employee benefits consulting public employees’ benefit board self-funding models - revised...

Employee Benefits Consulting

PUBLIC EMPLOYEES’ BENEFIT BOARD

Self-Funding Models - Revised

November 16, 2004

BD attach. 3

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Revised November 16, 2004

Agenda

• Background – History of PEBB Self-funding Task Force and Legislation

• Review Self-funding concepts• Self-funding Preliminary Projections for Current PEBB

Medical Plans (RBCBS only) –2006 & 2007• Recommended Next Steps• Questions/Comments

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PEBB – Self-funding History

• Board appoints Self-funding Task Force - 2002– Complete research ( AG, industry, regulations)– Analyze and make recommendations

• Board adopts Task Force Recommendations – June 2002– Recommend draft legislation to clarify administrative language

• PEBB sponsored Legislation passes 2003 session

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Review Self-funding Concepts

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Self-Funding Continuum

• Fully insured contract – (PEBB’s current arrangement with Kaiser and RBCBS)– Carrier assumes 100% of risk

• Self-funded arrangement– Employer funds all benefits provided under plan

• Hybrids e.g., Refunding, Minimum Premium, etc.– Fully insured contract with elements of self-funding

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Fully Insured Contracts

• Carrier has 100% liability for plan benefits

• Carrier develops premium annually to fund liability

• Components of premium– Paid claims– Reserves – Pooling charges – Retention (including charge for administrative services & “pure

risk” charge)

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• Paid claims – Benefit dollars allocated to reimburse providers for covered expenses

• Reserves – Carrier liability for incurred but not reported claims

• Pooling charges – Cost to assume risk over pre-determined amount for individual

claims (i.e., specific stop loss)

• Retention – Administrative expenses– Pure risk charge– Carrier profit (if any)

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• What does carrier look at when pricing large groups such as PEBB?– Prior claims experience– Trend– Changes in benefit program that could affect claims utilization

assumptions e.g.,• Changes in benefit design• Changes in employee contribution requirements/cash back• Changes in provider networks• Other innovations e.g., member/provider incentives

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Self-Funding

• The plan sponsor assumes liability for plan benefits

• Benefits claims are (typically) funded as they are paid

• Financial components of self-funding– Claims costs– Reserves for IBNR and pending claims– Administrative costs – Reinsurance premiums (specific/aggregate stop loss)

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Self-Funding

• Claims costs– The plan sponsor funds all benefits– Claims can be funded at:

• Expected claims costs levels;• Maximum claims liability i.e., expected claims + additional

claims up to aggregate stop loss attachment point (e.g., 120% of expected); or

• Somewhere in between (e.g., actuarially determined contingency reserve requirement)

– Fund through trust or general assets

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Self-Funding

• Reserves– Plan sponsor’s contractual obligation to pay claims incurred

within given liability period– Reserves provide for Incurred But Not Reported (IBNR)

claims • Industry rule of thumb: @ 25% of expected claims • PEBB claims lag currently less than 10%

– Determined each plan year by actuarial consultant

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Self-Funding

• Administrative expenses– Administrator’s fees to process claims– Provider network access fees– Cost containment programs

• Utilization review• Acute case management• Chronic disease management

– Plan document/SPD drafting and printing – Regulatory compliance e.g., HIPAA administration

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Self-Funding

• Reinsurance & other insurance premiums– Specific stop loss premium – Aggregate stop loss premium– Fiduciary liability policy– Fidelity bond

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Self-Funding

• Funding mechanisms– General asset plan

• Advance funding not permitted• Pay as you go• No trust required

– Qualified trust• 501(c)(9) trust• Advance funding permitted• Requires regulatory binders, audit agreements and special filings• Interest income is tax free

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• Advantages– Benefit of carrier’s volume discounts from providers and

pharmaceutical manufacturers– Carrier assumes fiduciary responsibility– Cash outlay is predictable month-to-month– Plan documents & SPDs produced by carrier– Administrative ease due to “bundling” of services– May be less expensive for public sector employers required to fund to

the maximum claims liability (i.e., expected claims + 20%)

• Disadvantages– Limited flexibility and control in plan design & provider contracting– May have increased retention costs (i.e., carrier profit in good years

when claims are less than expected)– No cash flow savings, interest earnings potential

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Self-Funding

• Advantages– Greater flexibility and control in plan design (Vision

implementation), provider contracting, financing and plan operations– Cash flow advantages available through funding of claims as they

occur– Interest earnings on reserves– Elimination of carrier risk charge & potential profit margin – ERISA exemption on state benefit mandates gives employer

flexibility to cover some mandated benefits (PEBB has previously stated it will follow all mandates)

– Tailored administration and reporting

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Self-Funding

• Disadvantages– May not be able to match carrier volume discounts on provider

contracting and Rx purchasing arrangements– Plan sponsor has legal and fiduciary responsibility– Increased administrative involvement for plan sponsor– May be more expensive for public sector employers if required to

fund to the maximum claims liability (i.e., expected claims + 20%)

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Stop Loss Overview

• Stop loss coverage is a form of reinsurance that plan sponsors purchase to limit liability when self-funding health care benefits– Specific stop loss

• Insures against single catastrophic claims that exceeds a specified dollar limit for a plan year

– Aggregate stop loss• Insures against total claims exceeding an estimated expected dollar

amount during a plan year

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Specific Stop Loss

• Level of Specific Stop Loss driven by cost vs. risk factors: What is plan sponsor’s-– Risk tolerance– Reserve position– Claims history

• General Rule of Thumb– < 500 participants $50,000– 500 - 2,000 $100,000– 2,000+ $200,000+– PEBB eliminated specific stop loss in 2004 due to poor ROI

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Specific Stop Loss

• What makes a difference?– Diagnosis/prognosis of large claims– Employer’s industry– COBRA and retiree participation– Disease management programs– Managed care platform– Demographics of group– Geographic locations of group

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Aggregate Stop Loss

• Generally cannot be purchased without specific stop loss

• Claims over attachment point usually reimbursed at year end

• Typical attachment point: 125% of expected claims, Aon illustration assumes 120% to minimize funding requirement for maximum claims liability

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Aggregate Stop Loss

• What makes a difference?– Employer’s industry– Demographics of group– Geographic locations of group– Plan design (including degree of innovation and predictability of risk)– Enrollment– Utilization– Participant contributions

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State of the Current Reinsurance Market

• Consolidation of markets– Third-party stop loss carriers– Third-party administrators

• Increased disclosure requirements on new and renewal business (more difficult to bind coverage)– HIPAA presents unresolved issues

• Not all stop loss policies are created equal

• Carriers limiting risk with tighter contract provisions and claim procedures

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State of the Current Reinsurance Market

• Development of preferred relationships among market partners promotes:– Strategic partnerships– Seamless solution for buyer– Best in practice contracts and processes– Turn-key operation

• Market partners include:– Third-party administrators and stop loss carriers– Stop loss carriers and consulting firms

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Revised Self-Funding Projections (Current Regence Medical/Rx)

• Preliminary projections presented 9/21/04 were based on experience through July 2004

• Updated financial projections are based on experience through September 2004

• Additional actuarial modeling was performed to determine required contingency reserve level

• Projected 2006 PEPM budget cost varies based on legal interpretation of contingency reserve requirement:– Option #1 – Full funding to reinsurance attachment point (i.e.,

expected claims + 20%) = $69,190,423– Option #2 – Partial Funding based on actuarial analysis of historical

claims fluctuation @ 99% confidence level = $45,380,439

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Recommended Next Steps

• Board discussion of summary findings – Nov. 16• Provide AG with update on Vision planning and self funding summary –

Nov./Dec.• Request AG advice regarding funding of contingency reserve • Develop summary of administrative requirements e.g., accounting

infrastructure needed to administer a self-funded program – Dec. 2004• Issue RFP to marketplace requesting vendor proposals for 2006 with

option to quote on either a fully-insured or self-funded basis – January 10, 2005

– Fully-insured proposals quote fixed costs PEPM (insurance premium or fully capitated rate)

– Self-funded proposals quote expected claims costs (with or without administrative services and reinsurance)

• Conduct analysis of RFP responses – March-May 2005• Board makes final RFP and funding decisions – June 2005

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employee benefits consulting public employees’ benefit board self-funding models - revised...

Documents

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individual claims

selffunding reserves

plan benefits benefits

claims benefit dollars

funding concepts

claims pooling charges