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State of South Dakota Employees Benefit Program Ri sk Mi tigation Strategi es Purpose of Study During 2013 legislative sessi on, the Appropriations Committee and Sub Committee on Insurance requested BHR to review stop loss coverage for the

  1. State of South Dakota Employees Benefit Program Ri sk Mi tigation Strategi es

  2. Purpose of Study • During 2013 legislative sessi on, the Appropriations Committee and Sub Committee on Insurance requested BHR to review stop loss coverage for the State Employee Health Plan • During the summer of 2013, BHR enlisted the assistance of Silverstone Group to do a preliminary exploration into Stop Loss Coverage options for the State Employee Heal th Plan - In July 2013 Aon He witt was selected to serve as the States benefit and actuari al consultant • BHR and Aon Hewitt's actuarial consultants explored stop loss as well as other risk mitigation strategies • This reports serves to provide the results of our analysis and BHR's recommendations '\t ;ing I He.a ~ & Be ne f:: s Co n5 . P ro p ri ie:'.3r/ & Con iid enti :; I

  3. Executive Summary of Results • BHR and Aon Hewitt explored three risk mitigation techniques: - Stop Loss (SL) - Catastroph ic (Cat.) or Claims Fl uctuation Reserve (CFR) - Guaranteed Cost Model (GCM) • The following res ul ts were found: Risk Mitigation e e e 0 Stop Loss None e e i ni tia l ly , then e e e CFR No ne e e 8 GCM Ma Jo r e e e No Change None • Re mainder of presentation describes results in deta il A()tl Con5 . : in g I H e: ~ & Benef.ls Hewitt 3 Prep · eia r/ & Confidenti al

  4. Stop Loss Com: . •~ ing I Hea "th & Be ne E: s ~ Hewitt 4 Pro p ri e:'.3r/ & Con iid enti ::. I

  5. Stop Loss - Defined • Aggregate Stop Loss covers claim amounts greater than a certain percentage of total expected plan costs Usually a 20% or 25% attachment point (i.e. amounts above these levels are protected with SL) Typically pu rchased by entities with less than 2,500 employees • Individual Stop Loss covers incurred expenses over a given threshold generated by a single member For large entities, such as 10,000 employees, rarely encountered • Although not completely actuarially credible at these high dollar claim levels (above $500K), the likelihood is low that the cost associated with purchasing this coverage would be less than the poor experience avoided A()tl i/.: in g I H e: ~ & Be ne f..1 s Con5 ! Hewitt 5 P rep ·e:ar/ & Confld en ti :I

  6. Stop Loss Premium Quotes s unU/ e specific PCPMRo te HCC PEPMFlate IN G PEPMRate IN6 PCPMRa te Tentative Tentative F i rm F irm ___ E .d .. SS00 ,000 An nucl Prem i'l!' m ~22. s _ s1 7_:n.2 _ so Agg regatini Specific Add 'I la :: er Li abi li t'( $2 ,0 00, 000 Sl ,. 300 , 000 t- T ot _ _ a_ l P _ o _ te _ n _ ti _ al _ L _ ia _ bi _li~ ty ---,t---- $6 , 0~225 ___ _ S /50,000 A o1 mu cl Prem i 'l! m :$ 1 =..3, 5 667 S8.3S t- "'=" '"" =• ._ a -"t i~ n, "s ,. ;o -" e -" cif .. ic c.----, , ---·- SO "-·---·- Ad d'l t.a.:erli :s bi lirv Sl 1 ~000 $1, 0: 0, 000 Total Po t ential Liability $4 , 135 , 667 $5.8 ! _ ~?2'9 -- .$6.28 Sl ,000,0.."0 Annual Prem ium _ .,_ _ _ $935 ,1 41 _ $1, 104,.198 $6.93 -- $1, 975~ 766 $12 _ 40 _ :_~gr egci tini Specific · ------ so -------·- ·- -~1,000, 000 --------· ~ ssoo , ooo ------------------ · so ---------- _ ____ _ Add'l t ase r Lia Di l ii v s1 5 00 000 S500 ODD 50 SO SS:00 ODO S750 000 50 .SO S3 as Total Potential Lia bilitv 141 $3 250 329 Sl 604 198 $1975 766 s1,2so, o:o Annual Premium $973 , 543 5".11 5661 , 244 $4 . .15 S.1 , S18 ,47 2 S9.53 ,_ •~ gg ~• ~ =i: ~• _ti ·~ n;g~s ~p_ e_ c if_ic ___ _, , ____________ _ 1-yoo, 000 ------· __ ssoo,ooo ------------ so ---- - -- 1- S.25 0,00D _______ 1----- '"- -S O ---- .. ------------· A _d_ d _ ' l_ , _ ,_ ., _L _ i, _b_ i li ~ tt _, ___ ..._ ___________ i- SO ___ ,._.._ __ S5CO , S00 SO SO Total P ote ntial Lia bilitv $2 224,043 Sl 161 244 $1 518..472 S1, SOO ,O:O Annu2I Pr em itr m S9 07 170 $6 .07 Aelc'reeatin" s io ec ific S.25 0000 Add'I u ser Lia bil iw S25 0000 so Total P ote ntial Lia bi li ty $1,467, 170 s2,aoo ,o:o A , nu ;;I Prem iti m I- ~.5 , !4 5 .__ _ $4. ID _ Ag~ re t::a tin~ Specific S.2 00000 so Add'I Laser Lia bi li tv so Total P ote ntial Liabi li tv S8:.SS 1 4i Con5- ' ing I H ea )h & Be ne E: s Proprie:::ir/ & Con iid enti: I

  7. ~ ~ ~ How many large claims should we expect? • Expect that there will be at least 1 claim Probability of Claims over ISL Deductible - 88 % likelihood 1 claims is over $1 M 45 % ----------------- - 72 % likelihood 1 claim is over $1.25M - 58 % likelihood 1 claims is over $1. 5M 35 % • No more than 7 claims are expect ed 30 % above $1 M deductible > E 2s% • No More than 6 claims are expected Ill above $ 1. 25M deductible 20 % a. • No more th an above 5 claims are 15 % expected above the $1 . 5M deductib le 10 % 5% 0% s 0 4 7 1 2 3 6 Number of Clai m ants over Deductible - $1M - $1.25M - $1.SM Con s ., ing I H ia:::. ':th & Be ne[1 s AOfl H ewi lt Pro p ·- ; 3ry & Con fl denti ::. I

  8. Stop Loss Example Summary State of South Dakota Illustrative Stop L oss Example Summary FY 2012 FY2013 No Stop Loss- Current Plan Claim Costs \Nithout Stop Loss $103.8 $111.6 Administrat i ve Costs $8.0 $10.0 Total Expense $111.8 $121.6 Stop Loss- Current Plan Claim Costs \Nithout Stop Loss $103.7 $111.1 Administrat i ve Costs $8.9 $10.9 Total Expense $112.6 $122.0 ($0.8) ($0.4) Stop Loss Savings Co n!: '!L :ing I H ea :th & Bene f.-: s 8 P rcp ri e1 ary & Con id en ti :. I

  9. Stop Loss Example - Details Based on Sun Life tentati ve $ "1 M specific deductible stop loss quote - $5.87 PEPM premium - Does not protect aga in st overall aggregate poor claims experience - Two lasered ind ivi duals with additional liabilities of $1 ,500,000 and $800,000 B Based on F Y1 2 Enrollment and H ig h Cost Claimants ased on FY13 Enrollment and High Cost Claimants Premium (PEPM) $5 87 Premium (PEPM) $58 7 Employees 13,057 Employees 13,297 Premium Paid by State $919,735 Premium Paid by State $936, 641 Lasered HG Claimant #! Claims Cost $2,407,068 Lasered HG Claim an t #1 Claims Cost $1 ,2 15,653 Total SL Threshold ($ 1 M + $1 .5M Laser Li ability) $2,500,000 Total SL Th reshold ($1M + $1 5M Laser Liabili ty) $2,500,000 Reimbursement Received $0 Re imbursement Received $0 La sered HG Claimant #2 Claims Cost $517,178 Lasered HG Claimant #2 Claims Cost $561,296 Total SL Threshold ($ 1 M + $800k Laser Li abili ty) Total SL Th reshold ($1 M + $800k Laser Lia bi li ty) $1 ,800,000 $1,800,000 $0 Reimbursement Received $0 Re imbursement Re cei ve d HG Cl ai mant #3 Clai ms Cost HG Claimant #3 Claims Cost $1,107,266 $1,489,812 SL Threshold ( $1 M) $1,000,000 SL Threshold ($ 1 M) $1 ,0 00,000 Reimb ur sement Received $107,266 Re imbursement Received $489,812 Total Cost to State (Premium - Reimbursements) $812,469 Total Cost to State (Premi um - Reimbursements) $446,829 Number of HC c la imants needed to exceed $1M in re im bursement (and ann ua l SL premium) to make stop loss fi na nc ially advantageous (excludes lasered individuals): 4 Individuals with at least $1.25M large cl aims • Aon Hewitt modeli ng estimates 4% probability of this scenario • 2 i nd iv idua ls with at least $1.5M large claims • Aon Hewitt modeli ng es ti mates 22% probability of this scenario At:JII Cons -~ ing I He:. ':th & Be ne f.1 s Hewi tt 9 P rop ·-:3ry & Con identi ::. I

  10. Guaranteed Health Cost Strategy Co n!: .'!L: ing I Hea~ & Be ne f.-: s ~ Hewitt 10 P rop ·s: ary & Con i d en tial

  11. Guaranteed Health Cost (GHC) Overview • Aggressive Cost Control Efficient network/provider purchasi ng Increase accountability of individual population health Plan design driving desired consumer be havior Manage highest cost, most complex diseases more efficiently • Cappi ng Trend at x% over 3 years "x" determined by employer, balance cost reducti on with ability to drive and effect change in covered population Dol la r for do ll ar liabi li ty guarantee for spending in excess of PEPM guarantee - Annual budget capped, even with 3 year program wi ll be intermittent payments to meet a nn ual budget if exceeded in year 1 or 2 • Previously not an available soluti on for a claim based liab il ity financial guarantee New innovati on within employer healthcare cost management Implementati on timeline more expansive than traditional stop loss To be a viable sol ut ion, expect premiums - 1.0 - 1.5% of overall cl ai m spend A()tl &onsllei,,g1 Holl!lllt81lohB!i,i os 11 Hewitt 11 Propretary & Confidential I 2013

  12. Guaranteed Health Cost (GHC) Overview • Self funded , claims capped at ceiling • Cap trend based on employer choice • Manages/focuses consumer driven pu rchasing, efficient network/provider contracting, and behavioral improvements Reinsurance carriers wi ll base their premium quotes on the perceived effectiveness of the programs in place • Employer st il l has control, drives Guaranteed Health Cost program structure for 3 year duration 12 Gon~ 1-!~ t fl,i.~ 5 12 Propriel;ary & Confidential I 2 01 3

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