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

The Pros and Cons of Self-Funding Health Coverage BY LARRY GRUDZIEN ATTORNEY AT LAW Factors of Self-Funding: Mar. 20, 2018

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 Factors of Self-Funding • Financial, Plan Design and Legal Compliance Considerations

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 Factors of Self-Funding 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

Exhibit 10.2 Percentage of Covered Workers in Partially or Completely Self-Funded Plans, by Firm Size, 1999-2016

Exhibit 10.3 Percentage of Covered Workers in Partially or Completely Self-Funded Plans, by Plan Type, 1999-2016

Mechanics: Benefit Design • Plan Document and Summary Plan Description (SPD) • In a self-funded health plan, the employer, with the assistance of 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 Factors of Self-Funding • Third Parties Providing Specialized Plan Admin. Services • Provider Networks

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. 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% Items to consider: • Factors of Self-Funding Robust and easily accessible to its members • Discount structure and payment timeline • TPA integration • Accurately priced by the stop loss carriers •

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. Factors of Self-Funding • Cost saving opportunities: Rebates and Plan Transparency

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 Factors of Self-Funding • Aggregate coverage is cheap (“sleep insurance”), historically a group has a 2% chance of hitting their maximum.

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. Factors of Self-Funding • Aggregate coverage is not always purchased since medical claim costs rarely exceed 125% of expected claims.

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. Factors of Self-Funding • 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.

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). Factors of Self-Funding • This contract can be used to help a group transition to self funding.