Partially Self Funded - 101

1. Partially Self Funded - 101 The Basics February 2009 Brown and Brown of Texas 10700 North Freeway, Suite 300, Houston, Texas 77037 (281) 260-2000

2. Types of Funding – Fully Insured • Claims costs are set based on the claims experience of groups with similar risk characteristics, not the individual client’s claims experience • Insurance carrier assumes claims risk • Costs do not fluctuate based on actual claims • Employer’s expense is fixed • Premiums include reserves, fixed costs, claims and administration fees • After termination, the plan holder is not responsible for any additional fees

3. Types of Funding – Partially Self-Funded • Employer shares in claims risk • Claims costs based on actual claims incurred & paid • Employers expense is fixed and variable • Premiums include insurance and administration costs • After termination, the plan holder will be charged fixed costs to administer the claims run out (contract depending) • Claims costs are based on actual claims incurred by plan members. This may be blended with the carriers block, credibility dependent

4. Types of Funding–Self-Funded aka Administration Services Only (ASO) • Employer is responsible for all claims incurred • Claims costs based on actual claims incurred • Employer pays insurance carrier a fixed fee to administer its claims • After termination, the plan holder will be charged fixed costs to administer the claims run out (contract depending)

5. Components of Premium Fixed Costs Expenses associated with plan administration – insurance premium, administration, commissions, etc. Reserves (IBNR) Money set aside for payment of claims incurred prior to plan termination, but submitted after plan termination Claims A request for payment by a health care provider in return for services rendered to a member of the benefits plan

6. Cost Comparison: Self-Funded vs. Fully Insured Commissions Aggregate Stop-Loss Corridor (25%) and/or Potential Savings toEmployer Ins. Co. Reserves and/or Profits Projected Claims Projected Claims (Expected Claims) Pooling Charges ISL and ASLRates Administration Charges Administration Charges (ASO) Overhead Carrier/TPA Overhead & Profit Commissions Partially Self-Funded Plan Cost Fully Insured Premium

7. PSF - Who Does it Fit? • Those that find cash flow to be very important • A company that believes their claims experience is better than the “average bird” • Sophisticated buyers

8. PSF Advantages • Benefit to Employer -------------------------- CONTROL • Improved cash flow – no prepayment of coverage • Plan flexibility initially as well as redesigning to control plan abuses as they are discovered. • Return on investment as the employer holds reserves. • Change players with minimal disruption to employees • Better Information / Detailed Claims • Mandatory State benefits can be avoided • Good Claims experience rewarded • Lower cost of administration

9. Self-Funding Not for Everyone! • The maximum cost for a PSF plan can be higher than that of a fully insured plan. • Employer must be willing to trade the security of his maximum cost for his opportunity to win. Hence, it is only appropriate if experience is sufficiently creditable • Increased administrative responsibilities • Termination of plan can be difficult without reserves – run-out claims are the responsibility of the insured

10. Degree of Financial Risk HighSelf Funding Medium Partially Self Funding Low Fully Insured

11. Important Facts!!! • Self-funding may not necessarily reduce costs every year. • Generally an employer will “win” 3 out of 7 years, “break even” 2 - 3 years and “loose” 1 – 2 years • Self-Funding is a long term strategy, not a quick fix!

12. Fixed Costs Include….. • Insurance premiums – ISL, ASL • Administration expenses • PPO fees • Broker Commission • Monthly Aggregate Cap, if purchased

13. What Is Reinsurance/Stop-Loss Insurance? Insures employer / plan sponsor’s assets (not plan participant) • Stop Loss is an insurance product that protects the EMPLOYERfrom unexpected or unpredictable, catastrophic losses. • It is purchased by employers that do not want to assume 100% of the liability for losses. • Stop Loss has two parts - the Individual or Specific Stop Loss and the and the Aggregate Stop Loss “Safety Net”

14. Specific Deductible (ISL) • Protection for individual claims over a certain threshold • The maximum dollar amount an employer is responsible to pay on one specificcovered individual during the contract period. When the contract period is over, the next contract period starts fresh. That is, the deductible begins again. • Insurance carrier reimburses the employer for claims in excess of a fixed dollar amount called the Specific Deductible. • It is a defense against catastrophic claims on an individual member. • Client pays premium for stop loss protection as part of fixed costs. It is often referred to as "hard dollars", as the employer pays the insurance company this premium every month.

15. Aggregate Stop Loss (ASL) • Protection against a high incidence of claims on the whole group • It limits the employer’s exposure for the group’s claims as a whole • Only the claims under the ISL deductible are applied to the Aggregate. • Insurance company reimburses amounts above the Aggregate Attachment Point.

16. CLAIMS

17. Aggregate Attachment Point • Aggregate coverage establishes the overall claims liability for the entire group, less any ISL reimbursements. • Underwriter determines rates/factors at the beginning of the year. Those attachment factors are then multiplied by the number of covered single and family units • Generally a multiple of expected claims (125%)

18. Minimum Attachment Point • Set at the beginning of the year - Generally at 85-90% of the 1st month’s census • It allows for some employee fluctuations but sets a maximum allowable decrease in the attachment point. • It helps to offset the expected deterioration in claims experience in a declining group • Can be an issue if the group anticipates a layoff

19. Types of Contracts Referred to as: 12/12, 15/12, 24/12, 12/24, “Paid” What do the 2 numbers mean? The first number refers to the number of months in the “incurred” period, with the second number referring to the number of months in the “paid” period. • Incurred- the date a service is rendered • Paid- the date the check is issued.

20. Contract Types – 12/12 • Claims that are incurred AND Paid within the plan year are eligible for reimbursement if the ISL or ASL level is exceeded • Least expensive contract as it only covers 9-10 months of claims liability 1/1 12/31 Incurred Paid

21. Contract Types: 12/15 Claims that are incurred within plan year AND Paid within the plan year PLUS three months following are eligible if the ISL or ASL is exceeded. 1/1 12/31 3/31 Incurred Dates Paid Dates

22. Contract Types: 15/12 Claims that are incurred within the plan year or the immediately preceding 3 month period AND Paid within the plan year are eligible for reimbursement if the ISL or ASL level is exceeded 10/1 1/1 12/31 Incurred Dates Paid Dates

23. Contract Types: 24/12 • Claims that are incurred during the 12 month contract period or the immediately preceding 12 month contract period AND Paid within the contract plan year are eligible for reimbursement if the ISL or ASL level is exceeded. • Usually only available at renewal 1/1/07 12/31/07 12/31/08 Incurred Dates (24 months) Paid Dates (12 Months)

24. Contract Types: 12/24 • Claims that are incurred during the 12 month contract period AND paid within the same 12 month contract period or the 12 months immediately following the contract period are eligible for reimbursement if the ASL or ISL level is exceeded. 1/1/07 12/31/07 12/31/08 Incurred Dates Paid Dates

25. Contract Types: Paid A contract indicates a claim is eligible as long as it was paid during the contract year, regardless of when it was incurred. This is often only offered to renewing groups.

26. Additional Forms of Protection – Specific Advancement • Designed to assist Employer’s cash flow as a result of sudden large claims • Requested after Specific Deductible is paid • Advances are paid as they occur during the contract period

27. Additional Forms of Protection Monthly Aggregate Cap • It protects the employer against large fluctuations on a monthly basis. • If monthly accumulated claims exceed monthly accumulated attachment point, the insurance carrier will “front” the claim • Any advance is repaid in the first month in which the cumulative claims applicable to the attachment point are less than the cumulative monthly attachment point.

28. How Monthly Agg Cap Works

29. Decision – Contract Type? • Employers usually purchase both ISL and ASL stop loss insurance coverage to protect them from the risks associated with self insuring. • The group can purchase a different contract for ISL than they do for ASL, however this is unusual • If a group only purchases one type of insurance it is generally ISL • The longer the contract the more protection but the greater the cost. How much do they need?

30. Options / Riders Aggregating Specific • A financing alternative that utilizes a separate “claims” fund for large claims that exceed the ISL deductible. • If a specific stop-loss claim is incurred, the employer pays an additional deductible up to the maximum in the loss fund. If there are no specific stop-loss claims, the employer keeps the additional loss fund. • This is a creative way to bring down the insurance cost

31. Lasering Options / Riders When an insurer sets a higher specific deductible for a certain individual due to his or her health status.

32. Disclosure Requirements In order to set accurate rates and factors for Stop-Loss, insurers need to know the diagnosis and prognosis of all potentially "major" claimants. Major claimants are those that have claims or are expected to have claims that exceed one-half the specific deductible. This information needs to be provided both at time of quote and updated just prior to the effective date. It is critical that we discover and disclose all potential major claimants. Not doing so will negate the quote.

33. Deductible Leveraging This principle dictates that the specific deductible for a group needs to increase on a regular basis, to allow for the increasing trend in medical costs. For example, if you have a claim that costs $75,000 and the specific deductible is $50,000, the insurer reimburses 33%. The next year, due to medical inflation, the same procedure costs $85,000. The insurer now reimburses 41% of the claim. Each year the employer's portion is constant while the insurer's portion keeps increasing. At some point, the rates will need to go up to reflect the increased portion of the cost born by the insurer. Increasing the deductible will keep the employer's portion of the risk at a constant level and will minimize rate increases.

34. Terminal Liability • This extends stop loss coverage for an additional period (3-12 months) after the contract expires • It must be selected with the coverage is purchased. • It covers the claims that are incurred while the plan is in force but not paid until after termination.

35. “Self Funding offers the greatest opportunity for controlling costs”