1. Financial Accountability Fully-Insured and Self-Funding September 12, 2017
Title Slide 1b
- Sneak peek at an alternate accent color

2. Where are your benefit plan dollars going?
Administration
Overhead
Reinsurance Premiums
Network Fees
Plan Management Programs
Margin (pay other district claims)
Claims
Current – Paid Claims
Future – Claim Reserves (Claims that have been Incurred But Not Reported--IBNR)

3. Does it make sense to leave money on the table?
If administration and claim cost are “less” than what is paid?
Assuming $100 of Premium
Administration: $17
Paid Claims: $65
Total Cost: $82
Where does the other $18 go?

4. It goes one of two places
If overall claims are high for other districts, it goes to subsidize their higher claims!
If claims are low, it goes to the trust (or insurance company)!

5. To obtain accountability
Fully Insured Retention or “Refund” accounting
Advantage of “fixed contributions”
Possibility of “money back” after year-end accounting
Self-Funding
More flexibility than fully insured; quicker financial rewards; more risk

6. Retention Accounting
Negotiated Fully-Insured Plan with insurance company
Income Statement prepared on a “look back” basis, at end of year
If a “+”, money comes back to district/employees
If a “-”, does not matter; insurance company takes risk

7. Retention Accounting
Insurance company responsible for reserves, taxes, claims and expenses
District responsible only for contract premium payment
Could provide foundation to move to self-funding

8. Self-Funded Plans
Florence contracts with vendor to administer the plan and process the claims
Florence agrees to pay for claims as they are received and processed. There are no guarantees as to what the claim costs will be in any given period
Florence purchases insurance (Reinsurance) for protection against large, catastrophic claims for individual participants (Specific Stop Loss) and high claim levels from the total group (Aggregate Stop Loss)
Florence assumes Fiduciary responsibility/liability
Reinsurance indemnifies “Florence;” it does not “insure” the plan participants
The selected vendor (third party administrator) handles all appeals and deals with claim coverage denials on behalf of Florence (district has final “say”)

9. Self-Funded Plans (continued)
Florence benefits when the combined costs for administration, reinsurance and claims are lower than other funding arrangements
Florence is at risk when claims are higher than expected, reinsurance rates increase, and/or administration charges increase
When Specific or Aggregate Stop Loss points are triggered, the reinsurer pays (losses recovered with subsequent rate increases)

10. Components of Self-Funded Plan
Plan Document / SPD
Claim Administrator
Provider Networks
Utilization & Disease Management
Reinsurance Contract(s)
Pharmacy Benefit Manager
Fiduciary Responsibility
Consulting Services
Pretty much everything that a fully insured plan has!

11. Advantages of Self-Funding
Eliminates the “Risk Charge” and Margins included in conventional insurance
Eliminates State Premium Tax on claims
Possibly lower administrative (non-claim) costs
No State-mandated benefits
Direct financial benefit to Florence for positive claim experience
Claim funds and reserves held by Florence until claims are paid (float); invested

12. Disadvantages of Self-Funding
More financial risk than conventional insurance
Claims can be volatile
Reinsurance market can be volatile
Risk may be increased through lasering, higher attachment points or non-renewals
Florence assumes fiduciary liability and active role in plan decisions
Florence is a covered entity under HIPAA
More responsibility for compliance with DOL guidelines and federal mandates
Irregular monthly cash flow (unless pre-funded at maximum liability via trust or segregated account)
More complicated exit/change issues (run out/in)

13. Who is a Good Candidate for Self-Funding?
An employer who is financially sound with good cash flow and budget control
History of good claims experience
Favorable demographics
Employer pays majority of employee health insurance cost
Employer understands and accepts balance of financial risk versus reward
Commitment to active plan management

14. Possible Scenarios Move to retention accounting Move to self-funding
Positive “income statement” balances can be used to fund reserves if self-funding is desired in future or, offset future increases
Minimal risk; substantial upside
Move to self-funding
More complete accountability; more flexibility; need to establish a trust and trust board; more risk

15. Thank you
On behalf of the Gallagher team, we appreciate your consideration of this material and your continued business!

16. Consulting and insurance brokerage services to be provided by Gallagher Benefit Services, Inc. and/or its affiliate Gallagher Benefit Services (Canada) Group Inc. Gallagher Benefit Services, Inc., a non-investment firm and subsidiary of Arthur J. Gallagher & Co., is a licensed insurance agency that does business in California as “Gallagher Benefit Services of California Insurance Services” and in Massachusetts as “Gallagher Benefit Insurance Services.” Securities and Investment Advisory Services may be offered through NFP Advisor Services, LLC, Member FINRA/SIPC. Investment advisory, named and independent fiduciary services are offered through Gallagher Fiduciary Advisors, LLC, a Registered Investment Adviser. Gallagher Fiduciary Advisors, LLC is a single-member, limited-liability company, with Gallagher Benefit Services, Inc. as its single member. Not all individuals of Gallagher and none of Gallagher Fiduciary Advisors, LLC individuals are registered to offer securities or investment advisory services through NFP Advisor Services, LLC. NFP Advisor Services, LLC. is not affiliated with Arthur J. Gallagher & Co., Gallagher Benefit Services, Inc. or Gallagher Fiduciary Advisors, LLC. Neither Arthur J. Gallagher & Co., NFP Advisor Services, LLC, nor their affiliates provide accounting, legal, or tax advice.
© 2017 GALLAGHER BENEFIT SERVICES, INC.