11367s0814 Edt The Basics of Small Group Self Funded Health Plans May 2, 2016 St Augustine, Fl.

Daniel R. Meylan Insurance Professional Since 1973 P&C and Benefits Broker Agency Owner Insurance Company Executive Agency Acquisitions and Valuations Self Insurance, Captives, RRGs Bank Agency Operations Husband, Father, Grandfather

The Basics of Self Funding Part 1 What is self funding? When should self funding be considered? Principles of self funding. Who uses self funding? What type of risks can be self funded? What is the operational structure of a self-funded program? What are the types of self-funded programs? What are the costs associated with a self-funded plan? What is the process of setting up a self-funded plan? Sample Cases – Successes & Failures

The Basics of Self Funding The foundation of self funding: Self funding or self insurance is ultimately a function of claims costs and the predictability of and control over claims activity.

The Basics of Self Funding What is self funding? Self funding is accepting the risk of loss as part of the operational expenses of the enterprise and limiting the ultimate exposure to the enterprise by purchasing some form of excess insurance.

The Basics of Self Funding Who engages in self funding? Most enterprises with 100 or more full-time employees utilize self funding as part of their risk management strategy.

The Basics of Self Funding Self funding requires: Cash Claims Data Management Involvement Some Level of Insurance Protection

The Basics of Self Funding Why self funding? Less expensive – improves profits More control of costs Manages unique risks

The Basics of Self Funding Self funding structure: Working layer – claims paid from the revenues and cash flows of the enterprise Excess Layers – Stop Loss or Reinsurance purchased to protect against catastrophic loss exposure Working Layer Excess Layers

The Basics of Self Funding Self funding terminology: Loss Fund – claims paid from cash flows of the enterprise Specific Stop Loss – insurance protection against singular catastrophic events – “severity exposure” Aggregate Stop Loss – insurance protection against the cumulative effect of numerous claims – “frequency” Loss Fund – Cash Flow Specific Stop Loss Aggregate Stop Loss

The Basics of Self Funding Risks that can be self funded: Workers Compensation General Liability Professional Liability Product Liability Group Health Insurance Auto Liability Environmental Liability

The Basics of Self Funding Who is a candidate for self funding? “When the cost of transferring risk (buying insurance) exceeds the cost of self insurance it is time to self fund.”

The Basics of Self Funding Conducting a self funding feasibility analysis: 1.Analyze accurate loss data (3-5 years currently valued) 2.Project future expected claims 3.Evaluate the company’s financial resources 4.Select a self funded structure 5.Determine the cost-appropriate stop loss terms 6.Determine the cost and structure of a claims administrator 7.Determine the structure and cost of safety and loss control 8.Determine regulatory approval cost and process if required 9.Evaluate final cost against other risk transfer alternatives

The Basics of Self Funding Types of self-funded plans: Risk Purchasing Group - RPG Risk Retention Group – RRG Retrospectively rated plan Rent-a-captive Wholly owned captive Self Funded WC Program Self Funded Group Health Program Level Funded Plans MEWA – Multi Employer Welfare Arrangement

Group Self Funded Arrangements MEWA Multi Employers Welfare Arrangements A MEWA is a self funded arrangement that allows multiple small employers to band together to form a group self funded arrangement that shares risk across multiple small employers. MEWA’s are only allowed in 6 states. Regulatory approval and oversight is costly

MEWA Multi Employers Welfare Arrangements Key MEWA features: Each employer’s employees are medically underwritten Program is not a “guaranty issue” plan. The MEWA may discriminate by charging higher rates to less healthy groups and declining unhealthy groups MEWA’s are subject to Insurance Dept. regulatory oversight MEWA’s are ERISA compliant MEWA’s are permissible as an alternative to ACA in some states

The Basics of Self Funding Financial components of a self funded program (100 pennies in a $1.00) Policy fees Premium taxes Reinsurance Loss control services Marketing costs Claims administration Claims costs Investment income Collateral costs Underwriting profit or (loss)

The Basics of Self Funding 10 financial components of a self-funded program Policy fees – The cost to underwrite issue and administer the policies including endorsements and billings. Premium Taxes – Taxes and fees due federal, state and local regulatory authorities and regulatory compliance costs. Reinsurance – Coverage purchased from other insurance carriers to defray catastrophic risk exposures. Loss control services – Safety training, premises inspections, on site risk evaluation, analysis of claims activity to predict and prevent future losses. Marketing Costs – Fees and commissions paid to the distribution system, licensed agents, brokers and carriers. Claims administration – The cost of servicing and managing claims activities including tracking and analyzing of claims history. Claims Costs – The actual ultimate cost of all claims including litigation and allocated loss adjustment expense. Investment Income – Interest earned on funds in excess of expenses and paid claims. Collateral costs – Costs associated with letters of credit or other financial guarantees. Underwriting profit or (loss) – (Premiums Paid + Investment Income) – (Fixed costs + claims and related expenses) = profit or (loss).

Self Insured WC Case Study – Success Story Client:Retail Grocers Association – 750 retail stores in 5 states Type of Program: Wholly Owned Captive Total Payroll:$225M Standard Premium:$ 9M Per Store Premium$ 25,500 Premium Rate8.5% of payroll Premiums Paid$7,344,000 Specific Stop Loss:$250,000 per claim Aggregate Stop Loss:94% of standard premium Total Incurred Losses:$3,071,000 Policy Fees$ 144,000(1.96%) Premium Taxes$ 220,320(3.00%) Reinsurance$ 807,840(11.00%) Loss Control$ 367,200(5.00%) Marketing$ 551,625(7.51%) Claims Admin.$ 388,511(5.29%) Incurred Losses$ 3,071,000(41.82%) Investment Income($ 680,000)(+9.25%) 72 months Collateral costs$ 25,000(0.3%) Total Program Costs $ 4,895,496(66.66%) Underwriting Profit $ 2,448,504(33.34%) Net Savings per store $ 8,502

Self Insured WC Case Study – Unsuccessful Story Client:Private Security Firm – 1600 employees in 12 states Type of Program: Rent-a-Captive Total Payroll:$44,000,000 Premium Paid:$ 7,040,000 Premium Rate$16.02 per $100 of payroll Specific Stop Loss:$500,000 per claim Aggregate Stop Loss:140% of standard premium Total Losses:335 Total Incurred Losses:$6,794,000 Program Costs: Policy Fees$ 125,000(1.96%) Premium Taxes$ 422,000(6.00%) Reinsurance$ 1,267,000(16.00%) Loss Control$ 281,600(4.00%) Marketing$ 352,000(5.00%) Claims Admin.$ 440,300(6.25%) Incurred Losses$ 6,794,000(96.50%) within retention Investment Income($ 318,000)(+4.51%) 72 months Collateral costs$ 113,000(1.6%) Total Program Costs$ 9,476,900(134.62%) Underwriting Loss$ (2,448,504)(34.62%) Final Rate Per $100 of payroll$21.54 per $100 of payroll

The Basics of Self Funding Observations on Self funding Self funding is always a risk management alternative Self funding is not always prudent Self funding requires active management involvement Self funding assumes predictable claims experience Self funding usually includes risk transfer through insurance at some level Self funding ultimately reduces long term risk management costs

The Basics of Self Funding aka “Level Funding” for Small Employers Part 2 Level Funded Small Group Health Plans 1.An alternative to the ACA cost increases 2.Lower costs for groups with favorable health conditions 3.Claims experience determines final costs 4.Maximum employer liability is fixed 5.Turn-key level-funded plans available for groups with 2 or more covered lives 6.Every plan is medically underwritten

23 What is the difference between self funding and level funding ? Self Funding the employers ultimate costs are variable and unknown and based entirely on the cost of claims typical for employers with 100 FTES or more Level Funding the employers ultimate costs are capped and limited to a specified dollar amount Typical Level Funded Plans are limited to 12 monthly payments available for groups as small as 2 lives

24 Why Level Funding for small employers Long Term – it’s the most cost effective way to finance a group health plan Reduces insurance company profit Eliminates state insurance premium taxes Employer knows their maximum liability Allows employer to take control of group benefit plan Money not spent on claims belongs to the employer – not the insurance company May avoid the negative rate impact of ACA

Small Group Level Funded Health Plans - Key Questions Why level funding for small employers now? What is the value proposition of level funding? What are the benefits for employers? What is the risk structure? The role of the local insurance broker? How does an employer enroll and qualify? What happens if the employer can not “qualify”?

Sample Funding Advantage Plan Small Case (Refund)

11149s0513 This sample chart illustration is provided for educational purposes only. Actual results may vary and are not indicative of future performance. Allied National, Inc. l 4551 W. 107th St. Suite 100 l Overland Park, KS l l l l twitter.com/alliednational Why Self Funding Now? $600 $500 $400 $300 “Employee Only” Rate Year “Employee Only” Rate Illustration $700 Self Funded Costs ObamaCare Rate Shocks Self Funded Costs After refunds Fully Insured

Healthcare Spending $3,000,000,000,000 (Trillion) $9,523 per person 17.5% of GDP 2015 Annual Growth – 5.3%

Increases Cost Adverse Elements of the Affordable Care Act Cost Structure $ $ Community rating 3:1 age slope rating Pre-ex included Minimum essential coverage Benefit Expansions Guarantee Issue 30 New Premium Taxes

Healthcare Cost Drivers 1.Business Practices – marginal business practices of government, insurance companies, providers and medical vendors and suppliers including mercenary pricing 2.Transparency - Lack of transparency with actual costs and appropriate profit margins 3.Litigation - The threat of litigation drives costs through redundant “defensive” medical practices and malpractice insurance costs 4.Wellness - Unhealthy lifestyles choices 5.Media Distortions – Promoting an entitlement mentality… “Free” is not “Free” 6.Consumer Education – Lack of informed medical consumers 7.Technology – State of the art medical technology prolongs life 8.Aging Population – Baby boomer generation experiencing deteriorating health 9.Government - Cost of Compliance A C A, E H R and additional taxes 10.Politics - Marketplace volatility driven by political uncertainty 11.Catastrophic Claims – Unlimited Lifetime Benefits Driving Cost Increases

Increase in Catastrophic Claims Claims Greater Than Number of Claims per Million Lives Year $1M $2M Claims Greater Than Average Excess Claim Above Spec Deductible Year $1M 294, , , , , , , ,145 $2M 162, , , ,913 1,629,953 1,916,672 1,138,588 1,882,203 12% trend 162, , , , , , , ,883 Source – Munich Re Annual Report 2012

Impact of Catastrophic Claims from 2004 to 2011 Average claim in excess of a $2M Stop Loss increased 78% each year since 2004

Impact of Catastrophic Claims from 2016 forward With the elimination of maximum lifetime benefits under the ACA, catastrophic claims are becoming the ultimate driver of increasing healthcare costs as stop loss carriers and reinsurers seek adequate premiums to cover these catastrophic losses. This will be the primary driver of rate increases over the next 3 years.

Alternative Funded Small Group Medical Plan – Self Funding “on training wheels” – 2 or more lives Self funding made “SIMPLE” Prepackaged plan docs and specific and aggregate stop loss Level funded plan Terminal liability coverage included Medically underwritten Full Accommodation What is Funding Advantage? 35

Who is Allied National? Operational Profile Underwriting Claims Administration Policy Service Actuarial Compliance Product Development Case Management Sales & Marketing Legal 36 Home Office: Overland Park, Kansas

37 Primary Risk Partner American Alternative Insurance Company A division of Munich Re $320.0B $28.4B AssetsEquity 37

38 Other Allied National Risk Partners 38

Our Culture and Business Model “Underwriting trumps sales.” Since our core product offering is small group self-funded plans our ability to continue to offer these products over the long-term is driven by the underwriting profitability of our overall pool of business. We follow a very disciplined approach to underwriting every risk, both as a new business and at renewal. Good risks receive favorable rates, poor risks are declined; the best risks will have an opportunity to participate in the underwriting profits on their account. 39

40 Allied National’s Unique Medical Underwriting Philosophy Traditional Underwriting TODAY Allied National Underwriting Price based on past health history, industry trends, and carrier loads Price based on future health care costs Past history Future costs

41 The value proposition of a small group level funded health plan is: Strategic Compliant Solutions Cost reduction over time Flexible structure More data and more choices Rewards for good behavior Lifestyle improvements

Our successful advisors…….. 1.Understand the product 2.Know the process 3.Respect underwriting discipline 4.Provide accurate and complete documentation 5.Know their client 6.Set expectations correctly 7.Don’t promise what they can’t deliver 8.Can adapt to changing circumstances 42

Advisor’s expanded role under the ACA Skills Health Insurance Agent Pre ACA Healthcare Advisor Post ACA Benefit Plan DesignsXX Marketplace Options – Carriers, Networks XX Cost ComparisonsXX CommissionsX ACA ComplianceX Self FundingX Medical UnderwritingX Employer Cost AllocationX HIPAA ComplianceX ERISA ComplianceX Employment LawX Claims AnalysisX Long Term Strategic PlanningX FeesX Time40 Hours per account/Year 70 Hours per account/Year

Allied Target 2-99 Market by State Estimated 2016 Funding 15 states - $86B

Allied National Network Options 45 Traditional PPO – PHCS, Cigna, Healthlink and more Narrow networks – by region Open Network – “Provider Freedom” Reference Based Pricing – “Medipay” Direct Primary Care compatible plans

46 $ MEC Value MVP +50 PMEC Allied National has Solutions…

Small Group Level Funded Plans and PEOs Underwriting trumps sales Every employer must “qualify” Medical enrollment forms required on every member Rates will reflect health conditions and demographics Rates are not final until all underwriting is complete PEO’s who enroll and maintain 2500 or more “qualified members” may become eligible for preferred rates and preferred underwriting based on the experience of their “group” of employers. 47

2016 Allied National Home Office Workshops Watch for upcoming announcements and online registration Limited to 15 attendees per workshop Agent pays travel costs – Allied pays all other costs Dates in 2016: June 8-9, July 20-21, Sept Introduction to Allied National products and services Meet home office staff: Underwriters, claims, customer service, communications Live look in at underwriting manual and rating system Interactive Q&A with company executives 48

2016 Allied National Elite Producer Workshops Watch for upcoming announcements and online registration Limited to 20 attendees per workshop – 2.5 days Agent pays travel costs plus $250 – Allied pays all other costs Advanced Small Group Self Funded Sales Training How to build your agency with Funding Advantage DallasMay AtlantaJuly IndianapolisSept Go to: to sign upwww.alliednational.com/events Sales Incentive Bonus for all Attendees – up to $10,000 49

50 Thank you! Question & Answer Session More questions? Contact Dan Meylan If you would like a copy of this presentation please see that I get a business card from you. I will out a link to this power point when I return to the office on May 9 th.