The Financial Impact of Optimal Risk Management and Accrual Funding Methods on Employer Sponsored General Asset Healthcare Plans A Five Year Trial Study and Meta-Analysis October 26, 2017

Discussion Outline Section 1: Executive Summary Section 2: Introduction Section 3: Research Questions and Hypothesis Section 4: Key Findings Section 5: Results and Discussion Section 6: Conclusions

Executive Summary This study supports the theory that the most cost effective, long-term pricing of employer sponsored self-funded healthcare plans is a result of using advanced financial risk and accounting accrual management techniques which facilitates transparent, mutually advantageous, and long-term working relationships with industry partners. It tests and quantifies the theory that using logics driven financial management techniques is the best strategy to temper costs when compared to market driven strategies which are a mistake and are actually detrimental to controlling cost and operational continuity.

Introduction This study is intended to quantify the financial results obtained by a control group of primarily blue collar employers located in the southwest United States that was experienced during a common five year trial period. The five employers agreed to participate in the study after being exposed to the specific study requirements in focus group environments during the period of 2008 through 2010 that introduced the Capstone Consulting Group forensic audit and forward management processes.

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Introduction continued • Transition to a self-funded medical and drug arrangement no later than January 1st of the 2011 plan year; • Adopt an initial two year static funding strategy based on a transitionary fully insured to self-funding financing model formula; • Not change any current insurance carrier relationships for the five year trial period as it regarded any risk assumption or transfers; • Not change any current medical network arrangements during the five year trial period; • Not change any current adjudication or medical management relationships during the five year trial period; • Adopt all Capstone risk management and accrual accounting methods during the five year trial period.

Research Questions Do logics based healthcare financial planning methods have quantifiable and marginal “alpha” long-term value? Is it feasible to maintain long-term, uninterrupted risk sharing relationships with single insurance carriers and vendors and still experience better than average financial metrics? Does the lack of trust and mutual loyalty impact the psychological drivers that exist during risk management and service contract negotiations? Does using market pressure techniques as the basis of plan risk and service contract negotiations result in more cost effective outcomes?  

Hypothesis Hypothesis H0: Optimizing risk management and accrual funding methods will not impact employer sponsored general asset healthcare plan cost and operational stability Hypothesis H1: Optimizing risk management and accrual funding methods will impact employer sponsored general asset healthcare plan cost and operational stability  

Key Findings All members of the trial group were able to comply with all rules of participation and complete the study. The trial group of employers experienced PEPY average cost results that were 30.28% less than the general population of employers with similar characteristics. The group ended the five year audit period with PEPM mean paid claims of $512.52, formula expected claims of $553.12 under a maximum liability of $651.48. At the end of the trial period, the mean premium vs. paid claim loss ratio for stop-loss excess risk insurance was 86.68%  

Key Findings continued Using an 88.58% of maximum liability corridor funding factor during the trial period, the trial group experienced a five year funding accrual surplus of $7,142,655. When compared to the original fully insured funding and risk position the trial group experienced a five year funding accrual surplus of $21,571,338. The outcomes reject the null hypothesis. Optimizing risk management and accrual accounting practices will positively impact employer sponsored general asset healthcare plan cost and operational stability.  

Results and Discussion  

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Conclusion These outcomes strongly support the theory that adopting logics based on forensic review of financial history, coupled with appropriate risk management and accrual accounting processes will optimize the stakeholder outcomes experienced by employer sponsored healthcare plans. For healthcare plans to achieve optimal financial results, they also require a relationship between sponsors and risk partners that is premised on a mutually trusting and loyal relationship. Operational processes must be based on tested risk management methodologies that produce a “smoothing” effect on long-term cost variations, and not the usual erratic outcomes that result when expectations and objectives are based on creating short-term winners and/or losers.  

The Financial Impact of Optimal Risk Management and Accrual Funding Methods on Employer Sponsored General Asset Healthcare Plans A Five Year Trial Study and Meta-Analysis October 26, 2017