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NOVEMBER 2013 | Volume 61

November 2013 The Self-Insurer (ISSN 10913815) is published monthly by Self-Insurers’ Publishing Corp. (SIPC), Postmaster: Send address changes to The Self-Insurer P.O. Box 1237 Simpsonville, SC 29681

FEATURES

ARTICLES 10 ACA Tops SIIA Conference Agenda: Insiders Describe Legal Wrangling and Lobbying Strategies by Bruce Shutan

Editorial Staff

14 Highlights From SIIA’s 33rd Annual

PUBLISHING DIRECTOR James A. Kinder

MANAGING EDITOR Erica Massey

SENIOR EDITOR Gretchen Grote

Often Overlooked Tax Issues by Bruce Givner, Esq.

§831(b) Captives:

CONTRIBUTING EDITOR Mike Ferguson

More Than 2

by Jim Kinder

26 PPACA, HIPAA and Federal Health

DIRECTOR OF ADVERTISING Shane Byars

2013 Self-Insurers’ Publishing Corp. Officers

20 ART Gallery: When 1 Plus 1 Equals

22 George Pantos Remembered

DIRECTOR OF OPERATIONS Justin Miller

Editorial and Advertising Office P.O. 1237, Simpsonville, SC 29681 (888) 394-5688

National Education Conference & Expo in Chicago

Adding Another Weapon to the Subrogation Arsenal by Jon Jablon, Esq. and Sean Donnelly

James A. Kinder, CEO/Chairman

Benefit Mandates: Final Regulations Create New Requirements for Employer Wellness Programs

38 Legal Challenge to ACA Contraceptive Coverage Mandate Could Portend More Complications for Self-Insurance Marketplace

Erica M. Massey, President Lynne Bolduc, Esq. Secretary

INDUSTRY LEADERSHIP 40 SIIA President’s Message

The Self-Insurer | November 2013 3

istory of Captives. The Internal Revenue Code does not define insurance. As a result, taxpayers and the Internal Revenue Service have been litigating about what is, and what is not, deductible as insurance since at least the 1920s. Spring Canyon Coal Co. v. Commissioner of Internal Revenue, 13 BTA 189 (1928), aff ’d, 43 F. 2d 78 (10th Cir. 1930). The idea of a “captive” insurance company began in 1955. The term “captive” came from the steel industry in which a mine that only produced coke and iron ore for its owner was a “captive” mine. Again, the Internal Revenue Service and taxpayers litigated for decades this time over what is, and what is not, deductible as premiums paid to captive insurance companies. The most famous case is probably Humana, Inc., v. Commissioner, 881 F. 2d 247 (6th Cir. 1989), which held that amounts paid to a wholly owned subsidiary were not deductible because the risk has not shifted and the arrangement is, in effect selfinsurance. However, amounts paid for insurance by the taxpayer to the wholly-owned subsidiary of its parent are deductible if the risk shifts to the insurance subsidiary and the taxpayer is a separate and distinct corporate entity.

History Of §831(b) Captives In 1986 Congress added §831(b) to the Internal Revenue Code to replace the prior complex, and modestly favorable, treatment for small insurance companies. See page 619 of the General Explanation of the Tax Reform Act of 1986. To understand the current special treatment we must first understand the general rule of taxation of property and casualty insurance companies: • §831Tax on insurance companies other than life insurance companies. (a) General rule. Taxes computed as provided in §11 shall be imposed for each taxable year on the taxable income of every insurance company other than a life insurance company. In other words, insurance companies (other than life insurance companies are taxed at the normal rates applicable to corporations, e.g., 15% on the first $25,000 of taxable income; 25% on the next $50,000; 34% up to $10,000,000; and 35% over $10,000,000. Section 832 defined “insurance company taxable income” to include investment income and underwriting income. Most importantly, underwriting income includes premiums earned on insurance contracts. • By contrast, §831(b) provides, in part, as follows: (b) Alternative tax for certain small companies. (1) In general. In lieu of the tax otherwise applicable under subsection (a), there is hereby imposed for each taxable year on the income of every insurance company to which this subsection applies a tax computed by multiplying the taxable investment income of such company for such taxable year by the rates provided in §11(b). (2) Companies to which this subsection applies. (A) In general.This subsection shall apply to every insurance company…if – (i) the net written premiums (or, if greater, direct written premiums) for the taxable year do not exceed $1,200,000, and (ii) such company elects the application of this subsection for such taxable year. The election under clause (ii) shall apply to the taxable year for which made and for all subsequent taxable years for which the requirements of clause (i) are met. Such an election, once made, may be revoked only with the consent of the Secretary. Note the important omission for a §831(b) insurance company: the normal corporate tax rate only applies to “taxable investment income,” not to underwriting income, as long as the premiums do not exceed $1,200,000.

Current Guidance on §831(b) Captives In 2002 the IRS issued three revenue ruling to provide “safe-harbors” for captive insurance arrangements. Revenue Ruling 2002-89 advises that where over 50% of the subsidiaries’ risk is with unrelated third parties, there is sufficient risk shifting and risk distribution. In Revenue Ruling 2002-90 the IRS concluded that the premiums paid by 12 operating subsidiaries to a captive insurance subsidiary owned by a common parent were deductible. One key fact is that none of the subsidiaries was insured for less than 5% or more than 15% of the total insured risk. In Revenue Ruling 2002-91 the IRS concluded that a group captive arrangement, with each insured having no more than 15% of the total risk, was a good insurance arrangement. Of course, there have been important later rulings also.

Standard Operating Procedure For §831(b) Captives Taxpayers and their advisors spend time interviewing captive managers; providing financial statements; commissioning “feasibility studies”; reviewing proposed lines of coverage; determining the optimal tax deduction; reviewing contracts with the captive managers; and determining the best party to own the proposed captive. As the calendar year ticks to a close, there is precious little time available to spend on these important considerations. Sometimes there is little or no time left for two tax issues, the failure of either of which can be fatal to the taxpayer’s desired deduction. Unfortunately, both have tests which lack – to use a phrase made infamous by a recent international political situation – a red line.

Often Overlooked Tax Issue #1 Internal Revenue Code §162, entitled “Trade or Business Expense,” is the primary section for business

The Self-Insurer

November 2013

deductions. It provides, in relevant part, as follows: • (a) In general. There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business… [emphasis added] The regulations issued by the Internal Revenue Service are not terribly helpful: • (a) In general. Business expenses deductible from gross income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer’s trade or business… Among the items included in business expenses are management expenses, commissions…, labor, supplies, incidental repairs, operating expenses of automobiles used in the trade or business, traveling expenses while away from home solely in the pursuit of a trade or business…, advertising and other selling expenses, together

with insurance premiums against fire, storm, theft, accident, or other similar losses in the case of a business, and rental for the use of business property... The full amount of the allowable deduction for ordinary and necessary expenses in carrying on a business is deductible, even though such expenses exceed the gross income derived during the taxable year from such business… [emphasis added]. How is this test to be applied by the taxpayer? In virtually every fact situation the taxpayer will be presented with a “feasibility study” showing lines of coverage that just happen to have premiums totaling slightly under $1,200,000. That is true for a taxpayer with $50,000,000 of revenue and $8,000,000 of profit; for a taxpayer with $20,000,000 of gross revenue and $4,000,000 of profit; and even for a taxpayer with $5,000,000 of revenue and $2,000,000 of profit. With that type of feedback from the captive manager and the actuarial firm, what is

the taxpayer to do? Answer: rely on the taxpayer’s CPA and tax lawyer. First, let us understand the “ordinary and necessary” test. The Supreme Court has indicated that an expense must be both ordinary and necessary to be deductible. Welch v. Helvering, 290 U.S. 111 (1933). Whether an expense is ordinary is determined by the time, place and circumstances. In a later case the Supreme Court observed that “One of the extremely relevant circumstances is the nature and scope of the particular business out of which the expense in question accrued…. It is the kind of transaction out of which the obligation arose and its normalcy in the particular business which are crucial and controlling.” Deputy v. Dupont, 308 U.S. 488 (1940). “Necessary” means that the expense is appropriate and helpful, rather than essential. Although to be necessary an expense need not be essential nor be the only means to the result, the means chosen must still be reasonable. Maule, 505-3rd T.M., Trade or Business Expenses and For-Profit Deductions, II.C.

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November 2013

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How do the taxpayer’s CPA and tax lawyer apply the “ordinary and necessary” test in practice? In most cases this can be done in about one minute. The tax lawyer has X years of experience; the CPA has X years of experience. Each has counseled dozens, hundreds or thousands of taxpayers in a broad range of industries, including (at least) dozens in the same industry as this taxpayer. Each is a “tax return preparer” for purposes of the Internal Revenue Code §6694 penalty. (The lawyer is a “nonsigning tax return preparer” as defined in Reg. §301.7701-15(b)(2).) That penalty is as follows: • (a) Understatement due to unreasonable positions (1) In general If a tax return preparer – (A) prepares any return or claim of refund with respect to which any part of an understatement of liability is due to a position described in ¶(2), and (B) knew (or reasonably should have known) of the position, such tax return preparer shall pay a penalty with respect to each such return or claim in an amount equal to the greater of $1,000 or 50% of the income derived (or to be derived) by the tax return preparer with respect to the return or claim. So, the question to the two “tax return preparers” is whether they will be comfortable being responsible for the return with the proposed insurance premium constituting part of the business expenses. “Is the figure provided by the captive manager ordinary and necessary for this taxpayer given all you know about the taxpayer? Or is the figure which is ordinary and necessary some lesser figure” Within one minute the tax lawyer and the CPA will both articulate figures with which they are comfortable and, in virtually every situation, the figures will be remarkably similar. As a result, the taxpayer has the benefit of X years or decades of experience. Unfortunately, they is little in the way of statistical information available to confirm the correct figure for each taxpayer.

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Is there precedent for this type of analysis? Yes. How is this for an analogy? In his concurring opinion in Jacobellis v. Ohio, 378 U.S. 184 (1964), regarding the possibility of obscenity in the firm The Lovers, Justice Potter Stewart wrote: “I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description [“hard-core pornography”], and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.” [emphasis added] Assume that the figure with which the tax professionals are comfortable is less than the figure provided by the feasibility study. How does the taxpayer get to the lesser figure? Does the taxpayer drops some of the proposed lines of coverage? Does the taxpayer buy less of some of the proposed lines of coverage? This is the perfect transition to the second topic because one problem may be that the pricing of the lines of coverage.

Often Overlooked Tax Issue #2 Internal Revenue Code §482 is often thought of as a tool used by the Internal Revenue Service to combat overpayment by a U.S. parent to a foreign subsidiary. It provides, in relevant part, as follows: • §482. Allocation Of Income and Deductions Among Taxpayers. In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order

8/30/2013 10:50:37 AM

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November 2013

to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses... This section can trace its lineage back to 1921, a mere 8 years after the enactment of the first income tax. Congress was concerned that related business taxpayers might set prices between themselves to inflate the income of entities subject to lower rates. The application to the operating business’s payment of a premium to a captive, to which the premium is nontaxable, is obvious. Lip service is given to this, of course. That is the entire reason behind the feasibility study which is given to the taxpayer at the beginning of the engagement to establish a captive. However, will the feasibility study protect the taxpayer from an attack by the Internal Revenue Service? The answer is a resounding “it depends”. Feasibility studies are typically prepared by actuaries.The actuaries engaged in the captive insurance business are almost uniformly outstanding, both as individuals and as professionals. Actuaries compile and analyze statistics and use them to calculate insurance risks and premiums. However, inside an insurance company, the actual pricing of premiums is not determined by actuaries, but by underwriters. Insurance underwriters use actuarial data to help determine premiums. But actuarial data is only one component in the pricing decision. Underwriters must also consider the competition; the need for new business; the earnings of the carrier’s reserves; management’s risk tolerance; and other factors that must be managed using computer programs and judgment gained over years of experience in the field. The question becomes, for each taxpayer wishing to institute a captive for its operating a business, to what extent it can rely on the “feasibility” study to set the rates and feel comfortable that the rates would not be vulnerable to a charge by the Internal Revenue Service under §482 that they are higher than what would be 8

November 2013

The Self-Insurer

charged by an independent third party in the marketplace? At a minimum the taxpayer and the taxpayer’s advisors must read the description of how the coverage was priced. Mathematical mistakes may occur. Conceptual mistakes may occur. In some cases the coverage may violate “the eyeball” test as being incredible. In the case of some lines of coverage the taxpayer can get quotes from commercial carriers. Many types of coverage proposed for captives are unusual or non-existent in regular commercial markets so the taxpayer may be lucky to get a quote from any third party, except perhaps Lloyds. Each actuarial firm has its own method for determining the cost of insurance for a captive to charge to the operating entity (premium payor). One source of statistics is the information taxpayers provide to captive managers about their existing insurance. Another source of date are rate sheets submitted by large insurance companies to the departments of insurance of the various states. Smart actuaries also hire any freelance underwriters they can locate to provide input to their proprietary database. However, freelance underwriters with good quality experience from property and casualty insurance companies are not easy to find, and getting help from underwriters currently inside carriers is difficult. The taxpayer may have to find the taxpayer’s own freelance underwriter to review the feasibility study. The taxpayer may feel most comfortable hiring a captive manager that has people on staff who spent decades in-house with large property and casualty insurance brokers or carriers.

Audits There is no evidence that the Internal Revenue Service is currently targeting captives in general, or any particular manager’s captives in particular, for audits using the Code sections discussed above. (There is a targeted audit campaign against one captive manager, but for problems unrelated to those discussed in

this article.) However, the lack of current audit activity should not give comfort to any taxpayer. Everything works until it is audited.Taxpayers are obliged to take deductions with care and thought. Also, if we learned anything from the Internal Revenue Service’s assault on the late 1990’s tax shelter industry, it is that once something is marketed widely, especially on the internet, it is on the Internal Revenue Service’s radar and an appropriate subject for an enforcement program.

Conclusion Internal Revenue Code Section 831(b) has now been law for 26 years. Captives for closely held businesses have proliferated over the past decade driven in part by the growth in the number of captive managers, which has created downward price pressures, and in part by the number of states adopting favorable legislation, which has now reached thirty. The benefits, both in terms of risk amelioration and tax benefits are large. However, there are tax risks, and not just the obvious one, that can cause complete failure. n Bruce Givner, Esq. is a tax lawyer, with Givner & Kaye, A Professional Corporation (Los Angeles). He can be reached at Bruce@GivnerKaye.com. Bruce is a graduate of the Columbia University School of Law (1976) and the N.Y.U. LL.M (tax) program (1977). He has been “AV” rated by Martindale-Hubbell for 25 years and has been selected as a “SuperLawyer.” He has authored over 80 articles in professional journals, one of which was cited by the U.S. Tax Court in Fujinon Optical, Inc. v. Commissioner, 76 T.C. 499 (1981). He is the author or a contributing author to eight volumes on tax planning published by the California CPA Society, the American Institute of Certified Public Accountants and the California Continuing Education of the Bar, for one of which he was cited by the California Court of Appeals. He represented the winning taxpayers in L&B Pipe & Supply Co., Inc. v. Commissioner, T.C. Memo 1994-187 (April 28, 1994).

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November 2013

CONFERENCE KEYNOTE by Bruce Shutan

ACA Tops SIIA Conference Agenda: Insiders Describe Legal Wrangling and Lobbying Strategies

everal industry insiders dissected the Affordable Care Act’s (ACA) impact on self-insured health plans at SIIA’s 33rd annual National Education Conference & Expo in Chicago, whose underlying theme was outsmarting health care reform. Attendees also were urged to become involved in lobbying to preserve their rights in the face of legislative and legal assaults. The reason federal regulators are so skeptical of self-insurance is that they fear that it will undermine the ACA’s goal of universal health coverage, explained John Eggertsen, an attorney who heads up Eggertsen Consulting, Inc., who noted in a keynote address how ERISA’s focus has shifted over the years from pensions to health and welfare coverage. He also cited a California law with regard to the use of stoploss insurance that imposes a $35,000 annual coverage limit, alarmed by the potential impact on small self-funded health plans. Mike Ferguson, president and CEO of SIIA, described ACA implementation rules and amendment legislation, along with stop loss, as top priorities – adding that any unease among regulators over stop-loss captives is rooted in self-insurance serving as the building block of these

November 2013

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programs. Rounding out his list of key legislative and regulatory issues were ERISA pre-emption, reauthorization of the Terrorism Risk Insurance Act and improvements to the Medicare Secondary Payer Act designed to streamline self-insured workers’ comp plans. States are trying to protect their public health insurance exchanges and will do anything in their power to remove perceived barriers to this emerging online marketplace, added Horace Garfield, VP of stop loss at Transamerica Employee Benefits who chairs SIIA’s government relations committee. Given this perception, he said that stop-loss insurance now has a target on its back. One argument used to justify this stance is that self-insured small businesses can always switch to a fully insured arrangement since the ACA’s insistence on guaranteed issue represents a critical layer of protection, according to Garfield. Eggertsen briefed attendees on one of SIIA’s current legal challenges involving a 1% assessment on the payment of health care bills by insurers and TPAs in Michigan, which initially hoped to raise $400 million, but fell significantly short of that mark at $250 million. He said one administrative challenge has been in self-insured multistate employers having to parse Michigan residents who have sought health care services from those who have moved to other states. Eggertsen also expressed surprise at the outcome of another court case involving the Travelers insurance

company in which the U.S. Supreme Court affirmed 9-0 that a state tax on hospitals did not impose an administrative burden on self-insured ERISA plans or undermine plan design. He called ERISA the single-most litigated employment law. Attendees learned about SIIA’s 2010 decision to revive its political action committee (PAC) after a period in the 1990s during which it wasn’t considered particularly effective. The PAC’s annual budget is now $65,000. Jerry Castelloe, chairman of the SIIA PAC board of trustees, recalls a recent meeting with Sen. Kay Hagan (D-N.C.), a member of the Committee on Health, Education, Labor, and Pensions, during which he was the only one of several lobbyists who could actually vote for her. “I sense that she paid very close attention to what I had to say,” he said. Her reply to his concerns about health care was that the ACA was already helping bend the cost curve downward. She agreed to a follow-up meeting. Garfield also briefly reported on another key meeting for SIIA that took place last fall with a senior staffer for Sen. Mitch McConnell (R-Ky.). Castelloe noted a shift toward seeking meetings with more moderate Democrats outside of the PAC’s comfort level. “We are making progress with expanding our reach” to help educate these members about the merits of self-insurance, he reported. Castelloe admitted that while meetings with regulators and lawmakers can be intimidating, the key to

overcoming fear is the knowledge that SIIA PAC representatives will be the most informed people in the room about self-insurance and related topics. His larger point was that this expertise can be used to educate leaders in hopes of ultimately lifting regulatory burdens. Castelloe recommended that attendees who are interested in lobbying on behalf of the SIIA PAC to attend the annual legislative conference in the spring to prepare for future meetings with key staffers or leaders on Capitol Hill.

Motivational Presentation The SIIA conference kicked off with an inspiring, fast-paced, folksy and humorous presentation by best-selling author and motivational speaker

Robert Stevenson, who urged attendees to embrace new thinking in a changing marketplace where great ideas routinely go viral. “Health insurance doesn’t work in America today, but you know that and offer an alternative,” he said. Stevenson, who wrote “How to Soar Like an Eagle in a World Full of Turkeys,” lauded self-insurance for helping businesses tame rising health care costs and achieve more predictable expenditures, citing the story of Harris Rosen, whose hotel and resort chain has been doing it since 1991. After serving as director of hotel planning for the Walt Disney Co., Rosen now owns seven hotels and has more than 5,000 employees and dependents. He has saved more than $225 million on health care costs since 1991 through selfinsurance, according to Stevenson, who added that for every $1 spent on health care, his firm earns an impressive $8.50 return on investment. “The passion in talking to this guy was mind-boggling,” he recalled, noting that premiums have been flat at Rosen’s company over the past five years, while turnover is just 15% in an industry where the average is in the 150% to 250% range. n Bruce Shutan is a Los Angeles freelance writer who has closely covered the employee benefits industry for 25 years.

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sponsors. But she wonders whether brokers accustomed to commoditized, fully-insured arrangements that pay generous commissions understand the risk involved with switching to a self-funded arrangement and knowing whether there’s enough cash flow to make it work. She also warned about the emergence of predatory practices among stop-loss carriers.

options for managing their active employee populations, according to Pajak. One is a build-your-own-benefits-plan-design approach to modifying existing health plans to become high-performing over time so that these employers avoid the 2018 excise tax on so-called Cadillac coverage, which he believes, 60% will incur. Another avenue would be to exit the health insurance market, altogether, which he cautioned as not necessarily providing any value relative to how current offerings stack up in the marketplace. A third strategy is to leverage someone else’s exchange around highperformance principles, providing each employer participant with greater financial and administrative efficiencies, including any vendor-relationship burdens. Pajak called this boxed solution the equivalent of turning over the keys to the car for full management of the plan.

Private Health Care Exchanges – Implementation for the Self-Insurance Marketplace Larry Boress, president and CEO of the Midwest Business Group on Health, cautioned that private exchanges are untested and not a panacea to rising health care costs, noting the difficulty deciphering key differences among all the leading operators in this emerging online marketplace. The model may largely appeal to employers with many seasonal or part-time workers, he observed, adding that many of his more than 120 large employer members are steering their pre-65 retirees into this benefits delivery model and very much like this approach. Most of his members recently reported that they will adopt a wait-and-see approach about private exchanges for their actives. He went on to add: “The idea of offloading all those plan administrative costs to a private exchange and just focusing on the wellness prevention and production is very attractive.” Benjamin Pajak, senior vice president of strategy and business development for Towers Watson’s Exchange Solutions business unit, said most self-insured employers don’t have the time or resources to accomplish what a private exchange can do in raising the bar on health plan management. Employers have several

Global Opportunities for Self-Insurance Hugh Rosenbaum, a U.K.–based retired principal from Towers Watson, noted that there are 70 captives engaged in employee benefits, 30 of which are in the U.S. other than group medical plans. He said it’s the norm in France, though there’s very little of it done in Germany, while there aren’t any waiting times in Spain. There are tax advantages and the hope of investment income to self-insuring captives versus non-insurance government schemes, Rosenbaum added. He said there are some group captives outside the U.S., providing an opportunity for captive insurers to expand their business. One unique approach overseas involves 24 discretionary mutuals founded in common law, which he said are not considered insurance and aren’t regulated as such, nor do they guarantee that claims will be paid. He cited another unusual vehicle called a risk-purpose trust, which covers a beneficiary’s unforeseen expenses and is used for patent protections and not employee benefits. Kathleen Waslov, SVP of Willis North America, Inc., noted that Brazil and Columbia have large pools of self-insured, prefunded medical benefits that are not insured. The primary motivation for using captives is for more immediate access to real-time data that can be aggregated, she said. Waslov also described accidental death and dismemberment policies as a big expense and volatile risk, with some captive reinsurance in the U.S. pertaining to this area. She added that providers of these services need insurance to smooth volatility and global emergency services.

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Bob Gagliardi, SVP of captive management at AIG, said “the international market represents a huge opportunity to capitalize on the captive insurance market,” with more than 70% of global captives owned by North American companies. The Western European insurance market is mature and captives are widely used, he said, though middle market and group captives are far less common there than in the U.S. and Eastern European markets are generally less developed with few captives owned. Gagliardi also said there are 50 to 100 Latin American companies that own captives, primarily in Mexico, Brazil and Columbia and many large privately held companies have an interest in tax efficiency involving captive vehicles. While Japan has a strong domestic insurance market with relatively firm pricing, he said that just 80 mostly multinational companies own captives. He categorized the Australian market as well developed, though few major companies own captives.

Health Insurance Reforms and the Self-Insured Employer Part 2: Financial Implications, Business Practice Realities and Strategies Scott Hass, vice president of Wells Fargo Insurance Services, said mental health benefits are the only potential blind spot among self-insured employers within the context of offering essential health benefits and sees psychotropic drugs being prescribed in a vacuum. About 99% of the most significant Rx pricing abuse involves

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November 2013

Medicare Reference Based and/or Maximum Allowable Plan Models – Concept Meets Reality

SIEF Board members Nigel Wallbank, Heidi Svenson and Alex Giordano draw raffle winner in the Exhibit Hall

under the Affordable Care Act (ACA). “We’ve only had one self-funded plan that would even be considered a middle plan,” he reported. Pascullo also addressed a trend toward narrower provider contracts. Hicks Morgan, owner of the self-insured Morgan Buildings & Spas, observed that the use of specialty drugs raises the need for stop-loss insurance at more affordable levels for smaller employers. A cancer patient in a small group can complicate a policy renewal, with Morgan saying the first pressure is to raise that attachment point or laser care. While surgery used to be the primary concern in terms of driving health care costs, he noted that it has since been replaced by post-surgery treatments involving cancer drugs.

National Level Regulatory Market Update for Workers’ Compensation Self-Insurers Tom Hebson, VP of product development and government relations for Safety National Casualty Corporation, warned that the ACA triggers considerable uncertainty

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with regard to workers’ comp. Key issues include the availability of adequate medical treatments and experts over the next 10 to 15 years, as well as growing utilization of the medical system with new entrants and an aging workforce, movement away from rural operations to urban operations, workforce shifts to part-time or reductions in overall payrolls, etc. One noteworthy trend he addressed is that excess comp losses can be staggering with anemic investment income returns. Among the key pieces of state legislation he examined: California Senate Bill 863, which includes changes in the medical fee schedule to the Medicare-based Resource-Based Relative Value Scale from the current official medical fee schedule, Illinois Senate Bill 2339, which requires joint self-insurance pools to provide an annual audit performed by an independent CPA, Oklahoma Senate Bill 1062, which creates an administrative dispute resolution system vs. workers’ comp civil court, and Missouri Senate Bill 1, which establishes a secondary injury fund focused on various areas.

Laura Conte, general counsel of INETICO, Inc., explained that since preventive care is a hallmark of the ACA, self-insured plans cannot include out-of-network costs related to preventive care doctor visits in the cost-sharing calculation. She also recommended that plan sponsors approach their TPAs about not charging them extra to comply with the added administrative burden. Debi Kelbert, a claims administrator with the self-insured DART Container Corporation, said that since ACA compliance due dates “tend to sneak up on us,” it’s helpful to make a list of all vendors that need to be contacted to coordinate benefits administration and management. She noted the need to reconfigure the accumulators in claims payment systems and create file feeds with outside vendors. Debbie Harrington, president of CAS Benefits, described the ACA as a great opportunity for TPAs to expand their business in an advisory capacity. It’s important to check that reinsurance contracts comply with the ACA or update those documents, she added. Her firm created a TPA checklist, which includes questions about whether the plan is grandfathered, has pre-existing conditions, clinical trials, experimental and investigative components, pediatric dental and vision, preventative services, a waiting period and 10 essential benefits. She said TPAs have to dig deeper to clarify what specifically is required under the clinical trials provision, which has created confusion and ambiguity. n Reporting on these workshops was provided by Bruce Shutan, a Los Angeles freelance writer who has closely covered the employee benefits industry for 25 years.

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November 2013

ART GALLERY by Dick Goff

When 1 Plus 1 Equals More Than 2

e’ll tee up this visit to the Gallery by recalling a couple of recent columns that may offer synergistic benefits to captive owners – synergistic, in this usage, meaning a combination greater than the sum of its parts. Purely accidental on my part, you may be assured. In the July issue we introduced the concept of enterprise risk management (ERM) that is a process incorporating all the usual mitigation tactics but also extending to the broader range of risks that may be introduced by the government, business circumstances, natural disasters or other untoward circumstances affecting the enterprise. Then last month we reported that some members of the National Association of Insurance Commissioners (NAIC) are in favor of requiring captives to be added to the NAIC’s Own Risk and Solvency Assessment (ORSA) self-reporting process that will embrace commercial insurance companies beginning in 2015. It struck me that ERM could be an effective springboard for captives to analyze and report their condition if the NAIC includes them in the ORSA process. For a response to that notion I dialed up Mary Peter, Director of Enterprise Risk Management for CPA/consultant firm Eide Bailly LLP in Minneapolis. I had noticed that Mary would moderate a panel on the ORSA reporting process at the Insurance Industry Forum: ORSA next month in Boston (www.InsuranceIndustryForum.com). My first question to Mary centered on whether being required to make an ORSA report to their lead state commissioner wouldn’t be an inordinate burden on captives. “It’s an inordinate burden for all insurance companies,” she responded, citing the NAIC ORSA Guidance Manual that is confounding insurance companies by its breadth of scope. She agreed that the ERM process could help companies deal with such an arduous self-reporting process as they include ordinarily considered risks along with extraordinary risks that could damage companies’ reputations or relationships with stakeholders. In counseling companies on the ERM concept and designing an effective ERM process, Mary described a planning process that involves setting up cross-functional teams that often include managers of finance, governance, compliance, IT, operations and risk management. “Often we see teams formed whose members haven’t previously worked together and don’t always know what each other does,” Mary said. I observed that such groups would need an interpreter just to talk to each other because the languages of various functions can be arcane. “That’s why they need someone like me to help them facilitate,” she said. “But usually it doesn’t take too long until you reach the ‘ah-ha’ moment when people

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begin to understand how ERM can be a valuable skill to develop.” In a diagram Mary offers, ERM is seen as an umbrella function over the usual functions of governance, risk management and compliance (GRC). “ERM is an archway for the company to take a holistic approach,” she says. “By clearly defining your ERM framework and then bringing in GRC components, the risks and opportunities relating to the company’s strategic vision become clear. Now the company is able to look at the interdependency of risks and their outcomes to the whole organization.” She cites often overlooked and seemingly intangible risks that ERM can expose. “Consider the risk of a failure of equipment creating an oil spill in public waters. An assessment of this risk would typically involve looking at fines, penalties, cleanup costs and profit loss. The missing elements in this scenario are the intangible assets or those which are difficult to quantify – for example, the future costs including legal fees, regulatory investigation, government involvement, public relations, media cost and reputation damage.” She says that such an exercise can identify a more accurate risk of capital and a more effective enterprise-wide approach to managing the company’s assets – both tangible and intangible. I couldn’t help but wonder if BP had taken such an approach to prepare for the contingency of an oil spill in the Gulf of Mexico. Mary finds some ray of light in the NAIC’s ORSA process: “The biggest

benefit is that the ORSA report is authored by the company – here’s who we are, what we do and how it works in our industry and as it relates to our complexity – rather than being assessed by the regulator or another entity that may not have a good understanding of your particular products, company and industry.” My thought was that the better prepared a captive can be through the ERM process, the better it would be able to handle ORSA if it becomes necessary. “Exactly,” Mary agreed. “You would have a framework to build on to help meet an ORSA Model Act, and at the very least would produce better reports for the usual regulatory review.” Readers are invited to send their questions or comments to the ART Gallery or, if moved to cover a subject in depth, send a query describing your article to Managing Editor Gretchen Grote at ggrote@sipconline.net. n

www.wspactuaries.com | Email: info@wspactuaries.com

Dick Goff is managing member of The Taft Companies LLC, a captive insurance management firm and Bermuda broker at dick@taftcos.com. Mary Peter may be reached at Mpeter@eidebailly.com or www.eidebailly.com/services/enterpriserisk-management.

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November 2013

George Pantos Remembered by Jim Kinder

n October 18th, 2013 we lost a great person who for over 25 years dedicated his work to promoting and protecting the self-insurance industry. George Pantos will certainly be missed by all who had the privilege of knowing him. Shortly after SIIA was formed in 1981 it became apparent that not only did the organization have to provide a broad series of educational programs if self-insurance was to grow and prosper, but also that the association would also have to take a proactive leadership role in government relations. This strategic decision was made under the leadership of then President Jim Duff who had a background in government relations during his tenure with General Motors, and helped to play a pivotal role in moving SIIA to the forefront as the voice of our industry. I remember Jim telling me that I needed to get active in political and lobbying issues to advance SIIA, but, I had no practical experience in that arena. During a strategic planning session with SIIA leaders, Sterling Spafford surprised me by saying that my assignment will be easy. He said, “I am going to make a call and set up an appointment for you to meet a special person who can assist making this assignment a success.” That call was to George Pantos and the next day I was on my way to Washington, DC, to meet George for the first time. What a meeting it was! At the time, George was a Senior Partner with the law firm of Vedder Price Kamholtz & Day and was the firm’s top ERISA and government relations partner. My first meeting with George lasted for hours and by the time it was over I was simply

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exhausted but at the same time so motivated I felt SIIA could concur the world. He was that inspiring. No decisions were made on that first meeting. All George said was, “Any way I can help you and SIIA just let me know.” While that was a very nice gesture I wondered how our little organization could afford George’s services. When I reported back to the leadership on my visit Jim Duff said, “Jim you need to return to DC and visit George and bring him on board, and let the board deal with the issue of financing the effort” So, I returned to DC for my second meeting with George to explain where SIIA was from a financial point of view, show him our projections and discuss our vision and how much this organization could benefit from his knowledge and skill. From there we developed a plan in which SIIA could retain George, and with that a strategic partnership was formed. The rest, you may say, was history but not behind the scenes. Contracting services to engage George through his law firm was an expensive proposition and George always provided way more time and service than SIIA was paying for. George confided in me that there was tension between he and his partners on the amount of time he was giving SIIA. I jokingly said, “Well why don’t you just join us full time?” I quickly realized that was a dumb comment, after all if we were struggling to pay fees how the hell could we afford to bring George on full time? George chuckled, gave a quick smile and told me to have a nice trip home and that we would talk again soon. So, I was surprised when George called and said, “Jim remember the offer you made for me to join the team fulltime?” I said yes and with that he said, “Let’s talk soon as I think I want to do that.” I went back to DC immediately. George and I met over lunch the next day and he opened the conversation with “Well, I made the decision; I want to join your company and help develop

your government relations program full time.” We talked for several hours going over all of the what ifs, his financial needs, and our abilities to meet them. The result was that George became a principal and shareholder of the management company and the next day started working full time for us and SIIA. The marriage was made! Yes, George was and always will be a true professional and one of the most giving people I have ever known. He not only helped to guide our government relations effort but also served as a mentor for all of us. His insight, ability to listen, knowledge of the legislative process, and incredible legal mind taught our team so much. From the challenging “Hillarycare” episode during the Clinton administration that largely forged our effectiveness in federal policy, up to and including the current Obamacare legislation, George served as our quarterback to lead our growing corps of lobbying staff and involved members who continually volunteer their time. George also led our Legislative and Regulatory Conferences in Washington for more than 20 years and originated our “March on Capitol Hill.” When we hired Mike Ferguson, who had a background in government affairs, we quickly paired him with George. Mike moved to Washington to spend a year working with George, and I am sure Mike would confirm that it was among the best formative years of his career. The same is true of Erica Massey and all the members of the team who over the years were blessed by working with George. George never slowed down, even after both he and I retired from full time duty so the next generation could start to take over. To the day he passed, I and all of the current management team serving SIIA continued to seek and receive his counsel. I know they will continue his tradition of protecting the industry we all so dearly love… All we can do now is to say thanks George and rest in peace, dear friend.

For those who may not have seen George’s obituary we have included it below along with some comments of SIIA figures.

George John Pantos George John Pantos, Esq. of Bethesda, Maryland passed away on Friday, October 18, peacefully in his home. He was 82. George was born on October 28, 1930 in Worcester, MA, the son of two Greek immigrants from Sotira, Greece. He attended Woodland Elementary School, Woodland Prep and South High School. George graduated from Syracuse University with a B.A degree and George Washington University with a law degree. In 1965, he married Barbara Crisci and together they had four children. George had a successful domestic and international career in law, business and government spanning over forty years. During this time, he served in the U.S. Government as Deputy Under Secretary of Commerce, was an attorney for the U.S. Chamber of Commerce and The White House, and was a Partner with Vedder Price. He also served as President of Government Relations for Kinder & Associates, Chief Counsel for the Self Insurance Institute of America (SIIA), President of the Captive Insurance Council of the District of Columbia (CIC DC) and Executive Director of the Healthcare Performance Management (HPM) Institute. Early in life, George served in the U.S. Army stationed in Europe. George was a devoted husband, father and grandfather and friend to all. He lived his life according to the highest ethical and moral standards setting a strong example for all that knew him. He was a deeply religious man who dedicated his faith to the Greek Orthodox Church. George always enjoyed music and was an accomplished jazz musician playing both the tenor saxophone and clarinet. He was a lifelong Republican and loyal Redskins fan.

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November 2013

SIIA members remember George… It is difficult to overstate George’s importance in helping to position SIIA as the highly effective lobbying organization it is today. On a personal note, perhaps the best way to describe him is that he was a man with a brilliant mind combined with a golden heart. – Mike Ferguson, President, Calmetto Management Group and Chief Operating Officer, SIIA As passionate as George was about the self-insurance industry he was equally, if not more passionate about his family and friendships. He had a tremendous influence on my professional and personal life. He will be truly missed by all who knew him. – Erica Massey, Executive Vice President, Calmetto Management Group, President, Self-Insurers’ Publishing Corp. and Executive Vice President SIIA From the time I first met George with Jim Kinder I knew we had a keeper. In planning our first Washington conference that was confirmed. Always the professional, highly respected by his peers, a classic gentleman, George’s quiet demeanor belied a strength of character that served SIIA well. I treasure the professional and personal relationships that continued for over 25 years. – Jim Duff, Past President, SIIA During my tenure as Vice President of the Government Relations Committee from 2002-2006, George was my SIIA staff liaison and partner in managing the important business of the committee. We met often, usually with George sharing his wisdom and guidance on how to make a difference in DC and on Capitol Hill, followed by a visit to the Hill to share our position with strategic Congressional members. George was known and well respected on the Hill and being with him gave me an immediate level of credibility. Much of my confidence today to represent the affairs of the industry in Washington I give credit to George’s tutelage. – Jerry Castelloe, Regional President, CoreSource and Chairman, Self-Insurance PAC Board of Trustees He was truly known and respected by all. When you went to DC and out to dinner with George, he was the one person I have ever known that Senators approached to say “good evening.” – Nigel Wallbank, Past President, SIIA May George Pantos’ passion, for his work at SIIA, shine bright in all of us. – Alex Giordano, SIIA Past President George was a gentleman, scholar and a lifelong supporter of the self-insurance industry. He provided education and guidance to many outside the industry as one of our best ambassadors. He will be missed. – Larry Thompson, SIIA Past President Very sad. What a gentleman and a dear friend. Our industry will miss a true friend and advocate. – Bill Bennett, SIIA Past President George was one of my favorite people. The world has lost a great gentleman and he will be missed. – Kurt Ridder, SIIA Past President George was a gentleman’s gentleman and will be missed by all. – Ron Woods, SIIA Past President

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George was a great guy and a longtime asset to SIIA. Nobody did a better job of getting you in front of the right people on the Hill. The days I spent working with him in DC are some of my fondest memories. He will be missed. – Ed Ueeck, SIIA Past President George was a brilliant ERISA attorney who guided SIIA through the bureaucratic mine fields that we often encountered early in our history. However, when I think of George, I think of a kind human being who never had an ill word for anyone. I think of a mentor who provided me with the insight and knowledge to become a leader in our industry, but mostly, I think of his kindness and willingness to help anyone who asked. He will be missed by all who had the pleasure to interact with him. – Steve Rasnick, President, The SIP Group of Companies George Pantos was a terrific mentor and friend. He conducted himself with an enormous amount of class, professionalism and dignity; but above all he was just an all-around great person. I will miss George dearly, but the lessons I learned from him will live with me forever. – Cliff Roberti, former Director of Government Relations George was truly an inspiration both personally and professionally. He was so passionate about everything he did and it was infectious. Working for him was a privilege and being his friend was my honor. – Ashley Neumann, longtime assistant to George n Jim Kinder is president of Kinder & Associates, Inc. and served as CEO/ Executive Director of SIIA from its inception to his retirement in 2006. He remains active in the industry as a consultant. He can be reached at 864-409-8347 email. Jkinder120@hughes.net

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November 2013

PPACA, HIPAA and Federal Health Beneﬁt Mandates:

Practical

The Patent Protection and Affordable Care Act (PPACA), the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and other federal health benefit mandates (e.g., the Mental Health Parity Act, the Newborns and Mothers Health Protection Act, and the Women’s Health and Cancer Rights Act) dramatically impact the administration of self-insured health plans. This monthly column provides practical answers to administration questions and current guidance on PPACA, HIPAA and other federal benefit mandates.

November 2013

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Q&A

Final Regulations Create New Requirements for Employer Wellness Programs

he Departments of Labor, Treasury, and Health and Human Services (the “Departments”) published final wellness regulations this summer (the “Final Wellness Rules”)1 modifying the 2006 HIPAA wellness program regulations (the “2006 Regulations”)2 in light of the changes made to the statutory provisions by the Affordable Care Act (the “ACA”). These Final Wellness Rules supersede the proposed regulations published on November 26, 2012 (the “Proposed Wellness Rules”).3 Although there are some welcome changes in the Final Wellness Rules, other changes, particularly those that apply to health-contingent wellness programs (including activity-based programs as described below), will make certain types of wellness programs more difficult to administer. On the plus side, consistent with the statutory provisions, the maximum reward that may be offered under a health-contingent program is increased generally from 20% of the cost of coverage (as under the 2006 Regulations) to 30%, and up to 50% of the cost of coverage for tobacco cessation programs. However, for wellness plans that condition a reward on the satisfaction of a health-contingent standard — e.g., no smoking or attainment of a certain body mass index (BMI) — the Final Wellness Rules change the way such health-contingent wellness incentive programs must be administered

by adding new, stricter requirements. The Final Wellness Rules apply to both grandfathered and non-grandfathered plans for plan years beginning on or after January 1, 2014. This article discusses key aspects of the Final Wellness Rules as applied to group health plans.

Types of Wellness Programs Like the 2006 Regulations, the Final Wellness Rules make a distinction between participatory wellness programs and health-contingent wellness programs.

Participatory Wellness Programs Practice Pointer: The Final Wellness Rules contain different rules for participatory wellness programs and health-contingent wellness programs. Health-contingent wellness programs are subject to stricter requirements, making it critical to correctly categorize the type of wellness program offered. Participatory wellness programs are programs that either do not provide a reward or do not include any conditions for obtaining a reward that are based on an individual satisfying a standard that is related to a health factor. Examples cited in the Final Wellness Rules include a fitness center reimbursement program, a diagnostic testing program that does not base rewards on test outcomes, a program that waives cost-sharing for preventive care, such as prenatal or well-baby visits (generally relevant for grandfathered plans only),4 a program that reimburses employees for the costs of participating in a smoking cessation program regardless of whether the employee quits smoking, and a program offering rewards for attending a free health education seminar.

Participatory programs comply with the HIPAA and ACA nondiscrimination requirements as long as participation in the program is available to all similarly situated individuals, regardless of health status. There is no limit on financial incentives for participatory wellness programs, and they do not have to meet the requirements for healthcontingent wellness programs.

Practice Pointer: “Reward” refers to a discount or rebate of premiums or contributions, a waiver of all or part of other cost-sharing, and other financial incentives. It also includes avoiding penalties (such as surcharges).

Health-Contingent Wellness Programs A “health-contingent wellness program” is a program that bases any portion of a reward on an individual satisfying a standard that is related to a health factor, or requires an individual to “do more” than a similarly situated individual in order to obtain the same reward. This includes performing or completing an activity relating to a health factor, or attaining a specific health outcome (such as attaining certain results on biometric screenings). In a departure from the Proposed Wellness Rules, the Final Wellness Rules divide health-contingent wellness programs into two categories: activityonly and outcome-based programs. Activity-only wellness programs require individuals to perform or complete activities related to a health factor in order to obtain a reward. However, they do not require an individual to attain or maintain a specific health outcome. Examples of such programs include walking, diet, and exercise programs. Outcome-based programs, in contrast, require individuals to attain or maintain a specific health outcome

(such as a certain BMI) in order to obtain a reward. In order for outcome-based programs to satisfy the Final Wellness Rules, the program will generally need to have two tiers. The first is the outcome – e.g., a measure, test, or screening that sets the initial standard for obtaining the reward, such as no smoking, or a BMI within a certain range. The second tier is a reasonable alternative that must be offered to all individuals who do not meet the specified health outcome (regardless of their medical condition). This second tier could be activity-based (e.g., exercise program) or outcome-based (e.g., an alternative BMI standard and a reasonable time period to meet the standard). Even if the reasonable alternative is activityonly, the program as a whole is considered outcome-based and must satisfy the requirements for outcomebased programs.

Practice Pointer: With an “activity only” wellness program, such as an exercise or diet program, a reasonable alternative means of obtaining the reward must be offered only to individuals for whom it is unreasonably difficult due to a medical condition to meet the applicable standard, or for whom it is medically inadvisable to attempt to satisfy the standard. In contrast, with an “outcomes-based” wellness program (e.g., no smoking), each individual who does not meet the standard must be offered a reasonable alternative to obtain the reward and an opportunity to involve the individual’s personal physician to develop an alternative. Five Requirements for Health-contingent Wellness Programs The 2006 Regulations and the Proposed Wellness Rules contained five requirements for health-contingent

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November 2013

wellness programs. Although the Final Wellness Rules maintain these five categories of requirements, there are some significant changes.

In general. The total reward for a health-contingent wellness plan – either activity-only or outcome-based – cannot exceed a specified percentage of the total cost of employee-only coverage, taking into account both employer and employee contributions. This is typically referred to as the “COBRA cost” of coverage, less the applicable 2% administrative charge. If dependents can participate in the program, the reward cannot exceed the applicable percentage of the total cost of coverage in which the employee and dependents are enrolled. In the Proposed Wellness Rules, the Departments requested comments as to whether (and if so, how) a reward should be apportioned among family members if the program is offered to family members and only some qualify for the reward. The Final Wellness Rules do not provide a specific method for apportionment of a reward; thus, there is some flexibility, as long as the solution is reasonable.

Tobacco use. The Departments exercised their regulatory authority by permitting a reward of up to 50% for programs designed to prevent or reduce tobacco use. Tobacco use can only affect rewards/penalties from 30% to 50%, while other wellness-related factors can impact the initial 30% of the reward/ penalty. The 50% differential for tobacco use provides consistency with the modified community rating rules which go into effect in 2014 and which permit health insurance issuers in the small and individual market to vary premiums for tobacco use by a similar factor (the modified community rating rules do not apply at this time to the large group market). Insurers that impose such a differential in the small group market must offer a wellness program that meets the requirements of the Final Wellness Rules.

The 2006 Regulations capped the permissible reward at 20% of the total cost. In accordance with the ACA, the Final Wellness Rules increase the maximum reward

The final regulations under the modified community rating rules

1. Frequency of Opportunity to Qualify As under the 2006 Regulations and Proposed Wellness Rules, individuals must have the opportunity to qualify for a reward at least once per year in healthcontingent programs (both activity-only and outcome-based). Thus, an opportunity to re-qualify each year must be extended even if a participant has repeatedly failed to meet a goal or complete established requirements.

2. Size of Reward

to 30% for programs other than those related to tobacco use.

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define “tobacco use” as use of tobacco products on average four or more times a week in the past six months. This definition has not been carried over into the Final Wellness Rules. Thus, outside the fully-insured small group market, employers appear to have some flexibility in defining tobacco use. The Final Wellness Rules contain an example of a permissible wellness program that defines tobacco use as use of tobacco in the past 12 months. Example. This example, taken from the Final Wellness Rules, demonstrates how the maximum permitted reward is coordinated in a wellness program that provides rewards based on tobacco use and other health factors. Facts: An employer sponsors a group health plan. The annual premium for employee-only coverage is $6,000 (of which the employer pays $4,500 per year and the employee pays $1,500 per year). The plan offers employees a health-contingent wellness program with several components, focused on exercise, blood sugar, weight, cholesterol, and blood pressure. The reward for compliance is an annual premium rebate of $600. In addition, the plan also imposes and additional $2,000 tobacco premium surcharge on employees who have used tobacco in the last 12 months are who are not enrolled in the plans’ tobacco cessation program. (Those who participate in the plans’ tobacco cessation program are not assessed the $2,000 surcharge.) Conclusion: The amount of the reward under this program is permissible. The total of all rewards is $2,600 ($600 + $2,000 = $2,600), which does not exceed the applicable percentage of 50 percent of the total annual cost of employee-only coverage ($3,000); and, tested separately, the $600 reward for the wellness program unrelated to tobacco use does not exceed the applicable percentage of 30 percent of the total annual cost of employee-only coverage ($1,800).

3. Reasonable Design The Final Wellness Rules emphasize that health-contingent wellness programs (both activity-based and outcome-based) must be reasonably designed to promote health or prevent disease. A wellness program is reasonably designed if it has a reasonable chance of improving the health of, or preventing disease in, participating individuals. It must not be overly burdensome, cannot be a subterfuge for discrimination based on a health factor, and cannot be highly suspect in the method chosen to promote health or prevent disease. However, it may have more favorable rates for eligibility or premium rates for individuals with an adverse health factor. The determination of whether a wellness program is reasonably designed is based on the relevant facts and circumstances. The Final Wellness Rules provide that in order to satisfy the requirement of reasonable design, outcome-based wellness programs must provide a reasonable alternative standard to qualify for the reward for all individuals who do not meet the initial standard.

4. Uniform Availability and Reasonable Alternative Standards Availability of Reasonable Alternative Standard Activity-only programs (e.g., diet or exercise programs) must make available an alternative means of obtaining the reward only to individuals for whom it is unreasonably difficult due to a medical condition to meet the applicable standard, or for whom it is medically inadvisable to attempt to satisfy the standard. If reasonable under the circumstances, the plan can seek verification, such as from a participant’s personal physician, that a health factor creates the need for an alternative standard.

Outcome-based programs must offer each individual who does not meet the initial standard a reasonable alternative to obtain the reward. The plan may not, in general, seek verification under an outcomebased program that an alternative is necessary due to a health factor. • If the plan offers an alternative to the initial standard that is an activity-only program, then the plan must comply with the requirements applicable to such programs with respect to the alternative. For example, if the plan offers an exercise program as an alternative to having a BMI below a certain level, then the plan must offer an alternative to the exercise program to anyone for whom compliance with the exercise program is unreasonably difficult or medically inadvisable. The plan may, if reasonable under the circumstances, seek verification that a health factor requires an alternative to the exercise program. • If the plan offers an alternative that is itself an outcome-based program, e.g., satisfaction of a different level of the same standard, then additional requirements apply. The reasonable alternative cannot be a different level of the same standard unless the plan also allows additional time to meet the standard. An example given in the Final Wellness Rules is that if the initial standard is a BMI of less than 30, a reasonable alternative would be to reduce the individual’s BMI by a small percentage over a realistic period of time, such as a year. An individual must be given the opportunity to comply with the recommendations of his or her personal physician as a second, reasonable alternative standard

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November 2013

to that offered by the plan. An individual may make a request at any time to involve his or her personal physician at any time (if the physician joins in the request) and the physician can change the recommendations at any time consistent with medical appropriateness.

Practice Pointer: Keep in mind that instead of implementing an alternative, a plan can also waive the standard and provide the reward. Waiving the standard will be a more administrable approach, but could lessen the intended effects of the program. The Final Wellness Rules contain a number of examples that help illustrate how the requirements apply in particular situations. Other Requirements In general Except as otherwise indicated, the following requirements for a

reasonable standard apply to both activityonly and outcome-based programs. Plans do not have to establish an alternative standard in advance of a request, but an alternative must be provided (or the original standard waived) upon request. Plans have flexibility to determine whether to provide the same reasonable alternative standard to an entire class of individuals (provided it is reasonable), or provide it on a case-by-case basis. Persons who meet the alternative standard must be eligible for the entire reward. If the alternative standard is not met until the end of the plan year, the plan can provide a retroactive payment for the amount of the reward. If a person fails to meet the reasonable alternative for a year, that does not excuse the plan from providing a reasonable alternative for the next plan year. In the case of an outcome-based program, a person who fails to meet the initial requirement after completing a

reasonable alternative may be required to complete the alternative in subsequent years in order to obtain the reward. Example. For example, suppose a lower premium is offered to individuals who do not use tobacco. As a reasonable alternative, the plan provides the same lower premium who complete a smoking cessation education program. At the start of the 2014 plan year, individual A does not qualify for the reward initially (because she smokes), but does complete the smoking education program. A is entitled to the reward for 2014 (which may be paid by the plan after she completes the program). For the 2015 plan year, if A still does not meet the initial standard, the plan may again require A to complete the smoking education program to qualify for the reward for 2015. If the reasonable alternative standard is the completion of an educational program, the plan must

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make the program available or assist the employee in finding it, instead of requiring the individual to find one, and it cannot require an individual to pay for it. The time commitment required must be reasonable (e.g., one night a week is not reasonable). If the reasonable alternative standard is a diet plan, the plan must pay for a membership or participation fee, but does not have to pay for the cost of food. If a medical professional who is the employee or agent of the plan makes a recommendation and a participant’s personal physician states that such a recommendation is not medically appropriate, the plan must provide a reasonable alternative standard that accommodates the recommendations of the personal physician. The plan may, however, impose standard cost sharing for coverage of medical items and services under the physician’s recommendations.

“Your health plan is committed to helping you achieve your best health. Rewards for participating in a wellness program are available to all employees. If you think you might be unable to meet a standard for a reward under this wellness program, you might qualify for an opportunity to earn the same reward by different means. Contact us at [insert contact information] and we will work with you (and, if you wish, with your doctor) to find a wellness program with the same reward that is right for you in light of your health status.” n Attorneys John R. Hickman, Ashley Gillihan, Johann Lee, and Carolyn Smith provide the answers in this column. Mr. Hickman is partner in charge of the Health Benefits Practice with Alston & Bird, LLP, an Atlanta, New York, Los Angeles, Charlotte and Washington, D.C. law firm. Ashley Gillihan, Carolyn Smith and Johann Lee are members of the Health Benefits Practice. Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner’s situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation. Readers are encouraged to send questions by email to Mr. Hickman at john.hickman@alston.com. Resources 1 78 Fed. Reg. 33158 (June 3, 2013). 2 71 Fed. Reg. 75014 (December 13, 2006). 3 77 Fed. Reg. 70620 (November 26, 2012). 4 Non-grandfathered plans are required to offer certain preventive care services without cost-sharing under the ACA.

5. Notice of Other Means of Qualifying for the Reward Finally, the Final Wellness Rules require plans to disclose the availability of other means of qualifying for a reward, including the possibility of a waiver of the otherwise applicable standard, in all plan materials describing the terms of a health-contingent wellness program. This disclosure must include contact information for obtaining the alternative and a statement that recommendations of an individual’s personal physician will be accommodated. For outcomebased programs, this notice must also be included in any disclosure that an individual did not satisfy an initial standard. A mere mention that a program is available, without describing its terms, does not trigger this disclosure requirement for either activity-based or outcome-based programs. The Final Wellness Rules include the following updated sample text that plans may use to satisfy this requirement:

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November 2013

Adding Another

WEAPON to the Subrogation Arsenal by Jon Jablon, Esq. and Sean Donnelly

November 2013

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t may only be November, but Christmas has come early for self-insured health plans. A recent court decision out of Washington affirms a self-insured plan’s right to offset claims as part of its subrogation and reimbursement rights – that is, to deny future benefit payments equal to the amount of past benefit payments that have not been reimbursed. The noteworthy case, Corbett v. Providence Health Plans, clarifies the nature of an offset provision and specifies that the use of such a provision is a valid method for Plans to recover on their existing liens, even when the offset provision is not added to the Plan Document until long after the lien is established. In order for an offset provision to be effective, however, a Plan first needs to have certain essential language already contained within its Plan Document. Specifically, in order to assert a right to offset future claim payments in the amount of the Plan’s existing lien, the Plan must have established, at the time of payment of the claims for which the subrogation right is asserted, proper language entitling it to reimbursement for claims that were incurred due to the fault of a third party. Some plans lack proper reimbursement and recovery language and courts consequently hold them to have made benefit payments free and clear, meaning they are not subject to a lien. Moreover, Plans must also ensure that they have proper offset language, which is language permitting the Plan to refuse to pay a participant’s future claims in the amount for which the participant is obligated to reimburse the Plan but has failed to do so. Self-funded plans thought they got a lot with Sereboff v. Mid Atlantic Medical Services, Inc., (547 U.S. 356 (2006)) – but the windfall keeps coming. In Corbett, the United States District Court for the Western District of Washington at Tacoma held that public policy is not frustrated by a Plan’s utilization of newly-added

offset provisions to recoup funds paid by the Plan years earlier. The court’s holding explained that self-funded health plans are allowed to utilize newly-added recovery methods to exercise existing rights.

Facts of the Case In Corbett, the Plan paid medical claims in 2007 for injuries incurred by two of its participants, a husband and wife, who were hurt in a motor vehicle collision caused by a third party. At the time the claims were paid, the relevant Plan Document contained language asserting the Plan’s right to reimbursement for medical expenses that were due to the fault of a third party. In 2010, the participants reached a settlement with the responsible party. The Plan, pursuant to its right of reimbursement, demanded full reimbursement of the claims paid but the participants refused the demand. Subsequently, in 2012, one of the participants gave birth and incurred a number of medical expenses related to her maternity. Since the Plan had not yet been reimbursed for the claims it paid on behalf of the participants in 2007, the Plan declined payments equal to the amount the participants had failed to reimburse. The Plan derived its authority for this offset from a new provision contained in the 2011 version of the Plan Document. The participants appealed the Plan’s denial of the maternity expenses, arguing that the Plan’s offset provision was not applicable because it was not contained in the 2007 version of the Plan Document that was in effect at the time of the accident.

The Court’s Holding The court held that the settlement payments made to the participants by the responsible party were always subject to the right of reimbursement provision set forth in the 2007 Plan Document. In amending its Plan

Document in 2011 to include the new offset provision, the Plan merely added a new method by which it could seek reimbursement pursuant to the original right of reimbursement provision established in 2007. The court found that “[The Plan] merely amended its [Plan Document] to add a new method to collect reimbursements that it already had the right to collect. This is distinguishable from retroactively applying a new amendment to deny prior, vested benefits” (emphasis in original). The court further held that the benefit payments made to the participants “had not vested through payment because they were always subject to a right of reimbursement.” The court determined that because the Plan had secured for itself proper reimbursement rights at the time of payment, the Plan’s payment had not vested. Rather, the Plan’s benefit payments were subject to the Plan’s reimbursement rights and thus not “unalterably and irrevocably conferred.” The court concluded that if a plan is validly entitled to reimbursement for payments made, then the benefits paid by the Plan are not considered to have vested because such payments are not made free and clear, but rather are subject to an equitable lien as explained by prior Supreme Court decisions such as Sereboff. The court in Corbett determined that a Plan may use any valid means of recovering its lien, provided that the method used is a means of enforcing a previouslyestablished right of reimbursement.

Limitations of Holding The court’s holding in Corbett provides Plans with a valuable weapon in their arsenal to more effectively pursue reimbursement. Nevertheless, this weapon is not without its limitations. First, as this case was decided in the Western District of Washington at Tacoma, its holding is presently only binding within that district.

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November 2013

Second, the court’s holding only applies to Plans to which participants are currently subject; if a participant has since termed, then there is no agreement to which the participant is bound. Therefore, this case is only relevant to participants whose Plan enrollment has not termed since the date of the Plan’s unreimbursed payments.

A Valuable Tool for Plans Despite the limited binding nature of this holding, a Plan can still use this decision as support for its ability to enforce its reimbursement rights through the use of offset provisions. If participants are hesitant to reimburse their Plan using amounts recovered from third parties, the Plan can assert its right to offset future benefit payments; that can be an incentive for the participant to reimburse the Plan with settlement funds as opposed to years down the line when the settlement funds are long since spent. The knowledge that the participant’s health plan will not pay a certain specific dollar amount in the future can be a daunting prospect. A traditional view of the Plan’s activities in a case such as this is that the Plan pays claims, learns of the third party settlement, attempts to secure reimbursement, and continues to pay the participant’s claims regardless of whether or not the participant has reimbursed the Plan for previous claims. However, the Corbett decision establishes case law to the effect that even if the Plan did not contain an offset provision at the time the Plan paid claims, the addition of such a provision at any time while reimbursement is still due (that is, until the participant is no longer enrolled in the Plan) will be sufficient to allow the Plan to use the offset provision for past payments that have not been reimbursed. Although this case is only binding within the Western District of Washington at present, there is

November 2013

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significant potential for this case to gain widespread acceptance as the principles cited by the Corbett court should be strong enough to persuade courts in other districts to reach the same conclusion in similar cases. In this industry, we frequently see instances where a Plan loses substantial rights due to poorly-drafted subrogation language. We recommend discussing your plan language with your own legal, compliance, or plan-drafting department, or enlisting the services of a specialist to ensure that your plan is afforded all the rights it needs to maximize recovery, efficiency, and cost-effectiveness. n Jon Jablon, Esq. is an attorney with The Phia Group, LLC. He attended New York Law School and is admitted to practice law in New York and Massachusetts. He specializes in client disputes, subrogation, PPO contracts, and compliance issues. Sean Donnelly is a legal analyst for The Phia Group, LLC. Sean attended Boston College Law School and is taking the Massachusetts bar exam in February. He provides various services for Phia’s clients such as plan drafting, compliance, and subrogation. The Phia Group, LLC, headquartered in Braintree, Massachusetts, is an experienced provider of health care cost containment techniques offering comprehensive claims recovery, plan document and consulting services designed to control health care costs and protect plan assets. The Phia Group’s overall mission is to reduce the cost of healthcare through its recovery strategies, innovative technologies, legal expertise, and focused, flexible customer service. True to its motto “A Revolutionary Passion for Savings,” The Phia Group has become one of the most innovative and fastest growing cost-containment firms in the nation, and is a pioneer setting the highest standards in the health care marketplace.

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November 2013

Legal Challenge to ACA Contraceptive Coverage Mandate Could Portend More Complications for Self-Insurance Marketplace Editor’s Note: The following story was recently published on the Self-Insurance World Blog, where SIIA Chief Operating Officer Mike Ferguson offers original reporting and commentary on legislative/regulatory issues affecting companies involved in the selfinsurance/alternative risk transfer marketplace. The blog can be accessed on-line at http://self-insuranceworld.blogspot.com

he United States Supreme Court is now expected to consider Hobby Lobby’s legal challenge to the contraceptive coverage mandate implemented as part of the Affordable Care Act. The owners of the national retailer claim that the law’s requirement that the company’s group health plan includes coverage for contraceptive services violates their religious beliefs. This blog remains agnostic with regard to the religious liberty issues, but there are evolving self-insurance angles related to this story that deserve attention. We recently reported that federal regulators contend the final contraceptive coverage mandate rules incudes a practical accommodation for most self-insured religious organizations (non-profit entities), but it’s really just a bureaucratic illusion. The rules allow such organizations a functional exemption from the requirements by transferring all financial and administration responsibilities to

November 2013

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their third party administrator (TPA) partners. While this firewall approach may have satisfied the Administration’s political considerations, it is so far proving unworkable in the real world as multiple TPAs servicing this market segment report that they cannot perform the required responsibilities, citing specific substantive reasons. The end result is that these self-insured religious non-profit organizations may simply have to dissolve their self-insured group health plans to the extent that they wish to stick to their religious convictions. The Hobby Lobby case potentially adds a new twist specific to for-profit self-insured companies. In other words, companies that do not have a primary

religious mission but whose owners may have strong religious beliefs. There are actually about 60 similar cases pending in various federal courts and we expect that some companies are self-insured and others are not. (This blog has not independently verified the funding structure of Hobby Lobby’s group health plans, but it is likely self-insured given the company’s size.) Hobby Lobby is the highest profile case both because of its size and because its position was affirmed by the 10th Circuit Court of Appeals in June of this year. In addition to the central constitutional issue, Court may also need decide whether the ACA is in conflict with the 1993 Religious Freed Restoration Act (RFRA), which says the government “shall not substantially burden a person’s exercise of religion” unless that burden is the least restrictive means to further a compelling government interest.

A broad ruling by Court declaring the ACA contraceptive coverage mandate provisions unconstitutional outright would take this issue off the table. An equally broad ruling in the other direction would certainly not be welcome by Hobby Lobby and other similar plaintiffs, but it would at least bring some clarity to their legal obligations. The more interesting scenario is if the Court charts a middle course in its ruling and determines that the exemption arrangement designed for self-insured religious organization could satisfy the RFRA’s “least restrictive means test” and therefore opens this option up for companies like Hobby Lobby.

would not be that simple because their TPA partners will be put in the same tenuous position as the current non-profit exempt organizations have already done, which could force these companies into more expensive fullyinsured health insurance arrangements or drop coverage altogether. Yes, companies may be able to rely on legally permissible firewalls should the Court rule accordingly, but both their TPAs and sponsored self-insured group health plans may end up getting burned in the process. Perhaps this may be an unanticipated example of being careful of what you ask for…or on this case, what you pray for. n

In other words, allow these for profit companies to self-certify as exempt organizations for purpose side-stepping compliance with the contraceptive coverage mandate. But for self-insured companies it

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November 2013

SIIA PRESIDENT’S MESSAGE Les Boughner

The most significant event of the year for the self-funded marketplace

ur National Educational Conference and Expo last month in Chicago was one the highest attended in SIIA history. The energy of the attendees was infectious and the sessions well attended with outstanding presentations and questions from attendees. Clearly SIIA continues to elevate its position in the field of self insurance and continues to be its advocate and spokesperson. There is no greater need for its advocacy than now and the National Educational Conference and Expo reflects it. The quality of our Conference is a function of the support, both voluntary and financial, of our membership. I would like to take a moment to thank the companies that sponsored the conference and made it such a success. • Berkley Accident and Health, sponsor of the Conference Tote Bag • ECHO Health, Inc., sponsor of the Health Care Educational Track • Emdeon, sponsor of the Hotel Key Cards • EthiCare Advisors, Inc., sponsor of the Welcome Reception • First Health, sponsor of the Registration Counters • HCC Life Insurance Company, sponsor of the Conference Program • Healthx, Inc., sponsor of the Schedule of Events Pocket Guide • Hines & Associates, Inc., sponsor of the Refreshment Break on Tuesday afternoon

At the conference we announced that at the last Board meeting we appointed Mike Ferguson and President and Chief Executive Officer. Mike, Erika and the SIIA team do a terrific job managing the administrative functions of SIIA. We felt that as Mike has become the public persona of SIIA, this would clearly reflect that role. I would also like to thank John Jones for his tireless contributions and astute insight as a SIIA Board member and Chairman. It is an enjoyable and rewarding experience to be on SIIA’s Board but it is a time commitment, especially when travel from Montana is involved. We will miss his participation but fortunately will continue to have access to his wisdom. I look forward to seeing you all at SIIA events in 2014!

• HM Insurance Group, sponsor of the Name Badge Holders • INETICO, Inc., sponsor of the Conference Notepads & Pens • ING Employee Benefits, sponsor of the Lanyards • Midwest Employers Casualty Company, sponsor of the Evening Reception on Tuesday • MultiPlan, Inc., sponsor of the Conference Newsletter • Ocozzio for their work on the videos and conference app • Optum, sponsor of the “Encore” party at House of Blues and General Session “Defending The Self-Insurance Industry – Special Report from the Front Lines” • PartnerRe, sponsor of the Alternative Risk Transfer Education Track • PharmMD, sponsor of the Exhibit Hall Luncheon on Wednesday • Reliance Standard Life Insurance Company, sponsor of the Exhibit Hall Aisle Signs • Restat, sponsor of the Session Planning Guide • Safety National, sponsor of theWorkers’ Compensation Education Track • Stratose sponsor of the “Encore” party at House of Blues • Sun Life Financial sponsor of the Conference Communications, Keynote Session “Outsmarting Change” with Robert Stevenson and the Online Registration • WINS WoRx, sponsor of the Exhibit Hall Luncheon on Tuesday 40

November 2013

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November 2013

SIIA would like to recognize our leadership and welcome new members Full SIIA Committee listings can be found at www.siia.org

2013 Board of Directors

Committee Chairs

CHAIRMAN OF THE BOARD* John T. Jones, Partner Moulton Bellingham PC Billings, MT

CHAIRMAN, ALTERNATIVE RISK TRANSFER COMMITTEE Andrew Cavenagh President Pareto Captive Services, LLC Conshohocken, PA

PRESIDENT* Les Boughner Executive VP & Managing Director Willis North American Captive + Consulting Practice Burlington, VT VICE PRESIDENT OPERATIONS* Donald K. Drelich, Chairman & CEO D.W. Van Dyke & Co. Wilton, CT VICE PRESIDENT FINANCE/CHIEF FINANCIAL OFFICER/CORPORATE SECRETARY* Steven J. Link Executive Vice President Midwest Employers Casualty Company Chesterfield, MO

Directors Ernie A. Clevenger, President CareHere, LLC Brentwood, TN Ronald K. Dewsnup President & General Manager Allegiance Benefit Plan Management, Inc. Missoula, MT Elizabeth D. Mariner Executive Vice President Re-Solutions, LLC Wellington, FL Jay Ritchie Senior Vice President HCC Life Insurance Company Kennesaw, GA

42 November November2013 2013| The| Self-Insurer The Self-Insurer

CHAIRMAN, GOVERNMENT RELATIONS COMMITTEE Horace Garfield Vice President Transamerica Employee Benefits Louisville, KY CHAIRWOMAN, HEALTH CARE COMMITTEE Elizabeth Midtlien Senior Vice President, Sales StarLine USA, LLC Minneapolis, MN CHAIRMAN, INTERNATIONAL COMMITTEE Greg Arms New York, NY CHAIRMAN, WORKERS’ COMPENSATION COMMITTEE Duke Niedringhaus Vice President J.W. Terrill, Inc. St Louis, MO

SIIA New Members Regular Members Company Name/ Voting Representative

Thanassis Papamichos, Vice Chairman & CEO, ACCURATE Health Auditing & Consulting, Athens, Greece Grant Moore, Principal, AKT, San Diego, CA Derrick Amato, CEO, COMP, LLC, Hartford, CT Lisa Pesta, Board Chair, Credit Union Health Benefits of America, Folsom, CA Jake Reason, VP, Medicare Set Aside Services, EK Health Services, Inc., San Jose, CA Jerry Messick, Elevate Captives, Oklahoma City, OK Mary Walker, President, ELMCO, Elmira, NY John Puvogel, Manager, Project Management, HealthPlus of Michigan, Inc., Flint, MI Michael Lagalante, International Benefits Administrators, LLC., Garden City, NY Joseph Gonzalez, Secure EDI Health Group, Charlotte, NC Larry Hightower, President & CEO, VXTRA, Atlanta, GA Randy Dorshorst, Executive Vice President, WebTPA, Irving, TX Kirk Mooneyham, Managing Director, Wilmington Trust, Greenwood Village, CO

Contributing Members Dominic Hagger, Divisional Director, Oxford Insurance Brokers Ltd, London, England

Employer Members Andrea Gibbs, Admin. Consulting Services of Tennesse Inc., Cordova, TN John Hunt, Vice President, Missouri Bankers Association VEBA, Jefferson City, MO Mark Hopkins, CBP, Director, Compensation & Benefits, SWM International, Alpharetta, GA

Affiliate Members Denise Gorgoni, Client Administrator, Davis Vision, Plainview, NY

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