SIEF | Brokers

Risk Management - Charges, Commissions and Retention

One advantage is the flexibility in controlling risk. Business objectives of self-insuring employers revolve around the best use of their money devoted to benefits: controlling claims, managing, and benefiting from investments. Compared to fully-insured plans, a self-insured health plan can allocate more of each dollar toward the payment of medical claims, eliminating insurance commissions, risk charges, profit and other costs of a commercial insurer such as marketing and overhead. Costs also decrease thanks to the sponsor’s ability to exert greater control over administrative expenses and costs.

Improved Cash Flow

Self-insuring allows claims to be funded as they are paid. Fully-insured premiums constitute a form of prepayment. With self-insuring, a plan can delay payment of recurring health plan costs until the services have been rendered. Commercial insurers, by contrast, set health insurance premiums at levels that anticipate projected increases in healthcare costs – usually well in excess of the actual rise in costs.

Innovative Plan Document Design and Control

Since the self-insuring employer is the plan fiduciary, decisions about plan design belong to the employer and not an insurance company. Flexibility in plan design derives from a self-insured plan’s freedom from state mandated benefit laws. The employer can design its plan without the restrictions, delays and costs involved in obtaining the approval of an insurer or regulatory agency. Employers thus make the overall compensation package more attractive, and plan design options can be tailored to the working population and company preferences. Language can be modified to fit individual plan needs, and accurately reflect the true intentions of the plan.

Value-Based Benefits and Wellness Programs

As medical costs have skyrocketed, sponsors have been taking steps to reduce medical costs by emphasizing prevention and maintenance care for chronic diagnoses. Employers have the flexibility to design and integrate such elements as health risk assessments, disease prevention and wellness programs tailored to the specific employee demographics and needs.

Specific Stop-Loss

Specific stop-loss coverage is purchased to limit the plan’s financial exposure on any one individual. The exposure (i.e. specific deductible) should be a function of the company’s size, risk tolerance, financial resources, location, benefits plan, PPO network, and claims experience.

Example: A group purchases specific stop-loss coverage with a $50,000 specific deductible. An individual has claims that exceed $50,000. The stop-loss carrier reimburses eligible claims paid out by the plan in excess of the $50,000 specific deductible. Therefore, if the plan paid $300,000 in eligible claims, the stop-loss insurance carrier would reimburse the plan $250,000. With specific coverage, the plan can file a specific claim at the time it incurs the loss. The premium for the specific stop-loss coverage is expressed as a monthly rate, e.g. per employee, single, family, composite, etc.

Stop-Loss Contract Types

When an employee is covered by a fully-insured plan and incurs a claim during the effective period of the contract, the employee simply submits the claim to the insurance carrier, and either the employee or the provider is paid the benefits due. This is known as an “incurred” contract.

A stop-loss contract operates differently because it is actually insuring the employer and not the individual employee. It is important to grasp this concept. When a plan is self-insured the stop-loss contract insures the employer against catastrophic losses under the plan. The medical plan established by the employer accepts the responsibility for paying providers’ claims for individuals but limits its risk with stop-loss coverage. Individual employees are not personally insured by the stop-loss carrier.

The stop-loss contract used most often in the first year of a self-insured plan is known as “incurred and paid” or “12/12” contract. In order for an employer’s plan to be reimbursed for a claim covered by a 12/12 contract, the claim must be incurred during the 12 months of the policy period and paid during that same 12-month period.

Are you a candidate?

Based on the extensive analysis above, the advantages of self-insuring health benefits are broad and advantageous for any employer group. However, not every employer group should be self-insured. Why?

There are certain attributes that an employer group must have to successfully manage their health benefits and spending.

First and foremost, the group needs to have some level of risk tolerance. Even with stop-loss protection, the employer group is still responsible for a layer of claims under the individual stop-loss deductible. Predicting an employer’s liability can be much more accurate if the group has a steady employee population and stable claims experience. In addition, self-insuring health benefits will give an employer greater plan design flexibility and greater control over healthcare spending as long as the group is willing to get involved.

Specific advantages of self-insurance.

Potential claims-related cost savings – Unspent claims funding is retained by the self-funding employer. For those fully insuring those funds remain with the insurance company.

Greater control of plan design – Self-funded employers can customize their plans to meet specific needs of their employee population. The employer decides what benefits to offer (consistent with benefits mandated by the Patient Protection and Affordable Care Act (PPACA, if not a grandfathered plan), employees’ financial responsibilities, and how much risk it assumes. Plans governed by ERISA are not subject to state benefit mandates.

Ability to manage risk – Self-funded employers have the ability to control expenses through their claim payment/claim negotiation policy.

Risk transfer – Self-funded employers can control the amount of risk assumed through prudent purchase of stop-loss insurance, formation of a captive, etc.

Maintenance of reserves/improved cash flow – Self-funding employers no longer pre-pay insurance companies for coverage. While funds must be reserved for claims payments, self-funding employers can utilize the money to generate additional income.

Lower plan administration cost – Typically, 15% to 20% of premium payments to large insurers go for plan administration and insurer profits. TPAs and large insurer ASOs fees are much lower.

Reduced premium taxes – State health insurance premium taxes range from 1.5% to 3.5% depending on the state. Only the excess-loss coverage premium – a much lower amount - is considered taxable for self-funded plans.

Elimination of state mandated benefits – As they are governed by federal legislation (ERISA), self-funded plans are not required to offer state mandated benefits, potentially reducing plan cost.

Ability to contract with providers and provider networks – Self-funding employers can contract with the providers and networks that best suit their employees’ needs rather than having to accept the providers and network offered by the insurance companies.

Access to claims data – Access is readily available to aid in decision making and planning. Self-funding employers receive monthly reports detailing medical claims and pharmacy costs. This information may not be available for some employers that fully insure.

Ability to manage “cost drivers” – "Cost drivers" are high cost, high risk chronic condition enrollees. Once identified, they can be better managed, reducing claims costs long-term.

Ability to make plan changes/plan flexibility – Self-funding employers are no longer restricted to making plan changes on an annual basis. They are able to make them whenever necessary to deal with changing market conditions. Self-funding gives the employer the ability to add essential benefits, eliminate coverage for non-essential services, and move people to or away from specific providers.

Cost stability – Year-to-year self-funding employers no longer have to deal with ever increasing rates from insurance companies.

Specific disadvantages of self-insurance.

Financial risk assumption – Self-funding employers are responsible for the payment of their obligation for claims for services covered in their plans. Employers purchasing stop-loss insurance are responsible for payment of these obligations up to the point when the specific or aggregate stop-loss coverage goes into effect.

Increased management involvement in plan design – Along with greater control of plan design comes the need for greater management involvement in plan design and modification.

Increased administrative responsibility/legal liability – A self-funded plan must be administered internally by the employer or by a TPA or ASO. Even employers retaining a TPA or ASO must provide oversight. The Department of Labor (DOL) has interpreted the failure to implement an efficient administrative system as a breach of fiduciary duty.

Unpredictable cash flow – Claims and claims dollar obligations may vary widely month to month. While funding based on historical claims experience and actuarial projects can increase predictability, monthly obligations may exceed the predictions by significant amounts. ERISA requires that all clean claims (those with no errors and for which no additional information is requested) are to be paid within 30 days of receipt.

Asset exposure – Self-funding employers could bear any liability resulting from a legal action against the plan.

Potential for an adverse experience – Poor claims experience leads to increases in the cost of specific and aggregate stop-loss coverage. This can eventually result in self-funding becoming uneconomic for the employer.

Requires a long-term commitment – Given the up-front cost and the ongoing costs, it may take as many as three to five years for the employer to reap the benefits of self-funding.

PPO discounts may be lower – Because the number of covered lives for the self-funding employer will be far fewer than for an insurance company, less of a discount may be offered by a preferred provider organization (PPO.)

Decision process to determine whether self-insurance is a good fit for your client:

Does it have the resources?

Financial strength and cash flow?
Management bandwidth?

What is its motivation?

Paternalistic toward employees?
Believe it can do “better” at managing the health of their employees?
Wants flexibility in plan design?

Does it understand the risks and how to mitigate?

Short term vs. long term financial goals
Fiduciary responsibilities
Stop-loss insurance options

Ways that providing self-insurance opportunities can strengthen client relationships for the long term – for the broker, it can mean the difference between being an order-taker or being a valued adviser and partner.

Opportunity: Who is the self-insurance expert in your market?

Every business in every industry strives to separate itself from its competitors, and from commoditization. No two businesses are alike so no two employer health plans should be alike.

Brokers and advisors for employer health plans help battle the commodity mentality. They continue to demonstrate innovation in the void of data that is unavailable from commercial carriers. As total costs of health-care continue to rise, forward thinking businesses cannot afford to wait for a one-size-fits-all solution to the cost issue.

The opportunity exists within a self-insured environment for employers to take charge of their health plan destiny. The opportunity exists for self-insured employers to implement creative plan strategies with guidance from their broker and advisors that require long-term commitments. The opportunity exists for self-insured employer groups to set a clear vision of their specific health plan goals and the actions needed to accomplish those goals.

Opportunity considerations:

Long term strategy strengthens the broker-client bond
Typically, beneficial outcomes for the client
Enables consultant/broker to show creativity and bring outside-the-box ideas
Results in being thought of as trusted advisor
Leads to referrals for other opportunities

Working with key self-insured group health plan services providers (TPAs, stop-loss carriers, PBMs, etc.).

Coming Soon.

A "self-insurance made easy" model plan that can be adapted to many client organizations.

Coming Soon.

Broker/consultant compensation arrangements associated with self-insured group health plans.

Compensation for brokers/consultants for a self-funded group health plan can come from fees or the traditional commission percentage.

Fees: Fees can be set as either an annual fee or as a per member/per month fee. These can apply to the administration of the self-funded plan or the stop-loss premium, or both. These are determined at the outset of the plan year and can be collected on an annual or monthly basis.

Commissions: A commission on the stop-loss premium is the traditional form of compensation for a broker/consultant on a self-funded plan. It is based on a percentage of annual premium, and is typically between 5-15%.

Oftentimes when a TPA is the claims administrator and helps to place the stop-loss business, the stop- loss commission is shared between the broker and TPA.

In all scenarios, compensation should be fully disclosed to the client.

Glossary of Terms

Summary Plan Description (SPD)

The written statement of a plan required by ERISA. It must be provided in an easy-to-read form, including a statement of eligibility, coverage, employee rights and appeal procedure.

Mandated Benefits

A specific coverage that an insurer or plan sponsor is required to offer by law. Mandated benefits in insurance contracts vary from state to state according to each state’s insurance laws.

Plan Year

The 12-month period in which deductible and co-insurance accumulates toward a plan participant's out of pocket maximums.

Reinsurance

Another term for stop-loss coverage.

ASO (Administrative Services Only)

An ASO plan is a contract with an insurer to provide a fully self-insured employer with certain administrative services only; no insurance protection is provided.

Benefit Booklet

A booklet for the employee that contains a general explanation of benefits and related provisions of the health plan.

Employee Retirement Income Security Act of 1974 (ERISA)

This federal legislation allows for and sets guidelines regarding a group’s ability to self-fund their benefits.

Fiduciary

Indicates the relationship of trust and confidence where one person (the fiduciary) holds or controls property for the benefit of another person. For example, the relationship between a trustee and the beneficiaries of the trust. Under ERISA any person who (a) exercises any discretionary authority or control over the management of a plan or the management or disposition of its assets, (b) renders investment advice for a fee with respect to the funds or property of a plan, or has the authority or responsibility in the administration of a plan.
One who acts in a capacity of trust and who is therefore accountable for whatever actions may be construed by the courts as breaching that trust. Under ERISA, fiduciaries must discharge their duties solely in the interest of the participants and beneficiaries of an employee benefit plan. In addition a fiduciary must act exclusively for the purpose of providing benefits to participants and beneficiaries in defraying reasonable expenses of the plan.

Plan Document

Explains the provisions of a plan, usually including the benefits provided by the plan and the rights of those who are covered under the plan.

Plan Participant

An employee or dependent covered by the health plan.

Plan Sponsor

The employer, in the case of an employee benefit plan maintained by a single employer.
The employee organization, in the case of a plan maintained by an employee organization.
The association, committee, joint board of trustees or other similar group of representatives of the parties involved, in the case of a plan maintained by one or more employers, and one or more employee organizations.

Third Party Administrator (TPA)

The party to an employee benefit plan that may collect premiums, pay claims and/or provides administrative services. Usually an out-of-house professional firm providing administrative services for employee benefit plans.

PPO or Managed Care Network

A network of hospitals and providers that have agreed to provide services at a reduced rate.
HMOs were an early form, regional or national PPOs and carrier networks (i.e. Blue Cross, Cigna, Aetna or United) are common today.

Medical Management

In its simplest form it is claims management and other services that work to manage plan assets. Medical management often goes on silently during routine claims, but can be seen in larger claims requiring more case management and/or clinical interventions.
Medical management can reduce medical costs by emphasizing prevention and maintenance of chronic diagnoses such as Health Risk Assessments, Prevention and Wellness Programs specifically tailored to employee demographics and needs.

Aggregate Stop-Loss

Aggregate stop-loss insurance limits the overall annual claims liability by reimbursing the company when the claims paid for the self-funded plan, as a whole, exceed a certain preset level.

Attachment Point

For aggregate stop-loss insurance it is the point at which the stop-loss insurance carrier reimburses the employer based upon the cumulative total of claims paid within a contract period.

Contract Period

The time covered under a contract designating when a claim is incurred and when the claim must be paid to qualify for reimbursement.

Run-In

Claims incurred prior to a plan year but reported after the end date of the plan year. These claims can be paid under the "current year" contract that includes the run-in period and the current plan year claims.

Run-Out

Claims incurred during a plan year but reported after the end date of the plan year. These claims can be paid under the "prior year" contract.

Binder Premium

The first month's premium required to initiate coverage with stop loss.

Specific Stop-Loss

Individual or specific stop-loss insurance provides reimbursement in the event an individual plan participant has claims that exceed the specific deductible during a contract period.

Specific Deductible

The amount of claims for which the plan is responsible for any one individual in a contract period.

Expected Paid Claims

An estimate of the dollar value of claims to be paid during a plan year or contract period.

Exposure

The state of being exposed to the chance of loss (risk). The extent of exposure as measured by participation, proportion of female or male lives in a group, amounts or units of insurance at risk, etc.

IBNR

Incurred but not reported. Claims that have been incurred but have not been reported to the administrator as of some specific date.

Incurred Claims

Those claims (paid or unpaid) for which a liability (the insurer’s) has arisen under provisions of an insurance contract.

Lag

The usual delay between the actual occurrence of a claim and its payment. Made up of both incurred but unreported claims, as well as reported but not yet paid claims. A function of benefit design, geographic location and administrative efficiency as well as human procrastination.

Paid Claims

The dollar value of all claims paid, i.e., hospital, medical, surgical, etc., during the plan year, regardless of the date that the services were performed.

Policyholder

The employer

Specific Stop-Loss

The form of excess risk coverage that provides protection for the employer against a high claim on any one individual. This is protection against abnormal severity of a single claim rather than abnormal frequency of claims in total. Specific stop-loss is also known as individual stop-loss.

Stop-Loss Carrier

The insurance company that provides specific and aggregate protection for the plan sponsor. This carrier can be changed without disrupting the health plan.

Claim Cost Negotiation

Negotiation with a provider (hospital/doctor) either for a pre-determined rate (prospective negotiation) or a reduction in charges incurred (retrospective negotiation).

Disclosure Statement

Form used to notify stop-loss carrier of all large and/or ongoing claims prior to the binding of coverage for all new and renewal stop-loss business groups.

Reimbursement

From a stop-loss perspective, compensation to the group for all eligible claims in excess of the specific or aggregate deductible.

Self-Funding

The method of providing employee benefits in which the group does not purchase conventional health insurance but rather elects to pay claims directly (generally through the services of a TPA) and purchase stop-loss insurance to cover abnormal risks and claim fluctuations.

Shock Loss

A large loss that significantly affects the experience of a group. Generally claims on a single claimant during a single contract period totaling more than 50% of the specific stop-loss deductible.

Partnering With Self-Insurance Industry Services

In order for brokers to be successful in the self-insurance marketplace, it is important that they establish solid relationships with third party administrators (TPAs) and other service providers. An industry-specific directory can be accessed by clicking here. It is also suggested that brokers become active in the Self-Insurance Institute of America, Inc. (SIIA). Learn more about SIIA at www.siia.org.