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Lecture 15 Alternative Funding Methods

Lecture 15 Alternative Funding Methods. Alternative to What? Reasons for Alternative Funding Methods General Categories Modify traditional contracts Partial or total self-funding. Reasons for Alternative Funding Methods. Cost savings Avoid mandated benefit provisions

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Lecture 15 Alternative Funding Methods

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  1. Lecture 15Alternative Funding Methods • Alternative to What? • Reasons for Alternative Funding Methods • General Categories • Modify traditional contracts • Partial or total self-funding

  2. Reasons for Alternative Funding Methods • Cost savings • Avoid mandated benefit provisions • Example - infertility treatments • Lower premium taxes • Reduce additional expenses • Commissions • General overhead • Risk charges • Improved cash flow • Keep cash longer • Higher investment returns • Tax considerations

  3. Plans that Modify Traditional Fully Insured Group Contracts • Premium-delay arrangements • Extend grace period • Reserve-reduction arrangements • Premium payments in line with claim payments • Limit-liability arrangement • Long term disability • Purchase coverage 1 year at a time • Insurer not responsible for claims if premium not paid

  4. Plans that Modify Traditional Fully Insured Group Contracts - (cont.) • Minimum premium plans • Aim to reduce state premium taxes • California ruling prohibits this tax avoidance • Employer • assumes responsibility for the first 80-90% of expected claims • Hires insurance company to act as agent • Purchases insurance for excess payments • Cost-plus arrangements (or flexible funding) • Premium equals prior claims plus loading • Better experience yields cost savings • Retrospective-rating arrangements • Premium based on claims experience during contract period

  5. Self-Funding Plans • Total self-funding • Desirable characteristics of coverage • Predictable claims Noncontributory plan • Nonunion plan Claims handling ability • Ability of provide administrative services • Ability to obtain discounts from providers • Typically applied to: • Short term disability Medical expense plans • Dental Vision • Prescription drugs Legal expenses

  6. Self-Funding Plans - (cont.) • Self-funding with stop loss and/or ASO • Stop loss coverage • Administrative Services Only contracts • Funding through a 501(c) (9) Trust • Voluntary Employees’ Beneficiary Associations (VEBAs) • Allows tax deduction for funding • Benefits for: • Death Medical expenses • Disability Unemployment

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