Basics of Small Group Level Funded Plans Iowa Association of Health Underwriters Continuing Education – 1 Credit Hour June 7, 2018 11419s0115 Edt.02.17.15

Small Group Level Funded Plans Key Questions Why level funding for small employers now? What is the market for small group ”level funded” plans Underwriting “level funded” health risks What is the objective of level funding? How does “trend” affect “level funding”? What is the risk structure of level funding? Explaining “level funded” concepts to employers

Group Health Insurance Market – USA Source BLS – 2012 Government & Military not included FIRMS 99,000 1,100,000 4,500,000 5,699,000 FTES 65% 24% 11% 100% Large Group >100 72.8M FTES Small Group >10 <100 26.8M FTEs Baby Groups <10 12.3M FTEs TOTAL 111.9M FTEs

“Employee Only” Rate Illustration Why Level Funding Now? “Employee Only” Rate Illustration $700 Fully Insured $600 2015-2016 ObamaCare Rate Shocks “Employee Only” Rate Self Funded Costs $500 $400 Self Funded Costs After refunds $300 2014 2015 2016 2017 2018 2019 Year 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 66207 l 888-767-7133 l sales@alliednational.com l www.alliednational.com l twitter.com/alliednational 11149s0513

What is Self Funding? Employer is the risk bearer! Fully Insured Risk bearer is the insurance company All RISK transfers to insurance company Self Funded Employer is the risk bearer! Claims paid from employers claims fund Employer hires/assigns a claims administrator to pay claims Employer purchases Stop Loss Insurance to limit risk 5

What is the difference between self funding and level 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 available for groups as small as 2 lives 6

Stop Loss Insurance Employer’s risk is contained Specific Stop Loss Claims paid by carrier when an individual’s claims exceed a set dollar amount Aggregate Stop Loss Claims paid by carrier when the group’s total claims exceed a set dollar amount 7

Level Funded Group Health Plans are subject to “ERISA” regulation. What is ERISA? Employee Retirement Income Security Act 1974

ERISA enables level funding ERISA pre-empts the state’s ability to: Mandate health insurance contract terms and benefits Impose premium taxes Impose underwriting constraints and mandated premiums Limit employee benefit plan options State insurance departments regulate stop loss carriers not level funded plans 9

Sample Small Group Level Funded Plan

Why Level Funding for small employers now? Long Term – it’s the most cost effective way to finance a group health plan Reduces insurance company profit Eliminates state insurance premium taxes Eliminates state benefit mandates Allows employer to take control of group benefit plan Money not spent on claims belongs to the employer – not the insurance company Avoids many negative impacts of ACA 11

Small Group Level Funded Features Accommodation When claims exceed money in claim fund – insurer loans employer money Reporting Detailed monthly reporting showing claim fund activity Plan Year and Claims Run Out 12/15, 12/18,12/21, 12/60 plan options Claims incurred during plan year are payable for X months past end of plan year. At end of the run-out – all remaining claims funds distributed according to plan provisions! At end of the run-out – remaining claims funds distributed according to plan provisions! 12

What is “trend? “Trend” is the actual annual rate of increase of the cost of private healthcare in the United States

How does “trend” affect level funded plans? Levle funded health plans are buying healthcare services that are increasing at 8-12% per year

Actual level funded plan “trend” factors? Allied National 9.9% Cigna 11.0% Starmark 10.0% UHC 10.5%

Trend + Demographic Yearly Impact (11%+2%) Year EE Rate 2016 $530 2017 $599 2018 $677 2019 $765 2020 $864

Trend + Demographic Yearly Impact (11%+2%) Year Family Rate 2016 $1,150 2017 $1,300 2018 $1,468 2019 $1,659 2020 $1,875

2015 Healthcare Spending $3,000,000,000,000 (Trillion) $9,788 per person 17.5% of GDP Projected Annual Growth – 5.7%

underwriting profitability Underwriting Level Funded Plans Since the primary objective of small group self-funded plans is to offer products that serve their agents and employers over the long-term, their market sustainability will be determined by their underwriting profitability of their overall pool of business. This requires a 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. 20

Two Medical Underwriting Philosophies for Small Group Level Funded Plans TODAY Traditional Underwriting Past history Price based on past health history, industry trends, and carrier loads Financial Underwriting Future costs Price based on future health care costs

Sources for Small Group Level Funded Health Plans Carriers – Starmark, UHC, Cigna, National General, Humana, Aetna TPAs – Allied National, Key Benefits, ATA MGU’s - Montgomery

Underwriting “Submission” Account submitted for a full underwriting review Required underwriting documents (will vary by carrier, TPA or MGU) Accurately completed enrollment forms Claims history for cases over 100 lives Employer statement All applicable waivers executed Current wage and tax statement Current or renewal rates Requested benefit plan design 23

Variables that will impact level funded costs Demographics Plan Design Medical Services Consumption Health Conditions Rx Consumption

Demographics Age make up Group size Gender distribution Number of dependents Industry Participation SIC code Multi-location – Zip Codes

Plan Design Deductibles and co-pays Dual options Networks Participation requirements Health saving account (HSA) Health Reimbursement Accounts (HRA)

Health conditions Height and weight Rx utilization Critical illness Chronic conditions Medical services consumption rate

Rating Challenges Any single critical illness Cancer Kidney failure Transplants Abnormal pregnancy Hepatitis C High Rx utilization Co-morbidity issues Diabetes and high blood pressure Diabetes and obesity High cholesterol and heart disease Pending Surgery

The secret to successful “level funded” underwritten plans is “communications” The only problem with “communications” is the illusion that it has actually taken place…. George Bernard Shaw

Set expectations correctly: The secret to selling underwritten plans…. “Preparation, communications, competence & commitment” Set expectations correctly: The product The process The politics The commitment The requirements The risk The reward The execution

Level Funded vs Fully Insured 55 lives (for illustrative purposes only) Year Funding Advantage ACA Compliant Fully Insured ACA Compliant Difference 2015 $305,412 $0 2016 $335,953 $427,577 ($91,624) 2017 $369,549 $534,471 ($164,922) 2018 $406,503 $598,608 ($192,104) 2019 $447,154 $670,440 ($223,287) Total $1,864,571 $2,536,508 ($671,937) Claim Refunds (15%) ($279,686) Net Cost $1,584,885 $951,623 Increased Cost 60.04%

A more complex transaction Requirements Fully Insured Pre ACA Level Funded Post ACA Benefit Plan Designs X Marketplace Options – Carriers, Networks Cost Comparisons Commissions ACA Compliance Self Funding Medical Underwriting Employer Cost Allocation HIPAA Compliance ERISA Compliance Employment Law Claims Analysis Long Term Strategic Planning Fees Time 40 Hours per account/Year 70 Hours per account/Year

Level Funding Operational Challenges Post ACA Higher Technical Skill Required Higher Client Services Needs Greater product complexity Larger client service time commitment More staff support capacity Higher agency operating costs 33

Selling Level Funding - Conclusion Sell yourself as the healthcare advisor Every case will have it’s own unique rate every year Inform and educate and set expectations correctly Not every employer will qualify – keep other options open Sell the concept and the long term value not the price Sell engagement and commitment to manage the risk Sell your professionalism, expertise and support structure Allow more time for placement and service Be sure your compensation is appropriate 34

sales@alliednational.com twitter.com/alliednational Allied National, Inc. 4551 W. 107th St. #100 Overland Park, KS 66207 Thank you! Allied Sales Support 888-767-7133 www.alliednational.com sales@alliednational.com twitter.com/alliednational Fax: 913-945-4396 35 35