability

Claims Corridor The area that represents the risk corridor above expected claims.

The corridor is typically set between 10 – 25 percent of expected.

Paid Contract Self-funded contract providing stop loss coverage for all claims

incurred under the life of the policy that are paid during the 12

month contract period.

IBNR “Incurred But Not Reported” refers to claims that are in the lag

period that occurs between its incurral date and paid date.

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Laser Stop loss carriers alter the ISL coverage for certain large ongoing

claimants. The difference may or may not accumulate towards the

employers aggregate claim liability. Some carriers do not mandate

lasers; however, many will consider upon employer request to

lower premiums.

Minimum Attachment Provision sets a minimum claim attachment liability in the event the

employer’s enrollment shrinks. This allows the insured and the

employer to control costs and risk and is based upon a percentage

of enrollment at the time of renewal.

Reinsurance Carrier Stop loss carrier providing ISL and/or ASL protection to the

employer. In a TPA arrangement this is usually a third party and

therefore is not fully integrated as under the Carrier arrangement.

Run-Out Refers to the period of time immediately following termination,

during which all claims incurred prior to the termination date are

being paid. Most contracts provide 3 to 6 months of run-out

protection while some may allow up to 12-15 months.

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State Premium Taxes An assessment levied by a federal or state government on the net

premium income collected. Premium taxes on self-funded plans

are typically lower since only reinsurance premiums are taxed,

whereas the whole premium in a fully insured plan is taxed.

TPA Refers to the third party/entity administering the plan. They may or

may not coordinate with employer on other components such as

provider network, DM, UM, Wellness Programs or Reinsurance.

Contact Type Refers to contracts seen in self-funded arrangements that are

offered through TPAs in conjunction with a reinsurer. The first

number refers to the “Incurral Period” and the second number

refers to the “Paid Period”. Examples includes 12/12, 15/12, 12/15,

12/18, 12/12 and Paid.

Documents

ELTZER GROUP BENEFITSnfp.meltzer.com/wp-content/uploads/Self-Funding-TMG-May-2014.pdfReality: Unbundled Services with a Consolidated Bill Administering a partially self-funded plan