Fully-Insured Contract

-1-

-2-

-3-

-4-

-5-

1. Retention to include:

2. - Premium Tax

- Administration

Charges

3. - Margins

4. Paid Claims

5. Claim Reserve

Underwritten Premium

Incurred claims (claims incurred in 1st year) = 89%

Incurred claims (claims incurred in 2nd year) = 89%

69%

18%

11%

2%

1st Year

Paid Claims

Reserves

Adm. Charge

Pooling Point

84%

2%

11%

3%

2nd Year

Paid Claims

Reserves

Adm. Charge

Pooling Point

Risk Management Areas of Control

1. Benefits (PPACA Mandates)2. Size of group through eligibility (PPACA Change)3. Utilization through cost containment

mechanisms4. Cost control through financial arrangement 5. Contractual control6. Exposure/population control

- Universe of Risk – Anticipated experience- Population of a group – 1,000- Demographics – Age and sex load factors- Geographic locations

Each group universe of risk has experience which can be predicted based upon:

- Size of group- Credibility of the group (Consistency of experience)- Probability factors pertaining to the group (Vary from the norm)

Risk Management Areas of Control continued

Group Size

1 - 2425 – 4950 – 99

100 – 199200 – 399400 – 999

1,000+

Credibility Factor

10%30%40%50%60%75%90%

Credibility: The possibility that the experience which was incurred under a current contract year will be repeated in

a subsequent contract year.

Risk Management Areas of Control continued

Risk Universe by Population

50%

20%

10%

20%

Population Low Utilizers 0 - 1,000

Consistent & Heavy Utilizers

Borderline/Frequent Users

Nonconsistent Utilizers - Usually under 500 - 2,000 claimants

Risk Universe by Age & Sex Loads

Risk Spectrum

Males under 30Males 30 – 44

Females 35 – 49Females under 35

Males 44 – 64Females 40 - 64

Risk Universe by Claims

75%

10%

15%

Claims attributed to 20% utilizers

By 50%

By 30%

Risk Universe by Claims continued

Risk Universe by Claims continued

Self-Funded – Service Entities

TPA:Third Party Administrators perform the adjudication and payment of claims.

UM:Utilization Management performs the pre-certification, concurrent review, large case management and may perform such services as claim audit and disease management services.

Network:The Network Manager provides the preferred provider network by contracting with specified providers of health and other services. Often referred to as a PPO.

Subrogation Services: A third party administrator, may be a legal firm that performs investigation and determination of what party is at risk for claims-occupational vs. medical.

Self-Funded – Service Entities Continued

Re-insurance Entity:Usually a company who provides an indemnification contract directly to the employer in order to transfer a per claim risk at certain specified limits as dictated by the contract. These companies are usually not health insurance companies, but rather are more related to property and casualty carriers. These contracts and carriers DO NOT necessarily have to abide by health mandates either State or Federal.

ERISA: Employment, Retirement Income Security Act. A Federal Law that provides and allows for the self-funding of health plans. For private sector employers, state laws have no authority over self-funded plans. Only federal mandates that are under ERISA apply to self-funded plans. Public Sector self-funded plans remain governed by state law, and state mandates.

Excess Loss or Stop Loss Protection

Individual and aggregate excess loss or stop loss coverage limits the risk to the group, and is designed to protect against catastrophic losses by putting a limit on the employer’s liability.

Specific Stop Loss: A deductible on a per participant basis that is an indemnification contract to reimburse the employer for losses in excess of a certain amount called the stop loss. Appropriate use of stop loss is determined by size of group and/or size of group’s overall claims.

Aggregate Stop Loss: An umbrella contract that assumes the risk of the total group losses that are UNDER THE SPECIFIC STOP LOSS usually stated in terms of factors: single and family, (i.e., $350.00 and $800.00). Overall contract is usually a percent of paid.

Specific Stop Loss Contract TypesAn indemnification contract, not a health insurance contract

These contracts are written on various terms that are stated according to:1. The period the contract covers when claims are incurred2. The period the contract covers over which the claims are

paid

These contracts are usually stated as: 12/12, 15/12, 18/12, 24/12, 12/15, 12/18,12/24, or such as 15/17, etc.

Example:15/12 claims incurred in 15 months including 3 months prior to the effective date of the contract and paid through the 12 months of the contract.

Specific Stop Loss continued

Example:12/18: Claims incurred during the 12 months of the contract and paid through 12 months plus an additional 6 months following the annual contract. Therefore, no claims are covered that would be termed the run-in, but would include claims incurred during the contract that run-out.

Key Terms:1. Pure Premium/Expected Claims Factors: the expected

average monthly claims cost per contract. 2. Attachment Point: the maximum claims liability covered

under umbrella aggregate stop loss position. Usually stated as a percentage of expected paid claims for that contract period.

Self-Funding Process

Employer is billed:• The amount of Claims• Network access fee and administrative fees • The employer assumes the risk of the claims

expense rather than the fully insured health plan

Five Arrangements:• Administrative Services Only (ASO)• With excess stop loss-partially self-funded• Partially self-funded using a high deductible FI plan

base• Level Funding• Minimum Premium with Terminal Liability Option

Types of Self-Funded Contracts

1. Level Funding or Maximum CostThese contracts include administration, network, managed care, and stop loss fees. These contracts also include both a specific and an aggregate stop loss. The maximum cost is stated in terms of the total fixed fees plus the maximum claim liability.The employer pays the maximum cost rates or level funding primary rates. There is a settlement which usually takes 3-6 months following the end of the contract year. If a surplus is developed, either all or part of the surplus can be returned or carried forward.

Types of Self-Funded Contracts Continued

2. Aggregate Only ContractsThese contracts include administration charges, network charges, managed care charges, and only an aggregate stop loss contract. They are often referred to as an “AGG. Only” contract. The group pays a maximum cost or level funding rate that includes all fees and is based on the aggregate contract level of maximum claims. Often, these contracts are based on a 12/12 or paid claims only first year contract. They can appear as very competitive contracts. The issues are protection of “run-out” claims and pricing on a full year of paid claims on renewal, first year to second year paid claims.

Types of Self-Funded Contracts Continued

3. HRA Front End Funded ContractsThese contracts usually feature a high deductible fully-insured health insurance program as their foundation. Then the employer/group develops a different level of benefits that are administrated on top of the fully-insured plan. The top level of benefits can be administrated on top of the fully-insured plan. Additionally, they can be administrated by a separate third party administrator, or they can by the same carrier that insures the fully-insured foundation plan.

Types of Self-Funded Contracts Continued

Self-Funded Plan

Fully-Insured Plan orThe Foundation Plan

Fully-Insured with HRA Carrier

Types of Self-Funded Contracts Continued

4. Minimum Premium Contract with TLOA type of contract whereby the client pays the fixed fees: admin, stop loss, network, UM, etc. on a monthly basis and funds claims as in a self-funded (usually 12/12) contract. However, there is Terminal Liability Option (TLO). The TLO is equivalent to the “run-out” claims estimation. In order to have the TLO you must pay a “fee” up front to include it in the contract.

Types of Self-Funded Contracts Continued

5. Pure Self-Funded Plans and ContractsThese types of plans can involve the employer purchasing administration separately, network separately, managed care separately, and all other services separately including stop loss contracts. Usually, the TPA includes most of these services, or contracts, in their proposals. Brokers can, on behalf of their clients, seek separate contracts and implement those separate services with the chosen TPA.

These types of contracts or plan structures can be referred to as ala carte health plan purchasing. When companies who are usually fully-insured carriers perform this type of self-funding, they usually require, but not always, that all of the services including stop loss are performed by them. When TPAs are used, services can be selected or purchased on a more ala carte basis.

Self-Funding of Health Benefit Plan Basics

Coverage Issues

Shock Loss Claims:• Diagnosis and prognosis• Changing stop loss levels – pressure to increase underwriting

limits• Leveraged trends that apply to stop loss markets

Example:1. Stop loss deductible is $30,000, claim is $100,0002. Employer pays $30,0003. Carrier pays $70,0004. Trend is 10%; therefore, same claim next year is $110,0005. Employer pays $30,0006. Carrier pays $80,000 carrier trend is not 10% but 14.7%

Choosing the Correct Stop Loss Level

Selecting the correct and most prudent stop loss position is not a decision of fixed fees. It’s a decision based on an appropriate claims study of two or three years of claims data. The best process is to develop a study of gross per employee per month claim cost vs. net paid with the impact of different stop loss levels.

In the end, it all goes back to the rating developed to meet the employer’s budget for the population risk being covered. The stop loss position chosen secures the total plan budget and therein the plan ratings.

• There are no rules of thumb!• There are no standard underwriting rules!• Each group is different and must be treated that way!

The best place to start is the lowest stop loss position the market will allow and then review the impact at $10,000 increment levels.

Selecting the Correct Stop Loss Position

An important element of the decision is the employer’s annual budget, the anticipated employee contributions, and how the health benefit cost integrates with the corporate strategy that relates directly to and from the corporate strategy.

Elements that must be considered are:1. Wellness initiatives and programs2. Compliance with PPACA affordability3. Compliance with PPACA non-discrimination test rules4. Compliance with PPACA mandated benefit provisions5. Number of plans that employees can select from

Few employers are relying on a single plan anymore due to demographics in their population and plan funding goals. Additionally, ‘employee choice’ is a financially sound way for companies to allow higher-risk employees to help fund the plan and subsidize lower-risk employees.

Issues in Stop Loss Contracts

1. Lasers2. Indemnity contract/not a health contract; therefore, mandates do not

apply. Exclusions in contract may ignore federal or state health mandates. 3. Cash flow mechanisms vs. reimbursement contracts4. 12/12 with terminal liability contract vs. 15/12 – 18/12 or 12/15 – 12/18

contract5. Stop loss carrier rating and agent/consultant E&O policy – what matters?6. Transitioning a self-funded group to another carrier and/or TPA7. Transitioning a self-funded group to a fully insured contract8. Reserving – why or why not? What does ERISA allow?9. Business transitions – when one company assumes or buys another and

the company being purchased is self-funded10. Integration issues – the right TPA, the right PPO, the right UM manager,

the right PBM, all different, all working for the same client – what’s important?

The consultant/agent’s role and responsibility.

THE STARR GROUP

For additional information about this presentation, please contact

The Starr Group by phone:

1 (414) 421-3000or email:

gbass@starrgroup.com