of Self-Funding Health Coverage BY LARRY GRUDZIEN ATTORNEY AT LAW - - PowerPoint PPT Presentation

Factors of Self-Funding: Mar. 20, 2018

The Pros and Cons

• f Self-Funding

Health Coverage

BY

LARRY GRUDZIEN

ATTORNEY AT LAW

Factors of Self-Funding Pros and Cons of Self-Funding Health Coverage

• Self-Funding: What is it?
• Self-Funding in the Marketplace Today
• Fully Insured Model vs. Self Funded Model
• The Mechanics of Self-Funding
• Self-Funding Scenarios
• The Pros and Cons of Self-Funding
• PPACA: Impact on Self-Funding
• Financial, Plan Design and Legal Compliance Considerations

Factors of Self-Funding What Is Self-Funding?

• When an employer group wants to offer health benefits to their

employees, but does not want to pay an insurance company.

• Instead they take the place of the insurance company

and “self insure.”

• Two levels of Self-Funding
• Fully Self-Funded
• Group retains all the risk – they do not purchase stop-loss
• Usually reserved for “jumbo” cases
• Examples: Microsoft, Walmart, General Motors
• Partially Self-Funded
• Employer purchases insurance policy to take part of the

risk

• On a smaller scale a HDHP with an HRA is an example
• Traditional self-funded plans purchase stop loss coverage.

Self-Funding in the Marketplace Today

Percentage of Covered Workers in Partially or Completely Self-Funded Plans, by Firm Size, 1999-2016

Percentage of Covered Workers in Partially or Completely Self-Funded Plans, by Firm Size, 1999-2016

Exhibit 10.2

Percentage of Covered Workers in Partially or Completely Self-Funded Plans, by Plan Type, 1999-2016

Exhibit 10.3

Factors of Self-Funding Mechanics: Benefit Design

• Plan Document and Summary Plan Description (SPD)
• In a self-funded health plan, the employer, with the assistance
• f their broker or consultant and attorney, creates, defines and

establishes a benefit plan for its employees.

• For groups that are currently fully insured the new plans are

normally modeled after their current fully insured plans.

• Self-funded plans are governed by ERISA (Federal law) and are

not subject to State mandates.

• Groups have great flexibility in plan design

Factors of Self-Funding Who Are the Players

• The Plan Sponsor
• Consulting Services
• Legal Services
• Actuarial Services
• Accounting and Auditing Services
• Stop-Loss Insurer
• Third Parties Providing Administration Services
• Third Parties Providing Specialized Plan Admin. Services
• Provider Networks

Factors of Self-Funding Mechanics: Paying Claims

• Self-funded employers can either administer the claims in-

house, or subcontract this service to a third party administrator (TPA).

• TPAs can also help employers set up their self-funded group

health plans and coordinate stop-loss insurance coverage, provider network contracts and utilization review services.

• Third Party Administrators (TPA)
• An Important Distinction: Bundled ASO vs. Unbundled

Independent TPA

Factors of Self-Funding Mechanics: Paying Claims

• TPAs provide many services to the employer including:
• Claim and Premium Administration
• Reporting
• Plan Document Creation
• Stop Loss Integration
• Cost Containment Features/Vendors

(in house or sub-contracted)

• PPO Access
• COBRA/HIPAA Administration

Factors of Self-Funding Mechanics: PPO Networks for Medical Claims

• Physician Networks (PPO)
• Self- funded health plans will typically “lease” a PPO network in order to

provide their employees access to physician and hospitals, as well as reduce the risk to employer’s claim fund by taking advantage of established PPO network discounts.

• Items to consider:
• Robust and easily accessible to its members
• Discount structure and payment timeline
• TPA integration
• Accurately priced by the stop loss carriers

PPO Network Service Type Charge Allowable % Off Billed PPO A Outpatient Hospital $1,614,407 $607,264 63.4% PPO B Outpatient Hospital $1,614,407 $757,724 53.1% PPO C Outpatient Hospital $1,614,407 $957,724 40.7% Referenced Outpatient Hospital $1,614,407 $386,021 76.1%

Factors of Self-Funding Mechanics: PPO Network for Rx Claims

• Pharmacy Benefit Management (PBM)
• A PBM is essentially an Rx TPA married to a Rx PPO network.
• Provide access to most major pharmacies
• Negotiate discounts on a employer’s behalf
• Manage formularies on behalf of employer (provide

recommendations)

• Many offer mail order and specialty drug programs
• Examples: Express Scripts (Medco), CVS Caremark, OptumRx,

Med Impact, Restat

• Most TPAs contract with numerous PBMs and are willing to

integrate the Rx claims information in their monthly reporting and stop loss filing.

• Cost saving opportunities: Rebates and Plan Transparency

Factors of Self-Funding Mechanics: Cost Containment

• Employers can also add numerous features to help manage

both the frequency and severity of claims.

• These programs are typically called cost containment.
• Disease Management
• Utilization Review and Management
• Case Management
• Bill Audit and Review Services
• Out of Network negotiation
• Patient Advocacy
• Tele-Doc Services
• Specialty Care Vendors: Dialysis, Hemophilia, etc.
• Wellness Programs
• TPAs and PPO networks will typically provide some of these

features.

Factors of Self-Funding Mechanics: Stop-Loss Insurance

• Since the employer is accepting the financial responsibility for

the medical claims there are two main concerns.

• Large Claimants
• Over Utilization
• Stop-Loss insurance provides protection against both scenarios.
• Specific stop-loss coverage covers catastrophic claims
• Aggregate stop-loss coverage covers against “over utilization” by

providing a maximum out of pocket for the employer’s collective claims.

• The availability of competitive stop-loss coverage is one of the

most critical components in determining an employer’s ability to self-fund.

Factors of Self-Funding Mechanics: Stop-Loss Insurance

• Specific Stop-Loss (Individual)
• Employer is responsible for all claims on every member until

the deductible is met.

• Carriers can provide various deductible options to suit a group’s

risk tolerance.

• The higher the deductible the lower the price for the insurance.
• Occasionally, specific individuals will be subject to a higher

deductible known as a laser.

• Aggregate Stop-Loss (Group)
• Claim maximum (aggregate attachment point) is normally set

25% higher than expected claims (25% corridor)

• Aggregate can be difficult to secure due to lack of claims data
• Aggregate coverage is cheap (“sleep insurance”), historically a

group has a 2% chance of hitting their maximum.

Factors of Self-Funding Mechanics: Specific Stop-Loss Coverage

• Specific stop-loss insurance (individual)
• Specific stop-loss coverage provides protection from

catastrophic losses on each individual insured under the plan.

• Example: An employer group with 250 employees selects a

$75,000 specific deductible. Employee John Smith has a heart attack and the total claims incurred during his hospital stay totaled $195,000.

• The employer is responsible for the first $75,000 in medical

claims incurred by John Smith. The stop loss carrier then reimburses the employer for the $120,000 that exceeded the specific deductible.

Factors of Self-Funding Mechanics: Aggregate Stop-Loss Coverage

• Aggregate Stop-Loss Insurance (Group)
• Aggregate Stop-Loss Insurance provides a second layer of

protection for self funded health plans intended to limit the plan’s maximum financial exposure.

• The aggregate “deductible” is determined by the insurance

company and is regularly set at 125% of the expected claims for the group.

• Example: A stop-loss carrier evaluates a 250 EE company’s data

and develops an expected claims attachment point of $2M.

• They then adjust it by 25% to arrive at a maximum claims

attachment point of $2.5M.

• Items to consider:
• Aggregate coverage can be difficult to secure due to a lack of

claims data.

• Aggregate coverage is not always purchased since medical claim

costs rarely exceed 125% of expected claims.

Factors of Self-Funding Mechanics: Stop-Loss Contract Options

• Standard Stop-Loss Contract Options
• Since all claims are not received and paid within the Plan Year,

stop loss is sold with various “contracts” offering coverage for claims incurred prior to the effective date (run-in) and claims that are paid after the policy year is over (run-out).

• Two important terms:
• Incurred (first number)
• Incurred date refers to the date the member receives care.
• This number designates the number of months qualified

claims can be incurred.

• Paid (second number)
• Paid date refers to the date the claim is paid by the

administrator.

• This number designates the number of months a qualified

claim can be paid.

• Typical turn around time from incurred to paid is 6-10 weeks.

Factors of Self-Funding Mechanics: Stop-Loss Contract Options – 12/12

12/12 Claims must be incurred and paid in the same 12 month period. 1/1/2016 12/31/2016 |-------------------------------------------------------------------| INCURRED |-------------------------------------------------------------------| PAID

• A 12/12 contract has no Run-In or Run-Out protection.
• Sometimes sold with a Terminal Liability Option (TLO).
• This contract can be used to help a group transition to self

funding.

Factors of Self-Funding Mechanics: Stop-Loss Contract Options – 12/15

12/15 Claims must be incurred within 12 months and paid within 3 months following the end of the coverage period. 1/1/2016 12/31/2016 |-----------------------------------------------------| INCURRED |-----------------------------------------------------|-----------------| PAID 3/31/2017

• This type of coverage is called Run-Out.
• It is also available in contracts on a 12/18 and 12/24 basis.
• Fully insured policies are on an incurred basis and typically offer

a 12/24 or greater.

Factors of Self-Funding Mechanics: Stop-Loss Contract Options – 15/12

15/12 Claims must be incurred within 15 months and paid in the 12 month coverage period. |-----------------|------------------------------------------------| 10/1/2015 1/1/2016 INCURRED 12/31/2016 |-----------------------------------------------| PAID

• This type of coverage is called Run-In.
• It is also available in contracts on an 18/12, 24/12, and paid

basis.

Factors of Self-Funding Self-Funding: A Fully Insured Prospect

• A prospective client currently offers (3) health plans to its

employees: HMO, Low PPO and High PPO.

• All plans are currently fully insured through a major insurance

company.

• The CEO and CFO of the organization believe that the insurance

company is making money on an annual, consistent basis off of their workforce’s good claims’ utilization and costs.

• They also desire the cash flow benefits and plan design control

that self-funding offers.

• The broker, consultant and the client work to secure claims

data, enrollment information, plan designs, etc. so that the stop loss carriers will have enough information to make an appropriate evaluation of the risk.

• After working with multiple stop loss markets, the group

receives their stop loss quote(s) and now have the ability to determine total cost scenarios including potential claims liability, stop loss premium and plan administration.

Factors of Self-Funding Real Life Scenario: A Fully Insured Prospect

Fully Insured Premium $2,750,000 $1,800,000 $200,000 Plan Administration $400,000 Stop Loss $65,000 PPO Access Fees $35,000 Ancillary Vendors $450,000 Expected Claims Risk Corridor $2,950,000 Maximum Liability

Factors of Self-Funding Self-Funding: Disadvantages & Potential Exposures

• Potential claim liability – claims can come in above expected
• Not building claim reserves – claim reserve underfunded
• Securing competitive stop loss – group size, location, available

claims data

• Looting claim reserve for other expenses - can lead to

insolvency

• Over-generous employers – exceptions are not covered by stop

loss

• HIPAA Compliance (“hands-on”)
• Nondiscrimination Testing
• Employer must maintain cash flow

Factors of Self-Funding Self-Funding: Advantages

• Control of the Plan Design
• Ancillary Service Flexibility
• Collection of Health Plan Data
• Lower Administrative Costs
• Cash Flow Benefits
• The Ability to Build Reserves
• Elimination of Carrier Profit Margin
• Reduced Premium Tax
• Avoidance of Health Insurance Industry Tax
• Mandates

Factors of Self-Funding PPACA: How It Affects Self-Funding?

• Interest is mounting because …
• It historically has been even before PPACA.
• In 1999, 44% of all employees were covered

in a self-funded environment.

• Today, that number has grown to 61%.
• PPACA requires employers with 50 or more employees to pay
• r play.
• This may leave employers looking for health benefits and self-

funding is one of the more long term, cost effective approaches.

• Better strategic position to adjust benefits to control increased

provider costs.

• Fully insured premiums expected to jump to accommodate new

provisions as a result of PPACA.

Factors of Self-Funding PPACA: How It Affects Self-Funding?

• Interest is mounting continued ...
• Other considerations:
• Limited exposure to MLR rules
• Guarantee issue rule, not applicable to stop loss carriers
• Stop-loss premiums will not likely be subject to all the ACA fees
• Some additional advantages:
• “Essential Health Benefits”
• Avoidance of Health Insurance Tax (HIT)
• Most premium taxes
• State mandated benefits

Factors of Self-Funding PPACA: How It Affects Self-Funding?

• PCORI Fee & Transitional Reinsurance Fees will apply to

fully insured and self funded health plans, however self funded health plans are exempt from both the Risk Adjustment Fee & Health Insurance Industry Tax due to ERISA law.

• What do the fees equal in savings for the self funded

client versus fully insured?

*For illustrative purposes only. Fee Estimates taken from the Oliver Wyman Study.

1/1/2014 1/1/2015 1/1/2016 1/1/2017 Renewal Premium $2,887,500 $3,031,875 $3,183,469 $3,342,642 Estimated HIT Fees $66,412 $98,536 $103,463 $133,706 HIT % 2.3% 3.25% 3.25% 4.0%

Factors of Self-Funding Reduced Premium and ACA Taxes

Note: Self-funded premium tax assumes stop loss premium is 20% of fully insured premium.

Fully Insured Self Funded Self Funded Annual Premium Premium Tax Health Ins. Industry Tax Total Premium Tax Savings

$1,000,000 $25,000 $23,000 $48,000 $5,000 $43,000 $2,000,000 $50,000 $46,000 $96,000 $10,000 $86,000 $4,000,000 $100,000 $92,000 $192,000 $20,000 $172,000 $6,000,000 $150,000 $138,000 $288,000 $30,000 $258,000 $8,000,000 $200,000 $184,000 $384,000 $40,000 $344,000 $10,000,000 $250,000 $230,000 $480,000 $50,000 $430,000 $40,000,000 $1,000,000 $920,000 $1,920,000 $200,000 $1,720,000

Factors of Self-Funding Financial Considerations

• Cash-Flow Flexibility
• Claim must be incurred by a participant, submitted for payment

(by the participant or the participant's provider, generally to the plan’s TPA), approved for payment (by the TPA or other claims administrator), and finally paid (e.g., by check or funds transfer from the TPA to the participant or provider).

• Claims are incurred unevenly throughout the year.
• There are ways to make cash flow more regular in a self-insured

plan, such as setting aside an amount each month (perhaps based on a fraction of the actuarial estimate of a full year's claims cost) in an employer account, taking care not to implicate ERISA's trust requirement unwittingly.

Factors of Self-Funding Financial Considerations

• Appetite for Financial Risk
• Employer assuming the responsibility to pay claims means

assuming the risk that claims will exceed estimates — even estimates calculated by an experienced actuary — and that claims could even exceed the plan sponsor's ability to pay.

• Stop-loss insurance can be an important tool for managing the

risk of self-insuring a group health plan.

• A plan sponsor purchasing stop-loss insurance pays a monthly

premium for the stop-loss coverage; after claims paid by the plan exceed a stated amount (the policy's “attachment point”), the stop-loss policy will reimburse the plan sponsor for covered claims above that amount.

Factors of Self-Funding Financial Considerations

• Can Self-Funding reduce Health Benefit Costs?
• It eliminates several significant components that make up

insurance premiums (such as premium taxes and insurance company profit).

• Overall savings are not guaranteed, because claims cost, the

most significant plan expense, is unpredictable.

• Self-insuring also avoids certain fees and compliance burdens

associated with health care reform.

Factors of Self-Funding Financial Considerations

• Can Self-Funding Reduce Health Benefit Costs?
• Administrative costs – use bundled or unbundled approach
• Claims costs – remember premiums are based an estimated

claims cost

• May have to engage actuary to prepare estimate
• An employer might prefer to pay fixed premiums, reasoning

that an insurer may be in a better position to manage its employees’ claims risk through a broader risk pool.

Factors of Self-Funding Plan Design Considerations

• State Law Benefit Mandates
• ERISA generally preempts (supersedes) state law as applied to a

self-insured health plan subject to ERISA

• Self-insuring thus has the effect of avoiding many state-law

mandates (for example, state laws or insurance regulations requiring child coverage to age 30 or coverage for certain therapies).

• This affords a self-insuring plan sponsor several advantages,

including:

• consistency in benefit design when operating in multiple

states;

• greater freedom to determine eligibility rules;
• greater freedom to determine covered benefits; and
• greater flexibility to exclude or limit coverage for certain

types of claims.

Factors of Self-Funding Plan Design Considerations

• Health Care Reform
• Some health care reform provisions apply only to insurers and

insured health plans — such as the requirement to offer only coverage that includes the “essential health benefits package.”

• The annual fee on health insurers, and certain insurance

market reforms apply only to insurers — with an indirect effect

• n sponsors of insured group health plans.

Factors of Self-Funding Legal and Compliance Considerations

• Final Authority on Claim Decisions
• Greater decision-making authority on benefit claims

and appeals

• Employer can exercise control over benefit approval, interpret

plan language and decide whether a claim should be paid

• Should employer engage a ”claims fiduciary”?

Factors of Self-Funding Legal and Compliance Considerations

• Greater Control Over Plan Documents
• Employer is not “locked in” to use a particular set of document
• Can draft own or use pre-packaged set of materials
• Employer has a fiduciary responsibility to review them

Factors of Self-Funding Legal and Compliance Considerations

• More Compliance Responsibilities
• Update documents and disclosures
• Who will distribute disclosures
• Conduct nondiscrimination testing
• Comply with HIPAA privacy matters

Factors of Self-Funding Legal and Compliance Considerations

• Greater Risk of Claims Litigation
• Insured plans insurer defend claims litigation
• Think of litigation related issues when negotiating TPA, ASO
• r other third party contracts

QUESTIONS?

CONTACT INFORMATION

Larry Grudzien Attorney at Law 708-717-9638 larry@larrygrudzien.com www.larrygrudzien.com

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