The Pros and Cons of Self-Funding Health Coverage

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2 The Pros and Cons of Self-Funding Health Coverage BY LARRY GRUDZIEN ATTORNEY AT LAW : Mar. 20, 2018

3 Pros and Cons of Self-Funding Health Coverage Self-Funding: What is it? Self-Funding in the Marketplace Today Fully Insured Model vs. Self Funded Model The Mechanics of Self-Funding Self-Funding Scenarios The Pros and Cons of Self-Funding PPACA: Impact on Self-Funding Financial, Plan Design and Legal Compliance Considerations

4 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-Funding Fully Self-Funded Group retains all the risk they do not purchase stop-loss Usually reserved for jumbo cases Examples: Microsoft, Walmart, General Motors 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.

5 Self-Funding in the Marketplace Today Percentage of Covered Workers in Partially or Completely Self-Funded Plans, by Firm Size,

6 Exhibit 10.2 Percentage of Covered Workers in Partially or Completely Self-Funded Plans, by Firm Size,

7 Exhibit 10.3 Percentage of Covered Workers in Partially or Completely Self-Funded Plans, by Plan Type,

8 Mechanics: Benefit Design Plan Document and Summary Plan Description (SPD) In a self-funded health plan, the employer, with the assistance of their broker or consultant and attorney, 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

9 Who Are the Players The Plan Sponsor Consulting Services Legal Services Actuarial Services Accounting and Auditing Services Stop-Loss Insurer Third Parties Providing Administration Services Third Parties Providing Specialized Plan Admin. Services Provider Networks

10 Mechanics: Paying Claims Self-funded employers can either administer the claims inhouse, or subcontract this service to a third party administrator (TPA). TPAs can also help employers set up their self-funded 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

11 Mechanics: Paying Claims TPAs provide many services to the employer including: Claim and Premium Administration Reporting Plan Document Creation Stop Loss Integration Cost Containment Features/Vendors (in house or sub-contracted) PPO Access COBRA/HIPAA Administration

12 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. PPO Network Service Type Charge Allowable % Off Billed PPO A Outpatient Hospital $1,614,407 $607, % PPO B Outpatient Hospital $1,614,407 $757, % PPO C Outpatient Hospital $1,614,407 $957, % Referenced Outpatient Hospital $1,614,407 $386, % Items to consider: Robust and easily accessible to its members Discount structure and payment timeline TPA integration Accurately priced by the stop loss carriers

13 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, Restat Most 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

14 Mechanics: Cost Containment Employers can also add numerous features to help manage both the frequency and severity of claims. These programs are typically called cost containment. Disease Management Utilization Review and Management Case Management Bill Audit and Review Services Out of Network negotiation Patient Advocacy Tele-Doc Services Specialty Care Vendors: Dialysis, Hemophilia, etc. Wellness Programs TPAs and PPO networks will typically provide some of these features.

15 Mechanics: Stop-Loss Insurance Since the employer is accepting the financial responsibility for the medical claims there are two main concerns. Large Claimants Over Utilization Stop-Loss insurance provides protection against both scenarios. Specific stop-loss coverage covers catastrophic claims 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.

16 Mechanics: Stop-Loss Insurance Specific Stop-Loss (Individual) Employer is responsible for all claims on every member until the deductible is met. Carriers can provide various deductible options to suit a group s risk tolerance. The higher the deductible the lower the price for the insurance. Occasionally, specific individuals will be subject to a higher deductible known as a laser. Aggregate Stop-Loss (Group) Claim maximum (aggregate attachment point) is normally set 25% higher than expected claims (25% corridor) Aggregate can be difficult to secure due to lack of claims data Aggregate coverage is cheap ( sleep insurance ), historically a group has a 2% chance of hitting their maximum.

17 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.

18 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.

19 Mechanics: Stop-Loss Contract Options Standard Stop-Loss Contract Options Since 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: 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. 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.

20 Mechanics: Stop-Loss Contract Options 12/12 12/12 Claims must be incurred and paid in the same 12 month period. 1/1/ /31/ 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.

21 Mechanics: Stop-Loss Contract Options 12/15 12/15 Claims must be incurred within 12 months and paid within 3 months following the end of the coverage period. 1/1/ /31/ INCURRED PAID 3/31/2017 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.

22 Mechanics: Stop-Loss Contract Options 15/12 15/12 Claims must be incurred within 15 months and paid in the 12 month coverage period /1/2015 1/1/2016 INCURRED 12/31/2016 PAID This type of coverage is called Run-In. It is also available in contracts on an 18/12, 24/12, and paid basis.

23 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, consultant 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.

24 Real Life Scenario: A Fully Insured Prospect Maximum Liability $2,950,000 $2,750,000 Risk Corridor $450,000 Expected Claims $1,800,000 Fully Insured Premium Stop Loss $400,000 Ancillary Vendors PPO Access Fees Plan Administration $35,000 $65,000 $200,000

25 Self-Funding: Disadvantages & Potential Exposures Potential claim liability claims can come in above expected Not building claim reserves claim reserve underfunded Securing competitive stop loss group size, location, available claims data Looting claim reserve for other expenses - can lead to insolvency Over-generous employers exceptions are not covered by stop loss HIPAA Compliance ( hands-on ) Nondiscrimination Testing Employer must maintain cash flow

26 Self-Funding: Advantages Control of the Plan Design Ancillary Service Flexibility Collection of Health Plan Data Lower Administrative Costs Cash Flow Benefits The Ability to Build Reserves Elimination of Carrier Profit Margin Reduced Premium Tax Avoidance of Health Insurance Industry Tax Mandates

27 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 61%. PPACA requires employers with 50 or more employees to pay or play. This may leave employers looking for health benefits and selffunding is one of the more long term, cost effective approaches. 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.

28 PPACA: How It Affects Self-Funding? Interest is mounting continued... Other considerations: Limited exposure to MLR rules Guarantee issue rule, not applicable to stop loss carriers Stop-loss premiums will not likely be subject to all the ACA fees Some additional advantages: Essential Health Benefits Avoidance of Health Insurance Tax (HIT) Most premium taxes State mandated benefits

29 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? 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.

30 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.

31 Financial Considerations Cash-Flow Flexibility Claim must be incurred by a participant, submitted for payment (by the participant or the participant's provider, generally to the plan s TPA), approved for payment (by the TPA or other claims administrator), and finally paid (e.g., by check or funds transfer from the TPA to the participant or provider). Claims are incurred unevenly throughout the year. There are ways to make cash flow more regular in a self-insured plan, such as setting aside an amount each month (perhaps based on a fraction of the actuarial estimate of a full year's claims cost) in an employer account, taking care not to implicate ERISA's trust requirement unwittingly.

32 Financial Considerations Appetite for Financial Risk Employer assuming the responsibility to pay claims means assuming the risk that claims will exceed estimates even estimates calculated by an experienced actuary and that claims could even exceed the plan sponsor's ability to pay. Stop-loss insurance can be an important tool for managing the risk of self-insuring a group health plan. A plan sponsor purchasing stop-loss insurance pays a monthly premium for the stop-loss coverage; after claims paid by the plan exceed a stated amount (the policy's attachment point ), the stop-loss policy will reimburse the plan sponsor for covered claims above that amount.

33 Financial Considerations Can Self-Funding reduce Health Benefit Costs? It eliminates several significant components that make up insurance premiums (such as premium taxes and insurance company profit). Overall savings are not guaranteed, because claims cost, the most significant plan expense, is unpredictable. Self-insuring also avoids certain fees and compliance burdens associated with health care reform.

34 Financial Considerations Can Self-Funding Reduce Health Benefit Costs? Administrative costs use bundled or unbundled approach Claims costs remember premiums are based an estimated claims cost May have to engage actuary to prepare estimate An employer might prefer to pay fixed premiums, reasoning that an insurer may be in a better position to manage its employees claims risk through a broader risk pool.

35 Plan Design Considerations State Law Benefit Mandates ERISA generally preempts (supersedes) state law as applied to a self-insured health plan subject to ERISA Self-insuring thus has the effect of avoiding many state-law mandates (for example, state laws or insurance regulations requiring child coverage to age 30 or coverage for certain therapies). This affords a self-insuring plan sponsor several advantages, including: consistency in benefit design when operating in multiple states; greater freedom to determine eligibility rules; greater freedom to determine covered benefits; and greater flexibility to exclude or limit coverage for certain types of claims.

36 Plan Design Considerations Health Care Reform Some health care reform provisions apply only to insurers and insured health plans such as the requirement to offer only coverage that includes the essential health benefits package. The annual fee on health insurers, and certain insurance market reforms apply only to insurers with an indirect effect on sponsors of insured group health plans.

37 Legal and Compliance Considerations Final Authority on Claim Decisions Greater decision-making authority on benefit claims and appeals Employer can exercise control over benefit approval, interpret plan language and decide whether a claim should be paid Should employer engage a claims fiduciary?

38 Legal and Compliance Considerations Greater Control Over Plan Documents Employer is not locked in to use a particular set of document Can draft own or use pre-packaged set of materials Employer has a fiduciary responsibility to review them

39 Legal and Compliance Considerations More Compliance Responsibilities Update documents and disclosures Who will distribute disclosures Conduct nondiscrimination testing Comply with HIPAA privacy matters

40 Legal and Compliance Considerations Greater Risk of Claims Litigation Insured plans insurer defend claims litigation Think of litigation related issues when negotiating TPA, ASO or other third party contracts

41 QUESTIONS?

42 CONTACT INFORMATION Larry Grudzien Attorney at Law benefitexpress contact information marketing phone number URL