Stop Loss 201

1. Stop Loss 201 Date, Presenter

2. Welcome to Stop Loss 201 • Important Reminders Before We Begin • Thank you for coming! • Please sign roster now, and fill out all information • This is the Stop Loss 201 course for two credits • You must be present for entire course to earn credits • Sales and Internal Company Procedures cannot be used for CE credit • Here is the course outline • Let’s begin!

3. Stop Loss 201 Presented By: • Title • Experience • Education/License

4. STOP LOSS 201 - AGENDA • Stop Loss Review • Why Do Customers Need Stop Loss? • Stop Loss Products • Marketplace Review • Firm vs. Contingent Quote • Value of Integration • Premium Stop Loss Products • Trend • Catastrophic Trend • Major Stop Loss Drivers • Leveraged Trend and Differences by Pooling Level • Suggested Pooling Levels • Volatility • Capital Requirements • Years Between the BIG Claim • Credibility • Experience Rated vs. Pooled Methodology • Conclusion and Case Study

5. Why Stop Loss Why Stop Loss • Stop Loss Customers Include: • Self-insured (ASO), mid-sized customers • Customers moving from insured to ASO plans • National account customers who are risk averse or have smaller cost centers structured under the parent company • What do Stop Loss products provide? • “Sleep insurance” • Protection from the impact of high dollar claims on their cash flow & experience • A level of predictability for medical claim expenditures

6. Stop Loss Products Stop Loss Products Individual Stop Loss (ISL) Definition/Concepts • Written with ASO plans in conjunction with an underlying medical plan • Protects an employer’s financial resources from large claims on any one individual. • Customer’s liability is capped at a certain dollar amount on each individual per policy year. • Amounts below the pooling point are the customer’s liability • Amounts above the pooling point are the Carrier’s liability • Claims over the pooling point for an individual member are removed from the customer’s experience & paid by the stop loss pool.

7. Stop Loss Products Stop Loss Products Aggregate Stop Loss (ASL) Definition/Concepts • Aggregate Stop Loss limits the ASO customer’s overall claim experience for a policy year. • The customer’s liability is usually expressed in terms of a percentage of total expected claims. Typically this is 125% but can vary based on customer need. • All claims up to this threshold are the customer’s liability, all amounts over are the Stop Loss Carrier’s liability. • In most cases, ISL coverage must also be purchased. In some instances, an “implied” ISL level can be used as an alternative. • Amounts paid by the employer, below the individual stop loss pooling point, accumulate towards the ASL threshold.

8. Stop Loss Products Stop Loss Products • Individual Stop Loss & Aggregate Stop Loss Contract Types • New Business: Contracts are labeled according to (1) how claims are incurred and paid and (2) how they accumulate to the pooling point. The first number refers to the incurral period and the second number to the paid period. • 12/12 (incurred in 12 / paid in 12) – Standard first year option • Run In Contracts: 15/12, 18/12, 24/12. Only available in first year. • Run Out Contracts: 12/15, 12/18, 12/24. Applies to termination year only. • Renewal: Contracts can renew on a rolling basis or a paid basis. A “paid” contract includes all claims incurred after the policy effective date (while the contract is in effect) toward the pooling point in the year in which they are paid. • Rolling Contract: i.e. Rolling 12/15 (incurred in 12 / paid in 15) • Incurred Contract: 12/36 - Accumulates claims toward the pooling point based on the year the claims were incurred, rather than the year they were paid – matching employer liability

9. Players in the Market Players in the Market • Managing General Underwriters • A group of our stop loss competitors who underwrite, act as a gatekeeper for carrier selection and claims administration, select reinsurance brokers to quote the business and eventually assign the business to selected carriers. • MGU’s assess risk, but do not retain it. • Direct / 3rd Party Carriers • A group of our stop loss competitors who provide stop loss coverage but do not administer the customer’s medical benefit plan. • Integrated Carriers • A group of stop loss providers that administer both the medical and provide stop loss coverage.

10. Players in the Market Players in the Market Common MGU / Direct Carrier Practices: • Strict disclosure on both new business & renewals • Contingent Quote; no firm quotes until 30 days before the effective date • Lasers often required • Gaps in coverage (limitations, exclusions, maximums in Stop Loss policy that are different from the medical plan) • Conservative contract constraints • Strict claim submission requirements • According to the 2007 Towers Perrin Stop Loss Survey close ratios on new business were 3.4% and retention rates were 68%

11. Disclosure Reporting Disclosure Reporting • The practice whereby a carrier requires completion of a disclosure • form signing off on all known and emerging claims. • Sources for completing the form include pre-certification information, case management notes, utilization review and claim files. Required information includes: • Diagnosis • Current/Planned treatment patterns • Prognosis • Signature of an officer of the company Information disclosed can be used to justify re-rating and failure to provide complete disclosure may result in claim denial.

12. The Risk of a Contingent Quote • Common practice among third party carriers is to issue quotes on an illustrative basis • Updated claim information is required 15 – 45 days prior to the effective date • Based on updated information TPC may re-rate or laser any emerging claims. On average, 10% of cases are re-rated based on updated claims experience. • Customer and Broker are left with unexpected changes on or about the effective date • The smaller employer groups are least likely to afford the risk of a contingent quote due to these risks

13. Firm vs. Contingent Quote • Company XYZ has 200 employees • Employers expected annual healthcare costs are $600K, ($500K medical, $100K Stop Loss premium) • Just prior to renewal, an early stage transplant patient develops on the plan with an expected cost of $300K • If this customer had a firm quote their costs would remain at $600K • With a contingent quote, costs would increase to $900K, ($500K medical, $400K Stop Loss premium), a 50% increase!

14. The Value of Integration The Value of Integration • Comprehensive Coverage & Integration • Consistent with underlying medical plan in terms of limitations, exclusions and maximums. • Consistent standards for medical necessity, claims review and payment • Ease of Administration • Single point of contact • Faster reimbursements • Additional claim audit • Timely notifications and reporting • Typically no claim filing requirements • Plus • Sensitive data remains with the medical carrier instead of being distributed to multiple parties • Accountability • Risk Retention

15. Premium Stop Loss Products Premium Stop Loss Products Incurred Accumulation Option (12/36) • Accumulates claims toward the pooling point based on the year the claims were incurred, rather than the year they were paid – matching employer liability. • Once an individual hits the pooling point in a given year, all other claims incurred by that individual within the year (paid within the 36 month paid period) will be covered. • Eliminates the need for separate Run Out or Run In protection in the future & eliminates the first year maturation adjustment. • Example: ABC Company has elected Incurred Accumulation with a 1/1/08 effective date. All claims incurred in 2008, paid by 12/31/10, will be grouped together for purposes of comparison to the pooling point. At renewal, all claims incurred in 2009, paid by 12/31/11, will be grouped together.

16. Premium Stop Loss Products • Impact: By purchasing the RP option in year 1 for $48,000 in premium, in year 2 the client avoids: • Lasering the high dollar claimants & thereby assuming the $280,000 potential claims OR • Premium adjustment of $30/mo to accommodate the high dollar claimants, resulting in a difference of $244,800. Premium Stop Loss Products Guarantee of Insurability Mature Example with Known Claimants at Renewal Lives: 800 Lives Pooling Point: $100,000 Contract Basis: 15/12 (mature) Claimants No high dollar claimants at presale; 2 claimants at $250,000 each at renewal With RP OptionWithout RP Option Difference Year 1: Pooling at $100,000 Rate $50.00 $50.00 0 High Claimant Adjustment 0 0 0 Renewal Planner Adjustment 5.00 0 (5.00) Total Rate $55.00$50.00 (5.00) Annual Premium $528,000.00 $480,000.00 ($48,000) Year 2: Pooling at $110,000 Rate $54.00* $54.00* 0 High Claimant Adjustment 0 30.0030.00 SubTotal $54.00 $84.00 $30.00 Renewal Planner Adjustment 4.50 0 (4.50) Total Rate $58.50 $84.00 $25.50 Annual Premium $561,600.00 $806,400.00** $244,800 * Rate assumes 8% medical increase ** If sold as immature, the rate would have been adjusted for maturation. If no PPT increase, addt’l adjustment for leveraged trend.

17. Impacting the Rate: Contract Nuances

18. Trend 18

19. Catastrophic Claim Drivers Catastrophic Claim Drivers The frequency of jumbo claims is defined as a member incurring medical claims of $1 million or more in a year, increased ten-fold from the year 2000 to 2005, from less than 1/10th of one member per 100,000 health plan members to 1.1 per 100,000 members in 2005 * Common drivers for catastrophic claims include: • Neonatal Care • Cancer Treatment and Care • Trauma / Burn Victims • Severe Cardiovascular conditions • Transplants • Hemophilia and Genetic Disorders (Multiple Sclerosis) • Specialty Drugs and Therapies * Source: Evergreen Re study published in the 9/16/07 MyHealthGuide Newsletter

20. Stop Loss Claim Drivers by Pooling Level • As the pooling level increases the drivers of Stop Loss Claims change • NICU costs drive a much greater percentage of overall stop loss claims as the pooling point increases

21. Catastrophic Claim Drivers Catastrophic Claim Drivers • Inpatient expenses drive 60% of all Stop Loss claim costs • With the effect of leveraged trend the increase of inpatient costs for stop loss claims is between 12% and 24% • An example of a catastrophic inpatient claim is premature births • Inpatient costs can drive as much as 70% - 80% of all stop loss claims as the pooling point increases

22. Catastrophic Claim Drivers Catastrophic Claim Drivers Premature Births • According to the March of Dimes, most pregnancies last around 40 weeks. Babies born between 37 and 42 completed weeks of pregnancy are called full term. Babies born before 37 completed weeks of pregnancy are called premature. • About 12.5 percent of babies (more than half a million a year) in the United States are born prematurely • (1). For reasons that doctors don't fully understand, the rate of premature birth has increased by more than 30 percent since 1981 (1). • Premature birth is a serious health problem. • Premature babies are at increased risk for newborn health complications, as well as lasting disabilities, such as mental retardation, cerebral palsy, lung and gastrointestinal problems, vision and hearing loss, and even death. • Many premature babies require care in a neonatal intensive care unit (NICU), which has specialized medical staff and equipment that can deal with the multiple problems faced by premature infants. • NICU Costs represent 35% of all stop loss claims > $500K 1. Martin, J.A., et al. Births: Final Data for 2004. National Vital Statistics Reports, volume 55, number 1, September 29, 2006.

23. Facility Differences • Contracting arrangements with local Hospital drives a portion of Stop Loss rates • Hospital average cost per day • The average cost per day for hospital admissions is between $3,000 and $3,500 • The average non-catastrophic cost per day is about $2,000 • Average catastrophic cost per day is about $6,000 and can be as high as $12,000 - $15,000 per day

24. Facility Differences • Hospital costs increase each year but the increases vary by facility type • The average trend at a Community Hospital is about 5% • The average trend at Tertiary and Teaching Hospitals is about 8%

25. Catastrophic Claim Drivers Catastrophic Claim Drivers • Outpatient services drive 20% of all Stop Loss claim costs • With the effect of leveraged trend the increase of outpatient • costs for stop loss claims is between 12% and 24% • An example of a catastrophic outpatient service is a cancer diagnoses receiving chemotherapy. Members in this treatment regiment can range from 50K - 150K in the majority of cases. In cases where cancer has spread to multiple organs it is not unusual to see claims in excess of 250K

26. Catastrophic Claim Drivers Catastrophic Claim Drivers • High cost Drugs represent 10% of stop loss claims on average • These drugs can run as high as $3 million for individualized cancer therapies. Given the highly individualized nature of certain high cost drugs, these drugs are produced on a as needed basis with minimal manufactures to help control cost • In 2004, high cost drugs represented only 4% of total stop loss claims vs. 10% today • A hemophilia patient receiving factor replacement can quickly increase significantly if a claimant develops antibodies and requires greater than normal factor 8 replacement doses

27. Leveraged Trend Stop Loss Carrier Cost increases 20% Customer Cost is Flat Assume that in your current year, the plan has a $75,000 pooling point and there is one employee with a $150,000 claim. The customer funds the first $75,000 and the stop loss carrier funds the remaining $75,000. If medical trend is 10%, the same $150,000 claim would increase to $165,000 in the following year. The customer would still fund the first $75,000 but the stop loss carrier would pay $90,000 – an increase of 20% In addition, a $75,000 claim (which does not hit the pooling point in the current year) becomes a $82,500 claim in the following year and the stop loss carrier is liable for claims it didn’t have to cover at all the year before

28. Leveraged Trend Effect on Pooled and Unpooled Claims • The example above looks at a 10% claim trend over a 4 year period • The overall pool increases 10% each year • The Stop Loss Carrier covers a greater percentage each year while the unpooled percentage will actually decrease • As you can see in the graph below the pooled claim dollars will expand at a higher pace when compared with the unpooled if no changes are made to the pooling level Pooled vs. Unpooled Claim Trend

29. Leveraged Trend Leveraged Trend • Leverage Trend is not a number, rather it’s a range of numbers • Lower Pooling levels have leveraged trend as low as 12 – 14% • Higher Pooling levels have leveraged trend as high as 30 – 40% • The reason for this differential is the effect of deductible leveraging

30. Increased Pooling Level Impact Increased Pooling Level Impact The best way to control leveraged trend is through increasing the pooling level. There is always a concern about the additional risk driven by the increase in pooling level. While it does increase customer liability, it may be more cost effective to do this than to receive an increase in premium to maintain the lower pooling point. For most health plans, a 10% increase in pooling level doesn't impact the overall risk for the health plan by much. As a result, a strategy of consistent increases in line with medical trend to the pooling level each year is most practical.

31. Example - Pooling Level Impact Example – Pooling Level Impact Exhibit I below looks at the effect of raising the pooling level each year in line with medical trend (estimated at 10% in the example). The premium savings generated in this example is $133,650, the question becomes is it worth the additional risk? Exhibit I

32. Example - Pooling Level Impact Example – Pooling Level Impact Exhibit II below shows the effect on claim payments of the annual increase in pooling level. If we assume 1 claimant each year with a base of $100,000 this customer would end up with over $50,000 of savings during the 5 year period. Exhibit II

33. Sample Renewal Rate Reductions • Changes in the pooling point will reduce fixed premium costs • As shown in the chart above for customers with mature claim experience and a pooling level of $75,000 a $10,000 increase in pooling level will reduce their stop loss premium by 11 – 19% • For customers with a pooling point over $200,000 a $25,000 increase in pooling level will lower rates by up to 25% • By increasing the pooling point customers will reduce stop loss premiums and also save on premium tax

34. Recommended Pooling Levels • Although each employer will have their own risk threshold we do have recommend pooling levels by employer size • Key is to balance stop loss ISL costs with the customers risk • Keep risk threshold consistent each year by increasing the pooling point in line with medical trend • The chart below represents recommended pooling levels for a variety of employer sizes • Assumption is $6K PEPY in annual claim costs • The target pooling point and ranges should increase about 10% per year

35. Summary Pooling Point Guidance 3 Actions to Mitigate the Renewal Rate Increase • Eliminate the Maturation Adjustment on First Year Business • Purchasing a Run In or Run Out contract in the first year eliminates the second year maturity adjustment. Another option is to sell on a mature contract basis. • Mitigate the Effect of Leveraged Trend • Pooling points should increase annually to mitigate the effects of leveraged trend • Eliminate Adjustments for Ongoing Claims • Adjustments for ongoing claims can be eliminated with products designed to guarantee a level of predictability for renewal rates

36. Volatility 36

37. Capital Requirements / Government Regulation • Capital requirements and government regulations drive much of the cost in the stop loss marketplace • Based on the rating of the Stop Loss Carrier and state insurance department regulations 40% - 55% of every dollar of revenue is required to be allocated to reserves. • Each state has specific filing requirements which drives higher administrative fees • Premium Tax • Some states levy special assessments for uninsured residents • Consequently the industry prices to a 68% loss ratio

38. Predicted Loss Ratio • Past loss ratio experience is not credible; ongoing claims have higher credibility and present selection risk • Typical Loss Ratio experience shows that a case has a 1 and 4 chance of falling into each of the following loss ratio buckets

39. Average Number of Years Between the Big Claim • The overall stop loss pool increases by leveraged trend annually • Some clients will look at their three or four years of experience, and expect a rate pass for “good experience” • How good would their experience be if they were the one with the really big claim? • The chart shows how often, on average, a client should expect to be the one with the really big claim

40. Expected # of High Claimants • Based on a 2,500 life group the above example shows the expected number of claimants that would exceed a pooling level of $100,000 • The expectation is this customer would have 2 members above the pooling level in 2001 • If the same pooling level is retained, the number of members exceeding the pooling level would grow exponentially over the years

41. Expected Claims by Pooling Level • Based on prior claim experience we can predict the number of claimants a group will have by pooling level • As a customer increases their pooling point the risk of members reaching the pooling level decreases which will translate to lower stop loss premiums

42. Pooled Risk vs. “Known Risk” • Overall, stop loss experience is pooled to obtain a manual rate • An individual employer group’s demographics and geographic location will drive an adjustment to the manual rate • Known claimants would be factored into the premium through either a claim load or laser • If there are no known risks in the population the employer group may receive a reduction in their rates • When obtaining a contingent stop loss rate an employer is taking a risk on potential high dollar claimants developing after their initial rate quote • An example of this is a customer that has favorable demographics and geography and receives a favorable reduction in their manual rate • However, If the employer does not get a firm quote they will be subject to being underwritten again within 30 days of the policies inception • Should a potential claimant over the pooling level develop, it would result in a increase in the rate or a Laser on that member • The frequency of known claimants developing later in the year is about 20%

43. Lifetime Max and HRA / HSA Plans • Policy and lifetime maximums • With no separate maximum there is full coverage of eligible claims paid under the benefit plan • Many specialty carriers standardly quote a maximum on ISL and ASL • Unexpected risk can be catastrophic eliminating the protection the employer was expecting • Effect on rates with a H R A / H S A • Effect on stop loss rates is minimal • Claim pick will change slightly • Largest impact is an increase to out of pocket maximums • Minimal effect in the short term but may reduce future claim risk

44. Value of Provider Network and Transplant Contracts • According to a 2006 study by Milliman, the average organ transplant costs $328,000 and can rise dramatically with complications • Transplant coverage is included in the underlying plan with most Integrated carriers • Case management is consistent throughout member treatment • Negotiating power of integrated carriers can lead to lower overall costs for employers • Some employer’s purchase carve out transplant services which require members to use a different network • Contract language can restrict members to only one transplant which could shift liability back to the employer • Restrictive language can eliminate payment and leave the employer at risk

45. Case Management Notes Release of Case Management Notes • Carriers will provide the succeeding carrier information, at the customer’s request, once signed agreements are in place to ensure that personal health information (PHI) is disclosed appropriately. The following information is normally released, at the customer’s request • Member name, address, social security number, and relationship to the account subscriber • Diagnosis (for ASO accounts only) • Hospital name (if patient is currently in hospital, for ASO accounts only) • Servicing provider information (name, specialty, address, for ASO accounts only) • Prognosis information is not provided.  • This information is subjective in nature and does not take into consideration how individuals respond to care plans  • Most carriers will not project which members may incur claims who will exceed the pooling point, including projected members on transplant lists, in case management or diagnosed with specific illnesses that may exceed the pooling point  • These projections are subjective and may be inaccurate due to the unpredictability of how individuals may respond to specific illness or conditions

46. Case Study - Handout Let’s put it all together • Sample Case • Large Retailer • 1,000 Employee’s / 2,000 Members • Demographic Factor of .90 • 53% Female • 47% Single • 21% Married • 32% Family • Main Locations in Texas • Current Pooling Point = $150K • Paid Contract 48 / 12 • Medical Trend = 8% Leveraged Trend Pooling Point Risk Threshold Volatility

47. Case Study You are the current benefits consultant for an employer who has 1,000 employees. They are in the process of renewing their individual stop loss policy for the upcoming policy year. The employer has asked for your expertise in understanding what to expect for their upcoming stop loss renewal. • $150K • $165K • $175K • $200K 1. The employer is interested in helping to control fixed costs, and would like a recommendation on what pooling level makes the most sense for their health plan. The current individual stop loss pooling level is $150K. Which of the following would you recommend, and why?

48. Case Study • -18% • -10% • +2% • +15% 2. Assuming the employer implements your recommendation in the previous question regarding pooling level, what level of increase in their stop loss rates should this employer expect in their renewal?

49. Case Study 3. When looking at their stop loss renewal, the employer has noticed the fact that they’ve had individual stop loss coverage for 5 years, and haven’t had a claim greater than $500K. As a result, the employer would like to know why their stop loss premium continues to be high given that they haven’t had any significant large claims. As the consultant for this employer, what’s the most likely explanation for why this may be occurring? • Stop loss is a pooled product • Catastrophic claims aren’t credible enough to experience rate a group of this size • Considering that a group of 1000 employees is likely to have a claim greater than $500K once every 6 years, this group’s experience is actually fairly normal when compared with the actuarial expected value of large claims • All of the above

50. Case Study 4. The benefit manager has been networking with peers from other companies and has been informed that if they go with XYZ Stop Loss Insurer, they could save 10% in fixed costs versus their current stop loss contract. They are also aware that XYZ Stop Loss Insurer requires disclosure, while their current stop loss carrier has offered a firm renewal 4 months in advance of their policy effective date. The employer has come to you for advice. Which of the following recommendations best describes the current situation? • It’s in the employer’s best interest to move the stop loss business to company XYZ, as 10% savings is a lot of money and likely to be a better deal for the employer. • It’s something the employer can consider as an alternative, though there’s a reason why the stop loss rates for XYZ Stop Loss Insurer are 10% lower, and it’s driven by disclosure and the option to laser or deny claims, which would otherwise be covered under a firm renewal. • From prior experience, company XYZ has never re-rated an account based on disclosure, so it’s not something the employer should be concerned about.