1. Lecture 15 Alternative Funding Methods Alternative to What? Reasons for Alternative Funding Methods General Categories –Modify traditional contracts –Partial or total self-funding

2. Reasons for Alternative Funding Methods Cost savings –Avoid mandated benefit provisions Example - infertility treatments –Lower premium taxes –Reduce additional expenses Commissions General overhead Risk charges Improved cash flow –Keep cash longer –Higher investment returns Tax considerations

3. Plans that Modify Traditional Fully Insured Group Contracts Premium-delay arrangements –Extend grace period Reserve-reduction arrangements –Premium payments in line with claim payments –Limit-liability arrangement Long term disability Purchase coverage 1 year at a time Insurer not responsible for claims if premium not paid

4. Plans that Modify Traditional Fully Insured Group Contracts - (cont.) Minimum premium plans –Aim to reduce state premium taxes –California ruling prohibits this tax avoidance –Employer assumes responsibility for the first 80-90% of expected claims Hires insurance company to act as agent Purchases insurance for excess payments Cost-plus arrangements (or flexible funding) –Premium equals prior claims plus loading –Better experience yields cost savings Retrospective-rating arrangements –Premium based on claims experience during contract period

5. Self-Funding Plans Total self-funding –Desirable characteristics of coverage Predictable claimsNoncontributory plan Nonunion planClaims handling ability Ability of provide administrative services Ability to obtain discounts from providers –Typically applied to: Short term disabilityMedical expense plans DentalVision Prescription drugsLegal expenses

6. Self-Funding Plans - (cont.) Self-funding with stop loss and/or ASO –Stop loss coverage –Administrative Services Only contracts Funding through a 501(c) (9) Trust –Voluntary Employees’ Beneficiary Associations (VEBAs) –Allows tax deduction for funding –Benefits for: DeathMedical expenses DisabilityUnemployment