Self-Funding & Stop Loss 101

Objectives Explain the history and evolution of self-funding Describe the advantages and items an employer should consider when self-funding Identify the basic concepts of stop loss, including specific and aggregate coverage, maximums, contract types, leveraged trend and carrier selection

Self-Funding Basics Self-Funding Employer funds/pays its own claims rather than buying traditional health insurance Employer often delegates administrative responsibilities to a TPA or Insurer Employer can manage its exposure to catastrophic claims expense by purchasing stop loss insurance ERISA (Employee Retirement Income Security Act) (1974) Formally recognized Self-Funded Plans Specifically exempts most self-funded employee benefit plans from state regulation, including premium taxes and mandated benefits

Alternative Financing Who Assumes the Risk? Self-Funded ASO w/Stop Loss Insurance Retrospective Premium Agreements Minimum Premium Accounts Pure Self-Funding (ASO) Fully- Insured Plans 100% Transfer of Risk No Transfer of Risk

Self-Funding Advantages for an Employer Group controls the plan, not the insurer Group controls the claims data Group can take advantage of their own good medical experience Can result in more effective healthcare cost control Employer can be very flexible in health plan design ERISA applies, often in lieu of state-mandated minimum benefit levels, easing administration of multi-state plans and consistency in plan offering Can tailor plan design to fit needs of its employee population Eliminates most state premium taxes

Self-Funding Advantages for an Employer May help employers cash flow Pay claims as incurred – no pre-funding or up-front reserve payments Reserves held by employer instead of insurance carrier. Interest paid on these reserves also remains with the employer. Eliminates most risk charges and profit margins charged by insurers Greater control over administrative expenses and costs of healthcare delivery Employer may purchase stop loss to reduce its exposure to losses due to catastrophic claims and create more predictability

Self-Funding Considerations for an Employer Risk Assumption/Risk Aversion Cash Flow Unpredictably Poor Experience Fiduciary Responsibility

Who is Insured? Employer / Plan Sponsor The employer has made a promise to provide benefits Existence or absence of stop loss does not change that promise The individual / participant is NOT the insured Stop loss reimburses the employer / plan sponsor for any claims the plan has paid over the stop loss deductible * Stop loss policy reimburses employer for losses associated with providing health benefits to employees and dependents. Stop loss cannot pay providers or employees of the employer.

Who is Insured? Fully Insured Self-Funded Employee Self-Funded Plan Employer Stop Loss Fully Insured Self-Funded Employee z Insurance Company Employer

Predictability of Risk The past is an excellent predictor of the future Risk predictability increases with employer size Only large claims are unexpected or unpredictable

Managing Risk Anticipate how much risk can be tolerated Analyze and budget for anticipated expenses Reduce risk by buying stop loss coverage

How much Stop Loss to Buy? The amount of Stop Loss coverage purchased may depend on Employer’s risk tolerance Group size Industry Financial strength

Claim Liability – Employer vs. Stop Loss Carrier Two Forms of Stop Loss Coverage Claim Liability – Employer vs. Stop Loss Carrier $2,000,000   $450,000 $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $75,000 $50,000 Specific (Individual) Stop Loss Stop Loss Carrier Liability ($ per Person) Employer Liability (Corridor)

Specific (Individual Coverage) Reduces the employer’s exposure to high-cost individuals Employer pays all claims for each individual Stop loss carrier reimburses the employer for claims on individuals whose annual eligible expense has exceeded the specific deductible At each contract renewal, each individual will be subject to a new specific deductible

Specific (Individual) Coverage Example Jane Smith suffers from renal failure and undergoes kidney dialysis. Her claims total $300,000. Jane’s employer is self-funded, but has purchased specific stop loss with a $75,000 deductible. Total Claim: $300,000 Employer Deductible: $ 75,000 Amount reimbursed by Stop Loss Carrier: $225,000

Specific Stop Loss Guidelines Appropriate Specific Deductible Risk factor is the relationship between the specific amount and expected paid claims. Employer tolerance for risk Group size 5% to 15% of expected paid claims is a popular benchmark

Specific Rate Calculation Specific Rates are based on actuarial data and the individual group characteristics listed below. This rate is commonly referred to as the “manual rate.” Geographic location Industry Demographic (age / gender) make up Deductible level Managed care network being utilized The underwriter takes the “manual rates” and loads or discounts the rates based on: Claim history Projected large claims Changes to the plan

Aggregate Coverage Reduces the employer’s exposure to high levels of claim utilization on the group as a whole, rather than specific individuals. The stop loss carrier reimburses the self-funded employer for all eligible claims that exceed the aggregate deductible. Claims in excess of the specific deductible are removed from the claims that apply toward the aggregate deductible. At each contract renewal, claims accumulations will be subject to a new aggregate deductible.

Aggregate Coverage Aggregate coverage is offered at 125% of the expected claims Aggregate coverage can also cover Rx, Dental and Vision claims Aggregate coverage will not be sold alone Aggregate coverage does not provide “catastrophic” coverage Specific “protects” the Aggregate

Aggregate Experience and Credibility Group’s actual claim experience and manual ratings are “blended,” depending on the amount of credible experience available. This figure is considered “expected claims.” A “corridor” is added, creating the annual aggregate deductible. The corridor is the margin or cushion the underwriter includes to limit the frequency and severity of aggregate claims. The industry standard for the aggregate corridor is 125%. By design, groups should not have aggregate claims, except in years of extreme changes in payment patterns or large changes in utilization.

Self-Funded/Stop Loss Cost Defined Fixed Costs Specific Premium Aggregate Premium Administration Fees – TPA, PPO Network, UR, etc. Variable Costs Expected Claims Total Costs Fixed Variable Maximum Costs Attachment Point (Expected plus Corridor)

Two Important Definitions Paid Charges that, as of the dates shown in the contract basis, are: 1. Covered and payable under your employee benefit plan, and 2. Have been adjudicated and approved, and 3. A check or draft for remuneration is issued and deposited in the U.S. mail, or other similar conveyance or is otherwise delivered to the payee, and 4. Sufficient funds are on deposit the date the check or draft is issued Incurred The date on which medical care or a service or supply is provided to a covered person for plan benefits under the employee benefit plan for which a charge results.

12/12 Contract Incurred (date service was rendered) 1/1/16 12/31/16 Incurred (date service was rendered) Paid (date claim paid by administrator) Incurred and Paid (12/12) - Eligible claims must be incurred and paid within the policy year. For renewal years, the contract will convert to a paid contract and the claims will be eligible under the renewal contract regardless of the date incurred, as long as it was incurred on or after the initial effective date of the contract. This is an appropriate first-year contract type for a group that is currently fully-insured or a group that is self-funded and the policy has a run-out provision.

Paid Contract Incurred (date services was rendered) 1/1/15 12/31/16 Incurred (date services was rendered) Paid (date claim paid by administrator) Paid - On renewal, a 12/12 or 15/12 contract becomes a paid contract. Claims will be eligible under the renewal contract regardless of the date incurred, as long as it was incurred on or after the initial effective date of the employer’s self-funded plan. This is appropriate for renewal contracts that started out as 12/12 or 15/12 contracts.

12/15 Contract Incurred (date services was rendered) 1/1/16 12/31/16 3/31/17 Incurred (date services was rendered) Paid (date claim paid by administrator) Incurred in 12 and Paid in 15 (12/15) - Eligible claims must be incurred during the contract period and paid within the contract period or the three months immediately following. This is an abbreviated version of the “true incurred” contract. Variations include 12/18 and 12/24 contracts.

15/12 Contract Incurred (date services was rendered) 10/1/15 1/1/16 12/31/16 Incurred (date services was rendered) Paid (date paid by administrator) Run-In (15/12) - Claims incurred up to 90 days before the effective date and paid during the first contract period will be eligible under the policy. For renewal years, the contract will convert to a paid contract. This is appropriate for a group that is currently self-funded with no run-out provision, but is new to the carrier.

Contract Type – Examples An employer purchased a 12/12 contract for 2016 and renewed with a paid contract in 2017. An employee, Sue White, was hospitalized from 12/1/2016 to 12/12/2016. The claim was paid by the TPA on 12/28/16. What contract year would this apply to? If you said the 2016 contract, you are correct! If the same claim was paid by the TPA on 1/16/17, what contract year would it apply to? If you said the 2017 contract, you are correct!

Stop Loss Carrier Selection Some of the key items to consider when selecting a stop loss carrier: Financial strength Direct carrier vs. MGU Stop loss policy Claims efficiency Underwriting philosophy Product options Access to resources Competitive

Topics & Trends Stop Loss / Self Insurance

Industry Trends The frequency of large claims is on the rise. Severity of claims is not changing Egregious claims PPO networks Erosion of R&C Hospitals requiring they control medical necessity in Network agreements. No audit, no review, just pay. Preemies are back on top as most expensive annual claim. Reactions Value Based Pricing, pay for performance model Referenced Based Pricing (Medicare plus model) Local arrangements (direct deal making)

Industry Trends Interest in stop loss captives on steady rise. Two approaches The turnkey captive approach is a producer controlled model that targets pool risk among controlled population. The small group approach is when a captive manager is contracted to pool small groups from fully insured to self-funded with captive. Alternative to “spaggregate” products for small group approach with an extreme risk as product has ability to be considered health insurance under ACA and state regulation Interest will continue to grow in Captives New market entry point for captive managers who mainly have a background in worker’s compensation.

Glossary “Fixed Cost” - All firm dollar costs of a self-funded plan. Includes specific premium, aggregate premium, administrative fees, etc. Also called “hard dollars.” “Soft Dollars” - Claim costs, which are variable although often capped. Also referred to as “claim liability” or “attachment point.” “ASO” - Administrative Services Only. A term used by carriers and HMOs to designate the service they provide to self-funded employers. “Self-funding” or “Self-insurance” - These terms are interchangeable. “TPA” - Third Party Administrator

Glossary “ERISA” - Employee Retirement Income Security Act of 1974 “Experience” - a detail of the actual claims paid during a specified time period for a particular employer group’s covered members. “Fiduciary” - any party who has discretionary authority or responsibility for the management or administration of a plan. “Plan Document” - A document which details the terms and provisions of a plan. “Corridor” - the margin or cushion the underwriter includes to limit the frequency and severity of aggregate claims “Census” - A collected detail of an employer’s member population, including number of covered lives, coverage status, sex, date of birth, and other demographic information.

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