The Concepts of Self-Funding

1. The Concepts of Self-Funding

2. Self-Funding Basics Self-Funding Employer funds/pays its own claims rather than buying traditional health insurance Employer often delegates administrative responsibilities to a TPA/Insurer/HMO Employer can manage its exposure to catastrophic claims expense by purchasing stop loss insurance (excess risk) ERISA (Employee Retirement Income Security Act) (1974) Formally recognized Self-Funded Plans Specifically exempts most self-funded employee benefit plans from state regulation, including mandated benefits

3. Alternative Financing Who Assumes the Risk? Retrospective Premium Agreements Minimum Premium Accounts Self-Funded ASO w/Stop Loss Insurance Pure Self-Funding (ASO) Fully- Insured Plans 100% Transfer of Risk No Transfer of Risk

4. Self-Funding Advantages for an Employer Group Controls the plan, not the insurer Group can take advantage of their own good medical experience - Can Result in more effective healthcare cost control Employer can be very flexible in health plan design - ERISA applies, often in lieu of state-mandated minimum benefit levels, easing administration of multi-state plans

5. Self-Funding Advantages for an Employer • May help employers cash flow - Pay claims as incurred – no pre-funding or up-front reserve payments • Reserves held by employer instead of insurance carrier. Interest paid on these reserves also remains with the employer • Essentially creates a not for profit health plan since it eliminates most risk charges and profit margins charged by insurers and the employer cannot export annual “surplus” into company PNL • Employer may purchase stop loss to reduce its exposure to losses due to catastrophic claims and create more predictability

6. Self-Funding Considerations for an Employer • Risk Assumption / Risk Aversion • Cash Flow • Unpredictably Poor Experience • Assets Exposure - General Asset Plan - 501 (c) (9) Trust Account • Fiduciary Responsibility • Risk Suitability

7. Risk Suitability What type of claims to fully-insure? Unpredictable: low frequency, high severity Examples Life / AD&D Long Term Disability What type of claims to self-fund? Predictable: low severity, high frequency Examples Medical Dental Vision

8. Who is Insured? Employer / Plan Sponsor • The employer has made a promise to provide benefits • Existence or absence of stop loss does not change that promise The individual / participant is NOT the insured • Stop Loss reimburses the employer / plan sponsor for any claims the plan has paid over the stop loss deductible * Stop loss policy reimburses employer for catastrophic losses associated with providing health benefits to employees and dependents. Stop loss cannot pay providers or employees of the employer.

9. Who is Insured? Fully-Insured Self-Funded Employee Employee Self-Funded Plan Insurance Company Employer Employer Stop Loss

10. Specific (Individual) Coverage • Reduces the employer’s exposure to high-cost individuals • Employer pays all claims for each individual • Stop loss carrier reimburses the employer for claims on individuals whose annual eligible* expense has exceeded the specific deductible • At each contract renewal, each individual will be subject to a new specific deductible * Note: Eligible and reimbursable expenses under the terms of the stop loss policy may differ from the employer’s plan document.

11. Aggregate Coverage • Aggregate coverage is offered at 125% of the expected claims • Aggregate coverage can also cover Rx, Dental and Vision claims • Aggregate coverage will not be sold alone • Aggregate coverage does not provide “catastrophic” coverage • Specific “protects” the Aggregate

12. Self-Funded / Stop Loss Cost Defined Fixed Costs - Specific Premium - Aggregate Premium - Administration Fees – TPA, PPO Network, UR, etc. Variable Costs - Expected Claims Total Cost - Fixed - Variable Maximum Cost - Fixed - Attachment Point (Expected plus Corridor)

13. Two Important Definitions Incurred The date on which medical care or a service or supply is provided to a covered person for plan benefits under the employee benefit plan for which a charge results Paid Charges that, as of the dates shown in the contract basis, are: Covered and payable under your employee benefit plan, and Have been adjudicated and approved, and A check or draft for remuneration is issued and deposited in the U.S. mail, or other similar conveyance or is otherwise delivered to the payee, and Sufficient funds are on deposit the date the check or draft is issued

14. Incurred Contract 1/1/09 12/31/09 Incurred (date service was rendered) Paid (date claim paid by administrator) Incurred - To be eligible under the specific, the claim must be incurred in the contract period. There are no time requirements for when the claim is paid. However, a claim notice must be submitted within 12 months after the policy period. For renewal years, the specific contract will remain an incurred contract. Appropriate if group is currently fully-insured or has run out protection with current stop loss carrier.

15. 12/15 Contract 1/1/09 12/31/09 3/31/10 Incurred (date services was rendered) Paid (date claim paid by administrator) Incurred in 12 and Paid in 15 (12/15) - Eligible claims must be incurred during the contract period and paid within the contract period or the three months immediately following. This is an abbreviated version of the “true incurred” contract. Variations include 12/18 and 12/24 contracts.

16. 12/12 Contract 1/1/09 12/31/09 Incurred date service was rendered) Paid (date claim paid by administrator) Incurred and Paid (12/12)- Eligible claims must be incurred andpaid within the policy year. For renewal years, the contract will convert to a paid contract and the claims will be eligible under the renewal contract regardless of the date incurred, as long as it was incurred on or after the initial effective date of the contract. This is an appropriate first-year contract type for a group that is currently fully-insured or a group that is self-funded and the policy has a run-out provision.

17. Paid Contract 1/1/09 12/31/09 Incurred (date service was rendered) Paid (date claim paid by administrator) Paid - On renewal, a 12/12 or 15/12 contract becomes a paid contract. Claims will be eligible under the renewal contract regardless of the date incurred, as long as it was incurred on or after the initial effective date of the stop loss policy. This is appropriate for renewal contracts that started out as 12/12 or 15/12 contracts.

18. PPACA Effects on Self-Funded • Prohibited use of pre-existing condition exclusions on dependent children under the age of 19 • Prohibition of cost sharing on preventive services and immunizations (unless Grandfathered) • Requirements of coverage for emergency services without pre-authorization • Prohibition on plans from requiring authorization or referral for patients seeking OB/GYN services (unless Grandfathered) • Extension of coverage for dependents up to 26 years of age

19. PPACA Effects on Self-Funded Plans Renewal / Start Dates September 23, 2010 September 23, 2011 September 23, 2012 January 1, 2014 Permitted Annual Maximums $ 750,000 $ 1,250,000 $ 2,000,000 No Annual Maximum Permitted

20. Small Group Impacts on Self-Funded Plans • Current Definition of under 50 employee lives • 60A.236 stop loss law; small employer coverage: - A contract providing stop loss coverage, issued or renewed to a small employer, as defined in section 62L.02, subdivision 26, or to a plan sponsored by a small employer, must include a claim settlement period no less favorable to the small employer or plan that coverage of all claims incurred during the contract period regardless of when the claims are paid • Stop loss carriers make coverage available on multiple contracts basis and the purchaser makes the determination of which type of coverage they desire

21. Small Group Impacts on Self-Funded Plans • In Minnesota today, self-funded plans with fewer than 50 employees are “incurred” stop loss contracts • Most self-funded plans (over 50 employees) purchase stop loss on “run-in” basis rather than a “run-out” basis, if coming from another stop loss contract • For many years now self-funded products have been available to employers with fewer than 50 lives. As a TPA and carrier, we have not seen any “back and forth” migration into or from fully-insured small group plans • Self-funding verses fully insured fits certain employers conceptually but not all. Moving the small group size limit to 100 would not change this current philosophy

22. Small Group Impacts on Self-Funded Plans MN Proposed Changes • The current Minnesota small group law forces stop loss carriers to load additional costs into “run-in” contracts to cover the laws “run out” requirement • If expanded to 100 lives and under, then a material population will be forced to purchase a product that provides both “run in” and “run out” coverage • We think the additional premium we would charge for such additional coverage would be 7-10% on average Potential ways to mitigate additional costs for self-funded employers • Allow a waiver on the application for the plan that is on a “run in” basis to decide if they want the additional “run out” coverage (samples can be provided for review) • Have the stop loss statute continue to apply to groups under 50 lives • Have the stop loss statute only apply to plans that do not meet the minimum spec and aggregate requirements (60A.235, subdivision 2&3)

23. QUESTIONS?