Employee Benefits Consulting PUBLIC EMPLOYEES’ BENEFIT BOARD Self-Funding Models - Revised November 16, 2004 BD attach. 3

2 Revised November 16, 2004 Agenda Background – History of PEBB Self-funding Task Force and Legislation Review Self-funding concepts Self-funding Preliminary Projections for Current PEBB Medical Plans (RBCBS only) –2006 & 2007 Recommended Next Steps Questions/Comments

3 Revised November 16, 2004 PEBB – Self-funding History Board appoints Self-funding Task Force –Complete research ( AG, industry, regulations) –Analyze and make recommendations Board adopts Task Force Recommendations – June 2002 –Recommend draft legislation to clarify administrative language PEBB sponsored Legislation passes 2003 session

4 Revised November 16, 2004 Review Self-funding Concepts

5 Revised November 16, 2004 Self-Funding Continuum Fully insured contract – (PEBB’s current arrangement with Kaiser and RBCBS) –Carrier assumes 100% of risk Self-funded arrangement –Employer funds all benefits provided under plan Hybrids e.g., Refunding, Minimum Premium, etc. –Fully insured contract with elements of self-funding

6 Revised November 16, 2004 Fully Insured Contracts Carrier has 100% liability for plan benefits Carrier develops premium annually to fund liability Components of premium –Paid claims –Reserves –Pooling charges –Retention (including charge for administrative services & “pure risk” charge)

7 Revised November 16, 2004 Fully Insured Contracts Paid claims –Benefit dollars allocated to reimburse providers for covered expenses Reserves –Carrier liability for incurred but not reported claims Pooling charges –Cost to assume risk over pre-determined amount for individual claims (i.e., specific stop loss) Retention –Administrative expenses –Pure risk charge –Carrier profit (if any)

8 Revised November 16, 2004 Fully Insured Contracts What does carrier look at when pricing large groups such as PEBB? –Prior claims experience –Trend –Changes in benefit program that could affect claims utilization assumptions e.g., Changes in benefit design Changes in employee contribution requirements/cash back Changes in provider networks Other innovations e.g., member/provider incentives

9 Revised November 16, 2004 Self-Funding The plan sponsor assumes liability for plan benefits Benefits claims are (typically) funded as they are paid Financial components of self-funding –Claims costs –Reserves for IBNR and pending claims –Administrative costs –Reinsurance premiums (specific/aggregate stop loss)

10 Revised November 16, 2004 Self-Funding Claims costs –The plan sponsor funds all benefits –Claims can be funded at: Expected claims costs levels; Maximum claims liability i.e., expected claims + additional claims up to aggregate stop loss attachment point (e.g., 120% of expected); or Somewhere in between (e.g., actuarially determined contingency reserve requirement) –Fund through trust or general assets

11 Revised November 16, 2004 Self-Funding Reserves –Plan sponsor’s contractual obligation to pay claims incurred within given liability period –Reserves provide for Incurred But Not Reported (IBNR) claims Industry rule of 25% of expected claims PEBB claims lag currently less than 10% –Determined each plan year by actuarial consultant

12 Revised November 16, 2004 Self-Funding Administrative expenses –Administrator’s fees to process claims –Provider network access fees –Cost containment programs Utilization review Acute case management Chronic disease management –Plan document/SPD drafting and printing –Regulatory compliance e.g., HIPAA administration

13 Revised November 16, 2004 Self-Funding Reinsurance & other insurance premiums –Specific stop loss premium –Aggregate stop loss premium –Fiduciary liability policy –Fidelity bond

14 Revised November 16, 2004 Self-Funding Funding mechanisms –General asset plan Advance funding not permitted Pay as you go No trust required –Qualified trust 501(c)(9) trust Advance funding permitted Requires regulatory binders, audit agreements and special filings Interest income is tax free

15 Revised November 16, 2004 Fully Insured Contracts Advantages –Benefit of carrier’s volume discounts from providers and pharmaceutical manufacturers –Carrier assumes fiduciary responsibility –Cash outlay is predictable month-to-month –Plan documents & SPDs produced by carrier –Administrative ease due to “bundling” of services –May be less expensive for public sector employers required to fund to the maximum claims liability (i.e., expected claims + 20%) Disadvantages –Limited flexibility and control in plan design & provider contracting –May have increased retention costs (i.e., carrier profit in good years when claims are less than expected) –No cash flow savings, interest earnings potential

16 Revised November 16, 2004 Self-Funding Advantages –Greater flexibility and control in plan design (Vision implementation), provider contracting, financing and plan operations –Cash flow advantages available through funding of claims as they occur –Interest earnings on reserves –Elimination of carrier risk charge & potential profit margin –ERISA exemption on state benefit mandates gives employer flexibility to cover some mandated benefits (PEBB has previously stated it will follow all mandates) –Tailored administration and reporting

17 Revised November 16, 2004 Self-Funding Disadvantages –May not be able to match carrier volume discounts on provider contracting and Rx purchasing arrangements –Plan sponsor has legal and fiduciary responsibility –Increased administrative involvement for plan sponsor –May be more expensive for public sector employers if required to fund to the maximum claims liability (i.e., expected claims + 20%)

18 Revised November 16, 2004 Stop Loss Overview Stop loss coverage is a form of reinsurance that plan sponsors purchase to limit liability when self-funding health care benefits –Specific stop loss Insures against single catastrophic claims that exceeds a specified dollar limit for a plan year –Aggregate stop loss Insures against total claims exceeding an estimated expected dollar amount during a plan year

19 Revised November 16, 2004 Specific Stop Loss Level of Specific Stop Loss driven by cost vs. risk factors: What is plan sponsor’s- –Risk tolerance –Reserve position –Claims history General Rule of Thumb –< 500 participants$50,000 – ,000$100,000 –2,000+$200,000+ –PEBB eliminated specific stop loss in 2004 due to poor ROI

20 Revised November 16, 2004 Specific Stop Loss What makes a difference? –Diagnosis/prognosis of large claims –Employer’s industry –COBRA and retiree participation –Disease management programs –Managed care platform –Demographics of group –Geographic locations of group

21 Revised November 16, 2004 Aggregate Stop Loss Generally cannot be purchased without specific stop loss Claims over attachment point usually reimbursed at year end Typical attachment point: 125% of expected claims, Aon illustration assumes 120% to minimize funding requirement for maximum claims liability

22 Revised November 16, 2004 Aggregate Stop Loss What makes a difference? –Employer’s industry –Demographics of group –Geographic locations of group –Plan design (including degree of innovation and predictability of risk) –Enrollment –Utilization –Participant contributions

23 Revised November 16, 2004 State of the Current Reinsurance Market Consolidation of markets –Third-party stop loss carriers –Third-party administrators Increased disclosure requirements on new and renewal business (more difficult to bind coverage) –HIPAA presents unresolved issues Not all stop loss policies are created equal Carriers limiting risk with tighter contract provisions and claim procedures

24 Revised November 16, 2004 State of the Current Reinsurance Market Development of preferred relationships among market partners promotes: –Strategic partnerships –Seamless solution for buyer –Best in practice contracts and processes –Turn-key operation Market partners include: –Third-party administrators and stop loss carriers –Stop loss carriers and consulting firms

25 Revised November 16, 2004 Revised Self-Funding Projections (Current Regence Medical/Rx) Preliminary projections presented 9/21/04 were based on experience through July 2004 Updated financial projections are based on experience through September 2004 Additional actuarial modeling was performed to determine required contingency reserve level Projected 2006 PEPM budget cost varies based on legal interpretation of contingency reserve requirement: –Option #1 – Full funding to reinsurance attachment point (i.e., expected claims + 20%) = $69,190,423 –Option #2 – Partial Funding based on actuarial analysis of historical claims 99% confidence level = $45,380,439

26 Revised November 16, 2004 Recommended Next Steps Board discussion of summary findings – Nov. 16 Provide AG with update on Vision planning and self funding summary – Nov./Dec. Request AG advice regarding funding of contingency reserve Develop summary of administrative requirements e.g., accounting infrastructure needed to administer a self-funded program – Dec Issue RFP to marketplace requesting vendor proposals for 2006 with option to quote on either a fully-insured or self-funded basis – January 10, 2005 –Fully-insured proposals quote fixed costs PEPM (insurance premium or fully capitated rate) –Self-funded proposals quote expected claims costs (with or without administrative services and reinsurance) Conduct analysis of RFP responses – March-May 2005 Board makes final RFP and funding decisions – June