Health Claims Trust Fund Overview and Best

Practices

Tony Roselli, CPA, CGMA –

Roselli, Clark and Associates

Edd Byrnes & Ken Lombardi

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Agenda MGL Chapter 32B, Section 3A Accounting for Health Claims Trust Funds Flaws in the statute Common problems Best practices How do we protect ourselves from pitfalls

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MGL 32B Section 3A Allows political subdivisions of the

Commonwealth of Massachusetts to establish a Health Claims Trust Fund.

Essentially a vehicle by which an organization can elect to manage its risk associated with employee and retired employee health claims.

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MGL 32B Section 3A Funding to the Trust is made available from

(1) appropriation, (2) applicable payroll withholdings from employees’ periodic pay, and (3) contributions from retirees.

For those who adopt these provisions, it replaces traditional premium based health insurance plans.

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MGL 32B Section 3A Requires annual audit Accounting is required to be in accordance with

generally accepted accounting principles (GAAP) – not Statutory like other funds

Treasurer is required to be the custodian of the funds

Treasurer is responsible to assure a sufficient balance at all times that enables the payment for incurred and unpaid claims and other related liabilities

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Accounting1. Withholdings from employees are reported as revenues to the Trust.

2. Matching contributions from the Town are reported as revenues to the Trust.

3. Reinsurance reimbursements are recorded as revenues to the Trust.

4. Medical claims are recorded as expenses of the Trust.

5. Administrative costs are recorded as expenses of the Trust.

6. Medical claims incurred but not reported (IBNR) are required to be accrued at the close of the year.

7. Payments for medical claims paid subsequent to year-end that relate to the target year are posted as accounts payable of the trust.

8. Reinsurance reimbursements received subsequent to year-end that relate to the target year are posted as accounts receivable of the trust.

9. Contributions received prior to year-end that relate to subsequent year claims are recorded as unearned revenue (typical when summer school pay lump sum exists).

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Accounting

Debits Credits

4 Processed claims 1 Employee withholdings5 Administrative costs 2 Town Contribution6 Claims incurred but not reported (IBNR) 3 Reinsurance receipts7 Subsequent year processed claims 8 Subsequent year reinsurance receipts9 Contributions related to subsequent year

Health Insurance Trust Fund

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Accounting Aggregate credits should exceed aggregate

debits

If aggregate debits exceed aggregate credits a deficit exists (we have a problem)

This should be monitored monthly

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Flaws in the Statute GAAP accounting required; despite the

Commonwealth being on a statutory system Treasurers (who have statutory responsibility) are

typically not proficient at GAAP accounting The Department of Revenue representatives who

enforce these regulations are not proficient at GAAP accounting

Typically results in inaccurate reporting and possible deficiencies in recognizing liabilities

No minimum subscriber requirements

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Flaws in the Statute No minimum reserve requirement for funds

held in reserve as is the case for a typical insurance company

While audit is required, no timeline exists on when the audit is to be submitted as is the case for a typical insurance company

No requirement for an insurance committee No requirement for a professional benefits

consultant to provide oversight

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Flaws in the Statute Essentially any political subdivision, no matter

how large or small, through a simple adoption of this statute can basically run an insurance company with unqualified individuals

This involves some of the most complex accounting and operating issues that exist with little in the way of requirements to insulate themselves from these risks

The end result when the wrong organization believes this is a good idea is disaster

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Common Problems Insufficient contributions

Employee rates Appropriation Leads to inadequate reserves

Inadequate monitoring No Insurance Committee No benefits consultant Confusion in assigned responsibilities Reinsurance claims not reviewed No monthly analysis conducted

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Common Problems Organization is too small to bear the risk of a catastrophic

year

Improper accounting Lack of GAAP knowledge IBNR calculation Liability cutoff issues

Lack of reconciliations

Tardy submission of audits to DOR

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Best Practices Determine if the quantity of employees in the

organization is sufficient to bear the risk of this activity Establish insurance committee to provide oversight of

the Trust and make recommendations on rates and contributions

Engage a benefits consultant with proper qualifications to work with the insurance committee and entity

Despite Treasurer named as responsible in the statute, assign responsibilities to proper employees such as Accountant, Finance Director and Town Manager or equivalent

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Best Practices Establish monthly monitoring process of

revenues and expenses Establish policies to maintain reserve of 20 –

30% Maintain sufficient reinsurance policy Establish reconciliation procedures Maintain accurate and timely accounting records Conduct audits timely and submit to Department

of Revenue timely

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How do we avoid the pitfalls Timely Annual audit including IBNR review. Professional benefits consultant.

Sets rates Obtains reinsurance quotes with proper individual

deductible Provides monthly or quarterly underwriting

estimates and presents to Administration and IAC Assures the group of timely reimbursement of large

claims back to Trust. Annual RFP for claims and reinsurance services

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Why things look good at start Assumption: You are moving from a fully insured plan to self-funding.

On your effective date and for the roughly the first three months of your plan year You will deposit your level monthly premium and the employees monthly premium into your Trust Account.

You will have very few claims charged against your Trust Account as your prior carrier has the obligation to pay any and all claims incurred while they were in force even though the claims were paid after their termination date. You have that same obligation if you were ever to terminate your self-funded plan and go back to a conventionally insured program.

This is called the Incurred but not Reported Reserve. (IBNR) So you can see while you are not paying claims during the first few

months you are in fact setting up your own IBNR which is a liability of the Trust.

Caution needs to be taken with this reserve. Investment policies must keep this liquid.

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How do you Set Rates Basically the rates are a function of the following factors on

fully credible accounts: Claims Administration Risk

So the general formula is: Total Paid Claims CLAIMS Less: Large Shock Loss Claims Plus: Pool Charge for Large Claims Pooling RISK Divided by Cumulative head counts Times trend for Medical Care inflation Include a factor for Administration Costs ADMIN.

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Ongoing Maintenance The following items are critical to maintaining a

positive Trust Fund balance: Annual audits Professional underwriting reviews at least

quarterly. Consistent monitoring of large claims reports and

filings for reimbursements. Consistent presentations to management and IAC

for transparency and for education of all involved Conservative investment policy.

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Questions