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September 2013

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The Importance of

DATA

ANALYTICS

for Self-Insurers

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September 2013

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The Self-Insurer

© Self-Insurers’ Publishing Corp. All rights reserved.

www.sipconline.net

SEPTEMBER 2013 | Volume 59

September 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

10 From the Bench: Two Cases, Same Party 14 ART Gallery: Obamacare Iceberg:

Editorial Staff

Worry About the Part You Don’t See

PUBLISHING DIRECTOR James A. Kinder

4

MANAGING EDITOR Erica Massey

SENIOR EDITOR Gretchen Grote

Analytics for Self-Insurers by Robin Gelburd

The Importance of Data

Benefit Mandates: The Supreme Court DOMA Decision: Impact on Health Benefit Plans

for Duel-Eligible Beneficiaries of Medicare and Medicaid by David J. Korch

CONTRIBUTING EDITOR Mike Ferguson DIRECTOR OF OPERATIONS Justin Miller

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

18 PPACA, HIPAA and Federal Health

36 Resolving Catastrophic Claims

DESIGN/GRAPHICS Indexx Printing

DIRECTOR OF ADVERTISING Shane Byars

ARTICLES

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10 Point Checklist Before You Adopt A Captive by Bruce Givner, Esq.

INDUSTRY LEADERSHIP 44 SIIA President’s Message

2013 Self-Insurers’ Publishing Corp. Officers James A. Kinder, CEO/Chairman Erica M. Massey, President Lynne Bolduc, Esq. Secretary

© Self-Insurers’ Publishing Corp. All rights reserved.

The Self-Insurer | September 2013 3

The Importance of

DATA

ANALYTICS for Self-Insurers

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The Self-Insurer

by Robin Gelburd

© Self-Insurers’ Publishing Corp. All rights reserved.

R

ising health costs in the United States have increased the financial burden of healthcare coverage for all parties – especially employers and employees. To combat this continuing trend, everyone must be more strategic about how they manage healthcare costs. Many employers see the Patient Protection and Affordable Care Act’s (ACA) exemptions for self-insurers as an opportunity to take greater control of the cost of their employee health benefits. Even while changes continue to be made to the ACA, meaning that the ultimate impact of “the decision to self-insure” remains unclear, many employers are revisiting the option to self-insure. According to research by the Employee Benefit Research Institute, one fact remains clear: selfinsurance is an increasingly popular option for employers in an era of high and escalating premiums. With this trend comes premium relief – but also increased risk for predicting and managing employee health costs. In order to fully comprehend these costs – and strategize accordingly – employers need access to regional market information on benefits utilization and health risks. This data can help self-insured organizations better understand, and mitigate, short- and long-term risk through smart plan design and clear, actionable benefits communication.

Self-insured employers have access to the claims data of their workforce, but current employee information is not the only data with which they should be concerned. Broader market information is crucial to support health plan design and offerings. Understanding how a plan population’s utilization patterns differ from that of the general population in the area can inform a host of decisions from network makeup, to investments in training and ergonomic equipment, to wellness program features and incentives. For example, analyses of the most and least common diagnoses or procedures and their associated costs in a region can provide valuable insights that help companies make educated decisions regarding their offerings. Such understanding can be an important commodity in an era when healthcare costs are continuing to rise, but employers and consumers are eager to reduce their payments while maintaining employee health and satisfaction. Below are several samples of market-level healthcare data in action: how data can provide key insights into benefit costs and utilization, network adequacy, risk management through wellness programs, the evaluation of fee schedules and claims adjudication and fraud detection.

Cost and utilization trending One smart way for employers to design cost-effective healthcare and dental plans is to analyze utilization and billing patterns in zip codes where employees currently receive care. With this analysis, employers can construct offerings, incentives, coverage levels, networks and co-pays to drive smart short- and longterm health behavior. This cost and utilization data also helps employers make smart plan and network design decisions, which keep employees healthy and productive. In dentistry, for example, the administration of topical fluoride is a procedure performed on high-risk patients to guard against tooth decay – the figure below shows the locations for selected states where the lowest to highest percentages of topical fluoride applications are reported. Analysis of plan data in comparison to data for multiple insurers within the state can help evaluate if plan members’ needs are being met. Potential actions that could result from this study might include communications to plan members about the benefits of fluoride treatments and/or educating network providers about the importance of identifying high-risk patients for whom this procedure would be appropriate.

Why Big Data and data analytics? When self-insuring for medical and/or dental care, it is critically important that employers understand the profile of their plan population. Data that provides a window into both the cost and utilization patterns of their plan population can support analysis and research that generates insights resulting in better-tailored benefit design.

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Network adequacy Claims data provide a critical tool for understanding network composition which, in turn, helps employers design plans that cover employees adequately – and cost effectively. The below example demonstrates patient utilization with respect to emergency department visits across New York during 2011.

• Alternatively, does high emergency room utilization suggest the absence of sufficient emergency rooms in the surrounding areas? • How do the business hours of primary care practices impact the utilization of emergency room visits in those high utilization areas? For self-insurers with employees receiving care in regions with high emergency department visits, it’s essential to (1) expand primary care networks (or operating hours) to enhance care management and thereby reduce emergency room utilization; (2) provide greater coverage relating to emergency department visits and (3) educate employees about their options such as access to urgent care facilities for non-emergency services.

The data raise a number of interesting questions regarding network adequacy.

Wellness and disease management programs

• Do zip codes with the highest emergency department visits suggest inadequate primary care networks?

Data can also help self-insured employers understand the needs of a patient population more fully, which helps companies design wellness and disease management programs that impact their bottom line. Chronic conditions are among the highest in cost and place employers under the highest risk when self-insured, not to mention the time lost when these employees miss work. Preventative measures may be essential to lower employer risk and increase employee health. Such programs should not have a one-size fits all approach, but should mirror the needs of the employee population being served.

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For example, an employer might choose to compare its claims data to overall regional data to determine differences that suggest the need for certain educational and/or preventive services. Thus, if a company sees a high incidence of carpal tunnel surgeries in its workplace, programmatic

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SIIA-DisplayAd-2013-v5.indd 1

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overall experience of the privately insured population provide a stronger base for decision making. Market data can be used to create usual, customary and reasonable fee schedules for outof-network reimbursement and ensure that allowed charges don’t exceed the needs of the local market. Smart use of data can empower decision makers to run their plans efficiently.

Fraud and abuse

interventions can be developed. The company might consider introducing certain work routines, rest breaks or other measures as strategies to reduce injuries caused by repetitive tasks. Further, to evaluate whether a wellness routine is having its intended benefit, employers might decide to track carpal

tunnel surgery utilization against the larger market over time.

Fee schedules and claims adjudication Data can be an important aid to managing reimbursement risk. While self-insured plans have access to their own claims data, insights into the

Another interesting use of data can be to identify charge outliers to detect possible instances of fraudulent billing practices. Billed charges for a particular procedure in a given area generally follow a bell curve, which can also be compared to the plan’s experience for the same procedure. While the curve for billed charges may vary to a higher degree for some procedures than others, as demonstrated by the figure below, outliers – charges that vary widely from the curve – may warrant further investigation.

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Using data to support more informed - and satisfied - employees

The charges on the right side of the graph clearly fall outside of the normal distribution of charges. Research into these charges may show that there were extraordinary circumstances involved with the provision of these services; however it might highlight a single practice that is consistently overbilling for the procedure. Companies can harness the power of data by comparing their plan’s experience to the overall market area to save costs and ensure the smooth operation of their benefits programs.

Data analyses provide great tools to ensure that self-insured plans meet the needs of both employers and employees. But a good plan is just the beginning. Self-insured employers need to invest in employee education to keep satisfaction high and costs low. To help employees make smart choices (and avoid surprises), employers need to provide clear plan information and decision support tools. With issues such as in-network and out-of-network fee schedules, as well as varying reimbursement rates, there is great potential for employees to incur unexpected out-of-pocket costs, which can lead to dissatisfaction, reduced productivity and compromised health outcomes. Data can help in this regard as well. Many companies are incorporating out-of-network cost estimation and transparency tools into member portals to help their employees make informed decisions when choosing providers. As more employers decide to selfinsure, they need clear, accurate data to manage risk and make smart choices. Data gives employers a window into utilization and billing patterns that can be a guide for plan and network design. Equally important, data helps employers develop smart communication and disease management programs, and ultimately achieve better, more affordable health outcomes. n Robin Gelburd is President of FAIR Health, Inc., a national independent, not-for-profit corporation whose mission is to bring transparency to healthcare costs and health insurance information through comprehensive data products, consumer resources and research tools, all powered by the nation’s largest collection of medical and dental claims data.

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Would you climb a mountain without a guide?

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www.BerkleyAH.com

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September 2013

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Bench From the

by Thomas A. Croft, Esq.

Two Cases, Same Party

H

ugh Scott, a Texas attorney involved with United Re, had a bad month. On July 13, a Kentucky Court of Appeals rejected his attempt to compel arbitration of his case with a Louisville company that alleged that he, personally, was liable for more than $900,000 in unpaid stop loss claims. On July 26, an Ohio Court of Appeals affirmed a trial court judgment for more than $200,000 for unpaid specific stop loss claims, plus $400,000 in punitive damages, against Scott, individually. The Kentucky case is instructive as to the issue of the enforceability of arbitration clauses in stop loss contracts, while the Ohio case demonstrates the consequences of a court’s conclusion that a party had a “sheer lack of credibility” and failed to

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observe corporate formalities, leading to personal liability on otherwise corporate obligations.

Kentucky Court of Appeals Decides Several Significant Arbitrability Issues in a Stop Loss Context (Scott v. Louisville Bedding Co., No. 2012-CA000252-MR, in the Kentucky Court of Appeals, July 12, 2013) A Kentucky Court of Appeals was faced with a host of complex issues arising out of an arbitration clause in a “Trust Agreement” it held was stop loss insurance, ultimately concluding that the clause was unenforceable. The self-insured group, Louisville Bedding, entered into a “Trust Agreement” with United Re Trust and

United Re AG (“United”) whereby (according to the Court) Louisville Bedding would be indemnified by United for claims in excess of $200,000 per person per year, or $1,878,341 in the aggregate. The precise mechanism by which such indemnity would be provided was unimportant to the Court, which held that “It is the obligation to indemnify another for risk that is the hallmark of insurance, and that obligation was the Trust’s. Therefore… the Agreement is an insurance contract.” The case is thus properly analyzed as one involving medical stop loss insurance, and is significant for its explication of the law relating to the enforceability of arbitration clauses in stop loss contracts. The case arose when the group filed an aggregate claim with United

© Self-Insurers’ Publishing Corp. All rights reserved.

which exceeded the aggregate attachment point by $925,847 that was not paid. The group brought suit against both United entities, Scott (the sole officer and employee of both, which he ran from his law office in Texas), the group’s TPA, and other individuals. The group alleged that the United entities were simply Scott’s alter egos, and that they were part of a scheme to avoid insurance regulations. The United entities failed to file an Answer to the group’s Complaint, and a default judgment was entered against them in the trial court. Scott did file an Answer, denying the material allegations of the suit, and later moved the trial court to enforce an arbitration clause in the Trust Agreement requiring arbitration of any disputes before the American Arbitration Association. After several orders addressing the question of whether Scott could compel arbitration, the trial court ultimately ruled that he could not, because the arbitration clause was unenforceable under Kentucky law. Scott appealed. The first issue addressed by the appellate court was whether Scott, individually, could compel arbitration, as the arbitration clause was contained in the Trust Agreement between United and Louisville Bedding, and Scott, individually, was not a party to it, though he had signed it in his capacity as “President of United Re AG.” The Court of Appeals relied on two bases for its conclusion that Scott was entitled to the benefit of the arbitration clause in the Trust Agreement: first, that Scott was alleged by the group to be the alter ego of United; and second, that the law generally allows employees sued for acts committed while acting on behalf of their employers to invoke arbitration clauses in agreements between their employers and thirdparties. Specifically, the Court held: “In short, Bedding treats Scott and the United Re Entities as if they are one and the same. Bedding cannot, on the

one hand seek the benefit of the Agreement and, on the other hand, disavow the arbitration provisions that are part of the Agreement.” Further, “because the intent of the arbitration provisions is clear, and the alleged wrongful activity by Scott took place during and in the course of his employment, Scott is entitled to enforce the arbitration provisions in the Agreement.” Once having determined that Scott was entitled to claim the benefit of the arbitration provisions, the Court next needed to decide whether those provisions were enforceable or not under Kentucky law. The Kentucky Uniform Arbitration Act (“KUAA”) would normally provide the basis for compelling arbitration pursuant to an arbitration clause, but that statute states that it does not apply to insurance contracts, unless such contracts are “between two (2) or more insurers.” In other words, under Kentucky law, arbitration clauses in insurance contracts are apparently unenforceable, unless the quoted exception applies. Since the Court had determined that the Trust Agreement was, in fact, an insurance contract, it was necessary to decide if the statutory exception applied in this instance. If it did, then the arbitration provision was enforceable under Kentucky law; if it didn’t, then it wasn’t. The Court of Appeals resolved this issue by concluding that self-insured employers are not “insurers,” so that the arbitration agreement between Louisville Bedding and United was not a contract between two insurers. The Court’s basis for and analysis of this particular issue is subject to question in my view, but, for present purposes, it is enough to understand that, since the statutory exception did not apply, Kentucky law as construed by the Court made the arbitration provision unenforceable, and thus, without more, Scott could not rely on it to compel arbitration of the group’s claims against him. Scott’s cause was not yet lost, however, as he argued that the Federal Arbitration Act (“FAA”) – which has no exception for insurance contracts – pre-empted the KUAA, and required arbitration of the instant dispute. The Court accepted the proposition that, in the absence of any other federal law to the contrary, the FAA would indeed pre-empt the KUAA and require arbitration here. However, the Court then embarked on a lengthy analysis of another federal statute – the McCarran-Ferguson Act – and concluded that it “reverse pre-empted” the FAA, because the KUAA exception for insurance contracts was “a law enacted for the purpose of regulating the business of insurance” in the Court’s view. Under McCarran-Ferguson, there is no pre-emption of state law “regulating the business of insurance” by federal law, unless said federal law (here, the FAA) “specifically relates to the business of insurance,” which the FAA does not. The reader is referred to the Court of Appeals’ opinion for a detailed discussion of the many authorities on this particular issue. The bottom line: the Court held that the FAA did not aid Scott in this instance, and provided no basis for him to compel arbitration. Scott’s last argument seems a “Hail Mary.” He invoked another federal statute, 9 U.S.C. § 202, which provides for enforcement of arbitration agreements under certain circumstances pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“the Convention”). The Court agreed that the United entities were incorporated in Switzerland, such that the arbitration clause in the Trust Agreement might be subject to the Convention. However, the Court noted that the statute cited above carved out agreements that were between “citizens of the United States,” which the statute defined as corporations having their principal place of business in the United States. The Court pointed to testimony from Scott in related litigation involving the United entities that all the operations of those entities were conducted from his law office in Texas, thus

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making the Convention inapplicable. Likewise, the Court observed that 9 U.S.C. § 202 did not pre-empt the KUAA for the same reason the FAA did not: it is not a law specifically relating to the business of insurance.

Ohio Court of Appeals Affirms Personal Judgment against Hugh Scott (Washington County Board of Developmental Disabilities v. United Re AG, et al., No. 12CA47, in the Court of Appeals of Ohio, 4th Appellate District, July 26, 2013) An Ohio Court of Appeals affirmed a judgment of an Ohio trial court holding Hugh Scott personally liable for more than $200,000 in actual damages and $400,000 in punitive damages arising out of stop loss claims made by a self-insured group. Scott testified that he did not own any shares in the various United-related entities at the relevant time, having assigned them to another individual prior to the transaction in question, and reacquiring those shares after the fact only so that he could obtain certain documents from the Swiss corporation and “become knowledgeable” in order to defend himself. The Court of Appeals noted the general rule that “corporations are legal entities distinct from natural persons who comprise them,” and that officers, directors and shareholders are therefore not normally personally liable for the debts of their corporations. However, the Court noted that, under Ohio law, the “corporate veil” can be pierced and personal liability imposed, where: “(1) those to be held liable hold such complete control over the corporation that the corporation has no separate mind, will, or existence of its own; (2) those to be held liable exercise control over the corporation in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity; and 3) injury or unjust loss resulted to the plaintiff from such control and wrong.” The case was tried to the court, without a jury. After hearing the evidence, the trial court concluded, among other things, that: “The evidence…clearly shows that United Re purported to be a financiallysolvent stop-loss carrier promising to procure actual insurance to cover the risks of its clients. This was a complete fraud. There never was insurance… Money was deposited in, and then taken out of, the same bank account with no regard for whether the participating employer’s risks were covered….This Ponzi scheme, as with all Ponzi schemes, collapsed from its own fraudulent weight. In view of all this, this Court concludes a fraud has been perpetrated on [the plaintiff].”

The Court of Appeals agreed, and disregarded various aspects of Mr. Scott’s testimony at trial, finding a “sheer lack of credibility” on his part. Thus, the Court of Appeals upheld the judgment of the trial court piercing the corporate veil, and finding Mr. Scott personally liable for the group’s loss, and it likewise affirmed the award of punitive damages. n Known for his extensive writing on medical stop loss insurance issues, both in The Self-Insurer and on his comprehensive website, www.stoplosslaw.com, Tom has been practicing law for 34 years. Currently he practices through his own firm, CROFT LAW LLC, in Atlanta, GA. He regularly advises and represents stop loss carriers, MGUs, and occasionally TPAs, brokers, and self-insured groups, in connection with matters relating to stop loss insurance and the disputes that may arise among these entities regarding it. He currently serves on SIIA’s Healthcare Committee. He has been honored as a Georgia “Super-Lawyer” for the past six years running, and is listed as “Tier 1” in insurance by Best Lawyers. He is an honors graduate of Duke University and Duke University School of Law, where he formerly served as Senior Lecturer and Associate Dean.

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Health Insurance Consultants 12

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ACCREDITED INDEPENDENT REVIEW ORGANIZATION

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ART GALLERY by Dick Goff

Obamacare Iceberg: Worry About the Part You Don’t See

W

atch for the next big wave of Obamacare news coverage this month when the government cranks up its PR effort to sell the idea to a largely skeptical public, and next month when people can sign up for the new health care insurance exchanges – except in those states where they can’t.

safety concerns while ensuring that the health coverage market remains competitive and gives small employers the maximum options. Limiting options does not help anyone.”

But nowhere in the news coverage will you learn that the government is working hard behind the scenes to drag people out of a defined group of employer-sponsored plans into the exchanges. This is because the government thinks employed people are the healthiest and will strengthen the financial viability of the exchanges. That’s the hidden larger part of the Obamacare iceberg that can sink our ship.

A report by Georgetown University’s Health Policy Institute made it clear that states are attacking self-insurance through the stop-loss insurance plans that make self-funding viable: “(Under ERISA) A state may not prohibit an employer from self-funding or set rules for the coverage provided by a self-funded plan, but it is generally understood that a state may regulate a stop-loss policy as insurance.

For example, the Department of Health and Human Services remains capable of implementing new federal regulations on self-funded health insurance. The New York Times reported, “The Obama administration is investigating the use of stop-loss insurance by employers with healthier employees, and officials said they were considering regulations to discourage small and midsize employers from using such arrangements to circumvent the new health care law.” It’s an upside-down Alice-in-Wonderland moment: we think the government is using Obamacare to circumvent self-insurance, and the government thinks the opposite. And we’ll get the Mad Hatter to arbitrate. Phyllis Borzi, architect of Obamacare implementation as Assistant Secretary for Employee Benefits of the Department of Labor, provided a truly Shakespearean moment when, speaking to the Employee Benefits Research Institute, she protested too much: “We are not secretly writing a stop-loss regulation that we’re going to put in some underground pipeline and spring on the community.” Well, that clears that up, right? We sought clarification, as usual, from attorney Tess Ferrera, partner and head of the ERISA litigation practice group in the Washington DC office of Schiff Hardin LLP. Tess knows these issues from both sides of the looking glass as former ERISA trial attorney for the DOL. She sees the combined power of the federal Affordable Care Act (ACA) and like-minded states to be a powerful force against self-insurance. “To succeed, the small business health option (“SHOP”) exchange must attract the maximum possible number of small employer groups,” she said. “ACA regulations have demonstrated a fair amount of hostility toward groups that aggregate small employers, such as multiple employer welfare arrangements (MEWA). There is no question a goal of the regulations is to make it as difficult as possible for MEWAs to exist.” “Small employers are also exploring self-funding arrangements as many are concerned that the ACA will increase the cost of insurance,” she continued. “A balanced approach by government could serve health and

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“Among states that have taken regulatory action, approaches vary – such as setting minimum attachment points; banning the sale of stop-loss coverage to small employers; or regulating stop-loss coverage sold to small employers under the same rules that apply to fully insured plans sold in the small group market, such as underwriting and rating rules.” SIIA has long fought for the principle that stop-loss insurance is not health insurance, and is supported in that position by a dozen federal court rulings. But the states don’t care about federal precedent and apparently no entity on our side of the fence is strong enough to knock them back on their heels. Attorney Ferrera sees another player at work: “The National Association of Insurance Commissioners (NAIC) wants to push as many small groups as possible into the state exchanges as an expansion of states’ power from

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near zero among ERISA plans to one hundred percent among the health care insurance exchanges. State laws raising attachment points are not new – the NAIC has a model rule that sets minimum attachment points for small groups.” I believe the 900-pound gorilla in the room is the newly established Federal Insurance Office located in the Department of the Treasury, from which we are beginning to hear rumblings of activity. It will be a major problem for the industry if the office turns out to be another activist agency following the party line. That’s the wild card in this game. As the vaudeville pitchmen used to say, “Folks, you ain’t seen nothin’ yet.” As always, I welcome all feedback and opinions. Please feel free to comment to me personally via e-mail or send it in article form to our editor at ggrote@sipconline.net. n Dick Goff is managing member of The Taft Companies LLC, a captive insurance management firm and Bermuda broker at dick@taftcos.com.

For more than 25 years First Health has worked extensively with employers, insurance carriers, TPAs and health plans to develop and deliver products that consistently provide optimal cost and care outcomes for employers and their members. First Health’s national PPO networks offer: • Access to more than 5,000 hospitals, over 90,000 ancillary facilities, and over 1 million healh care professional service locations nationwide • Network solutions with providers directly contracted in all 50 states, DC and Puerto Rico • Superior PPO network savings • Outstanding customer service • Multiple repricing options, including EDI First Health also offers complementary networks, secondary network partnerships, non-network fee negotiations, a transplant Centers of Excellence network and clinical management programs.

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Mind over risk. Staying confident in a world where change is constant.

HCC Life has stood on a strong foundation of solid business practices and a firm commitment to our medical stop loss clients for 35 years. We’ve used that groundwork to drive us as a leader in the industry to understand trends that shape the market and properly assess risk to intelligently manage data. This gives our

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msl2188 - 06/13

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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.

Q&A

The Supreme Court DOMA Decision: Impact on Health Benefit Plans

O

n June 26, 2013, the Supreme Court issued the long-awaited ruling in United States v. Windsor, which dealt with the constitutionality of Section 3 of the Defense of Marriage Act (“DOMA”). Section 3 of DOMA limited the terms “marriage” and “spouse” for federal law purposes to opposite-sex couples, thus requiring different treatment of legally married same-sex couples compared to legally married opposite-sex couples for some purposes relating to employee benefit plans under federal law. In Windsor, the Supreme Court held that Section 3 of DOMA is unconstitutional – requiring equal treatment for same and opposite-sex spouses under federal law. Windsor did not address section 2 of DOMA, which provides that states are not required to recognize same-sex marriages legally entered into in other states. This could potentially impact the manner in which spouses are treated under federal law, such as if a same-sex couple legally married in one state moves to another state that does not recognize same-sex marriage. See below for more discussion regarding the definition of “spouse” under federal law after Windsor. Windsor leaves many questions unanswered as to how the decision is to be implemented with respect to employee benefit plans. Key questions that, at this point, are not clearly resolved include when a plan is required to recognize a same-

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sex marriage and when a plan may (but is not required to) recognize a samesex marriage. Further, the extent to which the decision will have retroactive effect is uncertain. Guidance on these issues from the Departments of Labor and Treasury is expected soon; in the meantime, however, employers may need to make decisions in particular cases as to how to treat same-sex married couples as well as take steps toward longer-term implementation efforts. Some flexibility may be needed until specific guidance relating to employee benefit plans is issued. Ultimately, some issues may be resolved in future litigation.

Definition of “Spouse” for Purposes of Federal Law Following Windsor With the DOMA definition of “marriage” struck down, for federal law purposes whether a couple is married will be determined by applicable state law. At this point, which state’s law applies is not clear. There is very little relevant authority, and none directly on point, in part because (other than Section 2 of DOMA) states are generally required to give full faith and credit to the laws of another state. For example, individual state laws vary as to the age at which persons can legally marry. However, a couple that is married in a state with a low age threshold is still considered married if they move to a state with a higher age threshold. In the absence of guidance, the applicable state law for purposes of federal employee benefit requirements relating to spouses could include the following: State of domicile: If a same-sex married couple resides in a state in which the marriage is recognized, i.e., a state in which same-sex marriages can be performed or a state that recognizes such marriages performed in another

state, then these spouses should be treated as married for purposes of federal law.1 The federal rule may ultimately be broader, however, than looking just to state of domicile. Any state law: Because Windsor did not address Section 2 of DOMA, some states may choose, in reliance on that Section, not to recognize samesex marriages performed in other states. Thus, for example, if a same-sex married couple moves to a state that does not recognize such marriages, the question arises as to whether that couple is still considered married for federal law purposes post-Windsor. While there is no direct precedent on this point, there is existing guidance that would support an interpretation that a same-sex marriage is considered valid if it is valid in either the state of domicile or where the marriage was performed.2 Also, while not legally binding, President Obama has publicly stated that his personal view is that a marriage recognized in any state should be considered as legal for federal law purposes.3 Guidance on this issue is expected to be issued soon. State law as provided in the plan: In the absence of guidance at the federal level, some plan sponsors may consider defining “spouse” in the plan or by reference to a particular state law specified in the plan. It is common today for plans to include a choice of law provision, and such provisions are generally recognized to the extent that the state law is not preempted by ERISA. While there are arguments that would support such an approach, there are also obstacles. For example, such an approach may not be possible when guidance is issued. This is most likely to be the case where there is a benefit conferred upon spouses under federal law, such as COBRA rights to covered spouses or in the case of the qualified joint and survivor annuity requirements

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applicable to qualified plans. Note, that, where federal law does not require that plans provide benefits to spouses and such rights are based on plan provisions alone, there may be more leeway with respect to the definition of spouse under plan terms. This issue is discussed further below. Practice Pointer: Windsor did not address domestic partnerships or civil unions. Thus, the pre-Windsor law continues to apply to such situations.

Issues for Health Plans The following table highlights provisions applicable to health plans and the treatment of same-sex spouses under DOMA and post-Windsor. Practice Pointer: While in most cases the post-Windsor tax treatment of health and welfare benefits will be more favorable to the same-sex spouse than previously, this will not always be the case. For example, under DOMA each same-sex spouse could have their own HSA. Post-Windsor, the rules that apportion the maximum contribution between spouses will also apply to same sex spouses. In looking at the table on the next page please refer to the discussion above with respect to the federal definition of spouse and marriage under Windsor.

Can a Plan Offer Equivalent Benefits to Same-Sex Spouses Even if the Marriage is Not Recognized for Federal Law Purposes? Generally yes, but the tax result may be different. Pre-Windsor, DOMA generally did not prohibit the offering of health and welfare benefits to same-sex spouses and some

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Provision

Prior Treatment of Same-Sex Spouses Under DOMA

Effect of Windsor

Tax Treatment of Health Benefits

The federal tax treatment for employer-provided health benefits did not apply to same-sex spouses, unless the spouse qualified as a dependent for federal tax purposes. Thus, for example, group health plans covering same-sex spouses were required to impute income to the employee based upon the value of employerprovided coverage.

A same-sex spouse receives the same federal tax treatment as an opposite-sex spouse, including: • Employer provided health coverage for a spouse is excludable from gross income and wages for payroll tax purposes; • Employees may pay their share of the cost of coverage (e.g. medical, dental, vision) for the spouse with pretax salary reductions through a Code Section 125 cafeteria plan; • Change in status events affecting a spouse will permit an employee to make corresponding mid-year election changes under the cafeteria plan in accordance with Code Section 125; • Health care benefits provided to a same-sex spouse through a VEBA will no longer be considered “disqualified benefits” subject to the de minimis rule; • Medical care expenses incurred by a spouse are reimbursable on a tax free basis through a Health FSA, HSA or HRA; • Earned income of the spouse is taken into consideration when determining the maximum tax free benefits available under a dependent care assistance plan Moreover, the employment status of a spouse will impact the eligibility of child care expenses under a dependent care assistance plan.

HIPAA Special Enrollments

HIPAA special enrollment rights did not apply with respect to a same-sex spouse covered by the plan.

Employees who marry a same-sex spouse during the year will now have a special enrollment right to enroll the employee and the spouse under the employee’s group health plan, to the extent the spouse is otherwise eligible for coverage under the plan. Likewise, an employee whose same-sex spouse loses eligibility for other group health coverage will have a special enrollment right under HIPAA to the extent otherwise eligible under the plan. Windsor does not require coverage of a same-sex spouse and to the extent same-sex spouses are not eligible under the plan, then there is no HIPAA special enrollment right. Nevertheless, employers who do not currently offer same-sex spousal coverage will need to carefully consider whether to offer such coverage. See “Do employers have to offer coverage to same-sex spouses” below for a more detailed discussion.

COBRA Continuation Coverage

A same-sex spouse was not entitled to COBRA rights as a “spouse”

Same-sex spouses will now qualify as “qualified beneficiaries” under COBRA who are independently entitled to COBRA if coverage is lost due to a qualifying event.

FMlA

The FMLA allows eligible employees to take leave to care for a spouse with a serious health condition (as defined by the FMLA). Under DOMA, “spouse” was limited to oppositesex spouses, so employees were not entitled to FMLA leave to care for a same-sex spouse with a serious health condition.

Employees may now be entitled to FMLA leave to care for a same-sex spouse who has a serious health condition as defined by FMLA.

Same-sex spouses were not treated as a spouse.

Same-sex spouses will now be treated as a spouse for purposes of Medicare’s secondary payor rules. This means that plans that cover a same-sex spouse of an active employee will now be primary to Medicare for as long as that employee is in “current employment status”.

Medicare Secondary Payor Rules

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employers extended benefits, such as health coverage, to same-sex spouses and others, such as domestic partners. Federal law did, however, govern certain aspects of the benefits offered, such as the federal tax treatment. If federal guidance, when issued, does not recognize some same-sex marriages (e.g., by looking to state of domicile), then the pre-Windsor law and practice on this issue should still apply. Pre-Windsor law with respect to other coverage of other persons who are not spouses, such as domestic partners, was not affected by the Supreme Court decision and should also continue to apply.

Do Plans Have to Offer Coverage to Same-Sex Spouses? Generally no, but be careful on this point. Eligibility for health plan benefits is generally determined by the plan sponsor and the terms of the plan. There is no federal rule that requires employers to provide health benefits to spouses in general and Windsor does not specifically require employers to offer benefits to same-sex spouses. As discussed, above, however, if benefits are offered to same-sex spouses, then federal law will extend certain provisions to such spouses, such as COBRA rights. In addition, in the case of fully-insured health coverage, state law provisions may apply to the health insurance coverage that is offered under the plan. Even though Windsor does not mandate coverage for a same-sex spouse, the decision may prompt claims for discrimination under state and local laws against employers who treat same-sex spouses differently from opposite-sex spouses. The extent to which the typical defenses to such claims (e.g. preemption of state law by ERISA) will be weakened by Windsor is unclear at this point.

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Employers should review current plan documents to determine how spouse is defined under the plan, the implications of the definition with respect to same-sex spouses, and whether a plan amendment is necessary to effectuate the employer’s intent with respect to coverage of such spouses.

Effective Date Issues for Health Plans There is no specific effective date for the decision, and full implementation on a prospective basis is dependent on guidance that has yet to be issued. At a minimum, plan sponsors should be prepared to begin implementing the tax implications of the Windsor decision as soon as administratively feasible, with respect to same-sex spouses that are currently covered under the plan, including the following: • Employers who currently offer coverage to same-sex spouses

should stop imputing income on the value of health coverage provided to same-sex spouses as soon as is administratively feasible • Health FSAs and HRAs should begin to reimburse the medical care expenses of a same-sex spouse of a participant unless the plan has specifically excluded same-sex spouses (see above for a discussion on whether plans must extend coverage to samesex spouses); • Employers should begin to allow election changes as a result change in status events that impact a same-sex spouse to the extent the election changes are otherwise permitted by Code Section 125;

Retroactivity Although we do not yet know how the IRS will proceed, the IRS could give the Court’s decision retroactive effect and require employers who

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imputed the value of same-sex spousal coverage in the employee’s income to seek FICA refunds and issue amended W-2s in accordance with IRS rules – potentially for all open years (e.g., 3 years). Such action by the IRS is not without precedent. Indeed, Windsor involved retroactive application of a tax law to the plaintiff in the case. However, until such time as the IRS issues guidance, we believe it is reasonable not to attempt to apply the new rule retroactively, as doing so could create numerous administrative difficulties if the IRS does not apply it retroactively. An employer could also face claims from participants whose prior requests for enrollment of (or reimbursement for) a same-sex spouse were initially denied based on the then applicable federal law. At this point it is unclear how such claims would be treated by the courts, but given that DOMA was in effect since the Clinton administration, we believe that reasonable reliance on DOMA should be considered a strong defense.

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That still leaves unanswered the question – could an employer voluntarily apply the ruling retroactively? An employer could presumably apply the decision retroactively on a voluntary basis to certain benefits. Thus, the employer may be able to request FICA/FUTA refunds in accordance with IRS rules (and so could employees who had imputed income for same-sex spousal coverage). To the extent otherwise permitted by the plan, an employer may be able to retroactively enroll same-sex spouses and/or reimburse previously denied expenses.

Action Items for Health Plan Administration In light of the above, we suggest that employers consider the following: • As a threshold matter, employers who sponsor health plans that offer samesex or domestic partner coverage should begin the process to identifying all same-sex spouses covered under the plan as a “spouse”– as opposed to a domestic partner. This will enable the employer to begin applying the proper tax treatment under federal law once it is determined how the IRS will ultimately define a spouse (i.e. legally married in any state or only in the state in which they currently reside). The changes that will be needed to enrollment systems and auditing process for should be considered. • If same-sex spouse coverage is currently offered, the employer should consider whether to apply the rule retroactively or prospectively – assuming retroactive treatment is not required. • Review the definition of “spouse” under the plan to determine implications of the current decision and whether a plan amendment is desired.

• If same-sex spousal coverage is not offered, consider the potential legal implications of not offering coverage to same-sex spouses. 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 E-MAIL to Mr. Hickman at john. hickman@alston.com.

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WE CAN HELP YOU LOWER YOUR COSTS, EVEN FOR YOUR MOST COMPLEX CLAIMS.

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10 Point

CHECKLIST Before You Adopt A Captive

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by Bruce Givner, Esq.

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Y

ou have read articles about the benefits of captive insurance companies. One of your friends has spoken favorably to you about the captive to which your friend’s operating business pays premiums. One of your advisors – accountant, lawyer, insurance agent – has urged you to check out the advantages of establishing a captive insurance company for your operating business. Great. All the praise is potentially well deserved. However, negative outcomes are also possible. The purpose of this article is to provide a list of items for you to check off on your way down the decision-making path. Of course this discussion is not an exhaustive treatment of captives or of the items on the checklist. However, this will alert you to important topics.

Origin Of “Captive” In 1955, Frederic Mylett Reiss, a Youngtown, Ohio, insurance broker, created the first insurance company (in Bermuda) designed to help one specific company, his companies, and now closely held companies. In the world of closely held companies, client Youngstown Sheet & Tube Company. When a steel mill like Youngstown Sheet the “captive” is typically by (i) a trust benefitbecause of the children of thecoke owner of & Tube owned a mine,owned the mine was calledfora the “captive” it produced and iron ore only for the owner. So it was the steel industry that gave the term the operating business; (ii) a dynasty trust for the benefit of the heirs of the owner of the “captive” to the insurance industry.

is typically owned by (i) a trust for the benefit of the children of the owner of the operating business; (ii) a dynasty trust for the benefit of the heirs of the owner of the operating business; or (iii) a domestic asset protection trust for the benefit of the owner of the operating business. (All three formats are illustrated below.) These “wealth” captives are “captive” in the same sense as the original one established by Mr. Reiss insofar as they only intend to insure risks of one operating business. However, they are not “captive” in the same sense as in the public company world, where the public company parent owns the captive insurance subsidiary.

operating business; or (iii) a domestic asset protection trust for the benefit of the owner

Captives ofWealth the operating business. (All three formats are illustrated below.) companies, and now closely held companies. In the world of closely held companies,

1. Are you a reasonable candidate?

the “captive” owned a trust forcompany. the benefit of public the children of thedozens owner of would formisa typically subsidiary to bebyan(i)insurance The company’s Children’s of other subsidiaries would pay premiums to that “captive” of the public company the operating business; (ii) a dynasty trust for the benefit of the heirs of the owner of the Trust Mom and Dad

The single most important point on your checklist is to be certain that you are a reasonable candidate to have a captive insurance company. Is your operating business significant enough to warrant embarking down this path? As a rule of thumb, it is nice to have a business with gross sales of $20,000,000 and a $5,000,000 profit. However, we have had lawyer and physician clients with smaller figures adopt captives (and survive IRS audits). So it is, indeed, entirely fact-specific. Note that the amount of your current property and casualty premiums is not really important.

In the early years, public companies like Humana, the hospital holding company,

parent. However, as the decades passed the attractiveness of captives have caused

operating business; or (iii) atodomestic assetthen protection trust for the benefit of and the owner smaller public companies adopt them, large non-public companies,

closely companies. theformats world ofareclosely held below.) companies, the “captive” Own held 100% Own 100% ofnow the operating business. (All In three illustrated $300,000 to $1.2 per year deductible premium Captive Insurance Company Operating Business Children’s (LLC taxed as “C”) Trust Montana Mom and Dad Own 100%

Operating Business

$300,000 to $1.2 per year deductible premium

Operating Business

$300,000 to $1.2 per year deductible premium

Joe Own 100%

Captive Insurance Company (LLC taxed as “C”) Montana

Nevada Asset Protection Trust $100,000

Joe Own 100%

Own 100%

$300,000 to $1.2 per year deductible premium © Self-Insurers’ Publishing Corp. All rights reserved. Operating Business

Own 100%

CaptiveNevada Insurance Company Asset (LLC taxed Trust as “C”) Protection Delaware $100,000 $250,000 Own 100%

Captive Insurance Company

Do you understand that a captive is, first and foremost, a property and casualty risk management device? It can be a vehicle to achieve premium stability, increased claims control, coverage for risks for which commercial coverage may be unavailable, and reduced administration costs. It can allow the operating business to recapture underwriting profits and increase its deductibles. The listing of these business points is to help

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Joe

Sam

Own 50% each

Operating Business

Sam’s Delaware Dynasty Trust

Joe’s Nevada Asset Protection Trust

$300,000 to $1.2 per year deductible premium

Own 50% each Captive Insurance Company (LLC taxed as “C”) Delaware

These “wealth” captives areIn“captive” in can the economically same sensejustify as the original one established theory you professionals to do most of the work. emphasize that, although there are a captive withtoonly one year’s youbusiness. still must spend time tax benefits attendant to a captive by Mr. Reiss insofar as they only even intend insure risks of one However, operating premium payment. However, it seems monitoring and understanding (i) the insurance structure, taxes cannot be However, theyt ofare in the to same sense as in the public company world, each year and inappropriate embark on this services being provided more than a collateral benefi thisnot “captive” enterprise unless it has a multi-year (ii) the results of operation. economic engine. where the public company parent owns the captive insurance subsidiary. future and the longer the better. Have you surrounded yourself Do you foresee that the operating

with good quality professionals before business will have the need – and the Do you have the time and the you undertake this enterprise? You ability – to pay significant premiums to ability to pay attention to this insurance 1. Are you a reasonable candidate? The single most important point on will want your existing professionals the captive for at least 3 to 5 years? operation? Yes, you will be hiring your checklist is to be certain that you are a reasonable candidate to have a captive insurance company.

Is your operating business significant enough to warrant

embarking down this path? As a rule of thumb, it is nice to have a business with gross sales of $20,000,000 and a $5,000,000 profit.

However, we have had lawyer and

physician clients with smaller figures adopt captives (and survive IRS audits). So it is,

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help you monitor the captive as the years transpire. Finally, recognize that the captive is largely going to be supplying supplemental insurance coverage, so you should not cancel your existing coverage.

2. Will your captive be in a pool? The Internal Revenue Code does not define “insurance.” Over the years we have come to understand that insurance has at least these two characteristics: (i) risk shifting (from the insured to the insurer); and (ii) risk distribution (which relates to “the law of large numbers”). The former is relatively easy to accomplish; captives have two routes to success as to the latter. One route to success with risk distribution for a captive is if you have twelve or more operating entities all of which can be paying no less than 5% and no more than 15% of the total premiums to your captive. If you cannot meet that mark, then your captive will have to join a “pool.” A pool is a grouping of the captive manager’s clients that enables each of them to meet the alternative risk distribution route to success: having 51% of the premiums insuring the risks of unrelated entities. If your captive must join a pool, a number of issues arise. For example, there is a separate fee charged to participate in the pool, which might be as little as 1% of the premiums. There is also concern as to liability: what is the extent to which your captive’s premiums contributed to the pool can be lost if other participants have large insured losses? To what extent will there be investment losses for your captive’s funds while they are in the pool?

that loss is covered by that participant’s own funds, and the other 51% is allocated pro rata among all of the pool participants. So if the pool has 100 members, your captive’s share will only be 1/99 X 51%. If the pool has a smaller number of members, the pool manager will typically reinsure a large percentage of the pool’s risk. Also, you should check the pool’s loss history. Most pools will tell you that their loss percentage runs no more than 3 – 5%. As to the investment concern, although your captive’s funds are “in” the pool, some captive managers will allow your captive’s share of the pool to be invested with your own money manager as long as the account is in the name of the pool and requires both your signature and the captive manager’s signature to make withdrawals.

3. Captive Manager. You should interview at least two, and preferably three captive managers. There are at least thirty captive managers licensed among the various states (30 states have favorable captive insurance company legislation). Plan to devote at least two hours to each interview (more time is preferable). The first hour should be spent reviewing the captive manager’s web site and materials you receive in advance of the interview. The second hour should be the interview itself, which is usually done over the phone. Once you have talked to two or three captive managers you will have a feel for the lingo, the procedure, the costs, the risks and other aspects of captive insurance companies that you would not have had you only read materials on your own. Captive managers run a gamut from high end, high service, high gloss operations that will charge $80,000 per year, down to the least expensive in the $30,000 range, with most in between those two extremes. On the high end you have

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Happily, these issues are usually addressed in a satisfactory fashion. For example, if one of the other pool participants has a 100% loss, 49% of

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HEALTHCARE SOLUTIONS T H E S Y M E T R A W A Y:

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firms that are run by lawyers, as a result of which our lawyer clients feel comfortable with them. Also on the high end you have firms that are run by accountants, as a result of which our clients who are most comfortable with accountants tend to choose them. One advantage of these high end firms is redundancy; if the person to whom you were speaking yesterday is not in when you call, there are two people who can continue the conversation without a loss of time or substance. In between the two extremes are several “aggregators”. These are firms that indicate that they will help you with a captive, but actually do little or none of the work in-house. They subcontract out all of the actual work, e.g., actuarial, accounting, management. At the lowest end of the cost scale are firms that we would liken to “sole practitioner” lawyers or accountants. They may well have nice operations, but there are few frills and no redundancy.

about their other insurance policies. The actuarial firms then engage independent underwriters (there are far too few of them) and brokers to help ensure that the premiums scheduled for specific risks make sense in the marketplace. After all, the data derived from carriers and customers cannot, by definition, cover all of the risks that are being provided by captives. By their very nature many of the risks provided by captives are not being routinely sold by commercial carriers. Even though the premiums make sense in the marketplace, that does not mean it is reasonable and necessary for that particular operating business to insure all of those risks (and pay all of those premiums). (This relates to Internal Revenue Code Section 162.) Almost invariably each candidate for a captive will be told that there is $1,200,000 of premium that is available, divided among a number of risks. (See the examples below for (i) a writer/producer and (ii) a physician.)

PHYSICIAN $275,000

Loss of business revenue due to excess malpractice covering liability not covered by the named insured’s primary coverage

$200,000

Loss of revenue due to loss of license to practice medicine

$100,000

Loss of business revenue due to loss of hospital privileges

4. Are the premiums (i) appropriate in the market and (ii) reasonable and necessary?

$ 70,000

Loss of business income resulting from loss of relationship with a significant referral resource

$ 60,000

Reimbursement for costs and expenses incurred in connection with tax audit defense or tax controversy

The IRS is concerned, of course, with the operating business’ deduction of the premiums. The first concern is whether the premiums are based on the market place. (This relates to Internal Revenue Code Section 482.) It is not enough to be told that the premiums were determined by actuaries: actuaries are not underwriters, and underwriters are the ones who price policies. Captive managers typically hire actuarial firms to help them price the policies. The good actuarial firms input data from the market place, e.g., the rate sheets that carriers supply to each state’s department of insurance and the information that each captive manager gets from its own clients each year

$ 50,000 Reimbursement for damages, civil penalties and costs to defend HIPAA violations $ 50,000

Loss of business income due to federal or state legislative changes including workers comp insurance law changes and changes in reimbursement rates

$ 25,000

Loss of business income and expense reimbursement due to computer system failure due to detrimental code

$ 25,000

Reimbursement for time lost and out of pocket expenses incurred to support litigation counsel in medical malpractice matters

$ 10,000

Reimbursement for necessary costs to repair or replace personal and laptop computers; cellular phones; and other similar equipment

$815,000 Total

5.Who will own the captive? As indicated earlier, there are three primary models for ownership in the “wealth captive” world. If the owner is either a children’s trust or a dynasty trust, then the bundle of advantages of the captive structure include the following: (i) deduction by the operating business; (ii) tax free receipt by the insurance entity; (iii)

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31

funds protected from creditors of the (a) operating business; (b) owners of the operating business; and (c) heirs; and (iv) “gifts” to the heirs that are not subject to gift tax (with assets now excluded from the parents’ estates).

6. In which jurisdiction will your captive be established? Most of the original captives were established in the Caribbean (Bermuda, still the leading captive domicile, is not part of the Caribbean, but is lumped in with it for this purpose) due to the fact that the capitalization requirements were lower and the regulatory environment was looser. However, over the decades a taint has arisen in connection with those

countries related to tax evasion, money laundering, drug smuggling and, most recently, terrorism. As a result, most professionals (and taxpayers) are more comfortable establishing their captives in one of the United States (for this purpose Puerto Rico counts as part of the U.S.). Thirty states and Puerto Rico have adopted favorable captive legislation, though not all of those states have committed the financial resources needed to make their departments of insurance able to easily handle the new business. The top U.S. jurisdiction historically has been Vermont. However, Delaware has made a strong push in recent years. Other significant jurisdictions include Hawaii, South Carolina, Montana, the District of Columbia, Nevada, Arizona, and Utah.

7. Will your operating business owe a selfprocurement tax? Roughly two-thirds of the U.S. states impose a self-procurement tax. This is due from the operating business when it pays premiums to a carrier which is not admitted in the jurisdiction in which the operating business is located. In California this is reported on FTB Form 570 and is 3% of the premiums. There is some controversy about the impact of the Nonadmitted and Reinsurance Reform Act, enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, on the self-procurement tax. As a result, we understand that many operating businesses find one reason or another

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to not pay the tax. However, the safest approach – what we advise every client – is to pay the tax.

loan money to the operating business; or (iii) make other types of unorthodox investments, year 4 is the time to begin considering those types of investments. However, prudence is still the watchword. It is, after all, an insurance company.

8. Who is reading all of those contracts? Establishing a captive insurance company involves a great deal of paperwork. There is a contract between you and the captive manager. There is a contract between your captive and the pool. There may be a separate contract between your captive and the actuarial service firm. There are also a great many insurance policies. Each of these contracts can be lengthy and filled with jargon which is not obvious to someone that is not skilled in the insurance industry. Unless you are going to do so, someone must read and understand the contracts on your behalf. And possibly negotiate the terms on your behalf. This is actual legal work.

9. What are your investment expectations? Assume your operating business has been paying $1,200,000 of premiums each year to the captive and the claims have been extremely low. At the end of 5 years there will be $6,000,000 in the captive, separate from any earnings. How are you planning to invest the money? For the first year the funds in the captive are in reserve status insofar as they are backing up insurance policies. Therefore, the assets must be liquidatable into cash within 72 hours.

10. What is your exit strategy? At some point you will no longer need the captive insurance company. You will ask the department of insurance to de-license it as an insurance company. Is the next step to liquidate the LLC? As a tax matter that means that the assets are distributed to the shareholder as a capital gain. That is an attractive result: deductions at 50% (depending upon your state’s income tax rates), and capital gains tax at 20% to – in California – 33%. So the arbitrage is attractive. Alternatively, you can keep the LLC going as a “C” corporation. In that case you must wrestle with two Internal Revenue Code sections with which we have not had much experience in over twenty years (since most closely held corporations have been “S” corporations): the accumulated earnings tax rules of Section 531 and the personal holding company rules of Section 541. However, it should be possible to invest the money wisely, e.g., in investment real estate, to keep the LLC going for a long enough period of time to make a transition from “C” corporation status to “S” corporation status. And that will be, indeed, an attractive end result.

Conclusion. A captive insurance company can be an attractive risk management technique. It also has attractive collateral tax and asset protection benefits. However, there are numerous items that must be ticked off on your checklist before you take the plunge. 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).

After the first year we recommend that the assets be invested in virtually the same way for the next two years. After three years have transpired, the normal statute of limitations on the IRS’s ability to audit the year of the deduction has ended. Therefore, if the goal is to have the captive (i) invest in real estate; (ii)

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PROVIDING SERVICE TO THE INSURANCE INDUSTRY FOR OVER 35 YEARS IN OVER 30 STATES Audits Tax Preparation, Compliance and Minimization NAIC Annual Statements, assistance and preparation Management Consultation Expert Witness Regulatory Matters

Contact: William L. Shores, CPA 17 S. Magnolia Ave. Orlando, Florida 32801 (407) 872-0744 Ext. 214 Lshores@shorescpa.com

Do you aspire to be a published author? Do you have any

stories or opinions on the self-insurance and alternative risk transfer industry that you would like to share with your peers? We would like to invite you to share your insight and submit an article to The Self-Insurer! SIIA’s official magazine is distributed in a digital and print format to reach over 10,000 readers around the world. The SelfInsurer has been delivering information to the selfinsurance/alternative risk transfer community since 1984 to self-funded employers, TPAs, MGUs, reinsurers, stoploss carriers, PBMs and other service providers.

Articles or guideline inquiries can be submitted to Editor Gretchen Grote at ggrote@sipconline.net. The Self Insurer also has advertising opportunities available. Please

contact Shane Byars at sbyars@sipconline.net for advertising information.

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Resolving Catastrophic Claims for Duel-Eligible Beneficiaries of Medicare and Medicaid by David J. Korch

W

hen looking to resolve catastrophic claims, we always get into the dilemma of how to address the what if ’s… what if the injured party needs some attendant care or skilled nursing care? What if there are not enough funds to cover the non-Medicare medical expenses? We will discuss the intertwining of various government benefits with other settlement tools to resolve catastrophic claims. These government benefits include Social Security Disability, Supplemental Security Income, Medicare and Medicaid.

Disability Income from Social Security Social Security Disability (SSDI) is income replacement for the disabled worker and is an entitlement program. An individual who qualifies for SSDI becomes a Medicare beneficiary after a 24 month waiting period. Section 224 of the Social Security Act (42 U.S.C. 424a) places a ceiling on combined Social Security disability benefits and State workers’ compensation benefits. The statute states that Social Security benefits “shall be reduced” by the amount necessary to ensure that the sum does not exceed 80% of the predisability average current earnings (ACE). The offset applies until the claimant

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reaches 65 years of age or when payments end. Usually the offset affects low income workers more often, and more dramatically, than higher income workers. In all but 13 states, Social Security will offset the SSDI benefits based on the workers’ compensation benefits as well as any other disability benefits that the injured worker receives (if the benefit was paid for by the employer). The 13 reverse offset states (states in which the carrier receives the benefit of the offset) are California, Colorado, Louisiana, Minnesota, Montana, Nevada, New Jersey, New York, North Dakota, Ohio, Oregon, Washington and Wisconsin.

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The SSDI offset, when settling a WC case, is guided under the POMS (Program Operation Manual System) of Medicare. Chapter DI 52110.001 deals with Annuities and Trusts. DI 52110.001B deals specifically with workers’ compensation awarded as an annuity. This states that where the WC award provides that a worker shall have the option of receiving a lump sum or an annuity in lieu of statutory periodic benefits, the lump sum or purchase price of the annuity (not including interest) is offsettable according to the normal proration rules. It further indicates that if the worker has no option, (e.g., the carrier’s policy is to pay in a certain manner) the amount of the lump sum or purchase price of the annuity is offsettable as of the time the annuity payments are actually received by the party. When we utilize 52110.001 in our negotiations, we can generate an income equal to or greater than the injured worker would receive if they remained on WC. This can be achieved through the use of periodic payments funded through a structured settlement annuity. This is a great negotiation tool and can help reduce settlement costs. If we can generate the same income level as the claimant is receiving prior to settlement, you may be able to reduce the cash needed up front to satisfy the claimant’s needs and attorney fees. Also, the utilization of the rated age would reduce the costs of the annuity thereby having more cash available for other needs. By utilizing a structured settlement to negotiate benefits (not cash) for the injured worker we can meet their needs and achieve a better outcome for the insured, carrier and or self-insured. Supplemental Security Income (SSI) is a disability income program for individuals who have an income

below the federal poverty level and administered by Social Security. A person who qualifies for SSI becomes eligible for Medicaid. As SSI and Medicaid are poverty programs, not entitlement programs, receipt of other forms of public assistance or recoveries will affect these benefits.

Medicare Medicare is federally funded and administered by the Centers for Medicare / Medicaid Services (“CMS”). See 42 U.S.C. § 1395y. It is comprised of: • Part A (Hospital Insurance) • Part B (Supplementary Medical Insurance) • Part C (Medicare Advantage) • Part D (Prescription Drug Coverage) Medicare covers acute-care such as hospitalization, short term care and post acute care. This includes services at a nursing facility for acute illness or surgery.

Medicaid The Medicaid Program provides medical benefits to groups of lowincome people, some who may have no medical insurance or inadequate medical insurance. Although the Federal government establishes general guidelines for the program, the Medicaid program requirements are actually established by each State. Whether or not a person is eligible for Medicaid will depend on the State where he or she lives. States are required to include certain types of individuals or eligibility groups under their Medicaid plans and they may include others. States’ eligibility groups will be considered one of the following: categorically needy, medically needy, or special groups. Following are brief descriptions of some of the key eligibility groups included under States’ plans. These

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descriptions do not include all groups. Contact your state for more information on all Medicaid groups in your state. (For more information, see www.cms.hhs.gov/medicaid/ whoiseligible.asp). While Medicaid covers most of the same services provided through Medicare, it also covers many prescriptions not covered in part D of Medicare and will also cover the services provided at a skilled nursing facility for the long term. When we discuss Medicaid benefits we are considering benefits that require the individual meet both low income and low asset tests. The income levels vary from state to state so this discussion will not be addressing the eligibility requirements but the benefits of incorporating these benefits into a settlement. Medicaid is a state run program partially funded by the federal government and is considered a means-based program. To receive Medicaid a recipient must first qualify for and receive at least one dollar from SSI. In 2011, to qualify for SSI, an individual could not have more than $2,000 in resources or more than $674 in monthly income. For a couple the resource limit is $3,000 and the monthly income limit is $1,011.

Dual Eligibility According to a recent report by the Congressional Budget Office (CBO) which used statistics from 2009, there were 65 million individuals who met the eligibility requirements for Medicaid. At the same time there were over 50 million persons on Medicare.These individuals qualified by either reaching the age of 65 or had been diagnosed with a medical condition causing them to meet the eligibility requirements as disabled through the Social Security system. Of the individuals qualified for Medicaid 14.9%, or 9 million individuals,

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were dual eligible individuals who qualified for both Medicare and Medicaid benefits. 7 million were full dual eligible (qualify for full benefits under both programs) and 2 million were partial dual eligible qualifying for Medicaid to pay some of their medical costs. CBO estimated that the federal and state governments

expended more than $250 billion for these dual eligible individuals.

Utilizing the Concept of Dual Eligibilty in Settlements Often times in settling a workers’ compensation case a Medicare SetAside (MSA) is established to pay for

Medicare covered services that are related to the worker’s injury. The MSA may be in the form of a trust, custodial account or self administered account. Remaining portions of the settlement typically take the form of a lump sum, annuity or combination of the two. By utilizing the MSA we have protected Medicare’s interests as well as assisted in protecting the availability of Medicare for the injured worker. In some cases, particularly in catastrophic cases, an injury victim may qualify for SSI and Medicaid, in addition to their Medicare benefits, due to their injuries and financial status. The Medicaid program supplements the coverage provided by the Medicare Set Aside and Medicare by providing services and supplies that are not available through the Medicaid program such as nursing facility care beyond the 100 day limit covered by Medicare, prescription drugs and eyeglasses. This arrangement works out because Medicaid considers Medicare as primary to Medicaid and Medicare considers the MSA as primary to Medicare. In other words, the payment responsibility would first fall to the MSA, then to Medicare and then finally to Medicaid. Combining government programs may be the only way to cost effectively fund a catastrophically injured worker’s future care. Any settlement beyond the limits (see earlier paragraph for criterion) would prevent the injury victim from qualifying for SSI and Medicaid. The solution is to establish a special needs trust (SNT), which provides a safe harbor for the injured worker’s award. This would include any lump sum cash payments and/or structured settlement annuity payments which would flow through the SNT. An important point to remember in this scenario is that the MSA is a countable resource in determining

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The three core principles Presidio was founded on – excellence of service, The three core principles Presidio was founded on – excellence of service, continuous innovation client financial peace mind – are as much continuous innovation andand client financial peace of mind –ofare as much aapart of who whowe we ever. Our management team and our employees part of areare as as ever. Our management team and our employees remain inplace placeand and continue to offer you the innovative remain in continue to offer you the innovative solutions solutions you expect.you expect. But some some changes willwill be big. Very Very big. PartnerRe’s $23 billion in assets But changes be big. big. PartnerRe’s $23 billiongives in assets gives Presidio stability that is unsurpassed by others in the Accident & Health market. Presidio stability that is unsurpassed by others in the Accident & Health market. Our truly global reach allows us to provide financial peace of mind worldwide. Our truly reach allows usyou to the provide financial peace of mind worldwide. For almostglobal 20 years, we’ve brought best rated carriers. Now we are one. For almost 20 years, we’ve brought you the best rated carriers. Now we are one. Contact us to discuss your health risk needs at 1 415 354 1551 or PresidioRe.com.

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SSI and Medicaid eligibility unless it is placed within the SNT. When applied in a workers’ compensation settlement, the SNT can accomplish several things for the settling parties. First, the settlement can provide a higher standard of living for the injured worker. In one particular case part of the settlement funds that were deposited in a special needs trust were used to purchase a modest home in which the injured worker could reside. The SNT owned the home and was able to provide for its care and upkeep. Prior to the settlement the injured worker had been living in a long-term care facility paid for by the carrier. The advantage to the injured worker was they could live on their own and gain back some dignity and feeling of self worth by living in their own home. They also took comfort knowing that there were multiple resources available to cover their medical needs. Either from the MSA, Medicare, Medicaid, or the special needs trust.

and Medicaid benefits, the language in the medical expense trust can be relaxed to allow for payments of more items and services. The settlement planning trust provides spendthrift protection for inexperienced beneficiaries or beneficiaries that can be easily taken advantage of. A structured settlement annuity can be used in conjunction with any of the trust products mentioned here. The trust and annuity are very complementary tools and work well together. The annuity provides guaranteed income that can last for the lifetime of the injured worker and the trust adds flexibility to meet unforeseen future needs and protect the worker from outliving their money. Blending multiple products together provides a more complete settlement package that is more likely to be satisfactory to all parties involved. When settling a workers’ compensation case, it is important to look at all the options available to you. The trust is an often overlooked tool that can be instrumental in bringing a successful resolution to the case for everyone. Having tools available that satisfy all parties will also bring quicker closure to the case. n David J. Korch, AIC, SCLA, CMSP is Vice President of Workers’ Compensation and Medicare Practices and a settlement consultant with EPS Settlements Group. His expertise is in workers’ compensation claims and Medicare matters and he has been involved in hundreds of workers’ compensation settlements,. His office is located at 49 Flint Ridge Drive, Shillington, PA 19607, He can be reached at 610-777-2797 or at dkorch@epssg.com

Secondly, the carrier received a substantial cost savings by settling in this manner because they no longer had the unpredictable long-term expense of a long term care facility. The third benefit of including a SNT in the settlement was that it encouraged the injured worker to settle and shortened the length of time to reach a successful settlement. If the injured worker does not qualify for SSI and Medicaid benefits another useful trust in settling a workers’ compensation case is the medical expense trust. The medical expense trust a.k.a. settlement planning trust, much like the special needs trust, can pay for additional items and services not covered by the MSA or Medicare. Since the claimant is not on needs based Government benefits, and there is no need to protect SSI

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Trusted Partners, Ensuring Your Success!

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SIIA PRESIDENT’S MESSAGE Les Boughner

T

he USA is the largest selfinsurance market in the world due to the private sectors administration of workers compensation and health care benefits.. Due to it’s franchise in the self -insurance market SIIA has taken the lead in providing an education on self-insurance options both outside the USA, and in the USA for foreign multinationals. There is considerable interest by multinationals for education on how to navigate ACA in the US. SIIA continues to provide the best educational and networking opportunities. SIIA’s International committee under the leadership of Greg Arms recently held its International Conference in Newport Beach, California and will hold the 2014 International Conference June -11th 2014 in Miami Beach, FL. Previously SIIA’s has lead fact finding and educational trips to London, Barcelona and Singapore. At our upcoming 33rd Annual National Educational Conference and Expo in Chicago October 21-23rd, there will be several educational sessions addressing international issues. Some of these sessions include: Global Opportunities for Self Insurance, with Hugh Rosenbaum, Towers Watson Hugh is an Internationally recognized authority on captives and innovative solutions for multinational corportions. A free thinker, Hugh will provide his observations on the strengths that the self-insurance market in the US that can be exported to the global market, and what we

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can learn from self-insurance solutions elsewhere. International Benefits in Captives, with Mike Ponicall, Partner, Mercer Multi-national corporations are increasingly utilizing captive insurance solutions for employee benefits risks. This session will provide an overview of current trends and include case studies from General Motors, Deutsche Post AG (DHL) and HSBC. Providing Health Benefits for Outward Expatriates in the Post ACA World, with Todd A. Hancock, Executive Vice President, International Medical Group, Inc. U.S.-based self-insured employers with American workers deployed in foreign countries are confronted with new challenges related to health care reform regulatory compliance considerations.This session will focus on these issues and how leading multinational employers are adapting to the post ACA world, as well as related requirements provided for in the Defense Base Act (DBA). The Emergence of Health Care As a Global Issue, with Chris Burns, Consultant As governments around the world continue to struggle with balancing their budgets, benefits under public health programs are being scaled back and the costs increasingly shifted to employers and individuals in the private sector. As a result, employer-sponsored health programs are growing rapidly and increasingly becoming the most utilized and valued benefit program offered to employees.The financial impact of this trend is becoming significant as recent surveys have shown a 10% average medical trend increase for health care

costs around the world in 2012 and an expectation for 2013 to be the same. This presentation will discuss the overall impact of this major trend as well as the financial tools and emerging wellness solutions that global employers can adopt to help control and mitigate costs. Medical Tourism Market Update for Self-Insured Employers, with Alison Repke, Director of Operations, Global Medical Conexions and Michael Ross, Consultant Medical Tourism has attracted increased attention in recent years, but what does this marketplace look like today and what will it look like in the years ahead? Two leading industry experts will share their unique insight, with a particular emphasis on the opportunities & challenges for self-insured group health plans to take advantage of this cost savings strategy. Also addressed will be the role of Lloyd’s of London brokers and underwriters who create supportive insurance products. SIIA is fortunate and proud to be able to attract these leading experts in their Industries as speakers.This is an unequaled opportunity both for domestic companies but also foreign multinationals to send attendees to learn how to develop the most effective selfinsurance solutions. While we encourage you to attend these sessions and learn about the opportunities the international marketplace can provide,you will not want to miss the closing House of Blues event. I look forward to seeing you in Chicago. n

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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

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 Douglas Morse, President/Owner, GISC, Inc., Pembroke, MA David Gillman, President & CEO, NexPay Inc., Addison, TX Jay VerHulst, President, Pay-Plus Solutions, Inc., Clearwater, FL Brian Johnston, Attorney, Polsinelli, Kansas City, MO Chase Osbourne, Director of Underwriting, Priority Health, Grand Rapids, MI Martin Earley, Vice President of Sales, ProCare Rx, Gainesville, GA Jeanette Battista, Vice President, Sales, Revolv, Inc., Palatine, IL Sean Willoughby-Ray, Vice President - Practice Lead, Scott Insurance, Greensboro, NC Brenda Beachey, Vice President Healthcare Services, UMB Healthcare Services, Kansas City, MO

Contributing Members

Elizabeth D. Mariner Executive Vice President Re-Solutions, LLC Wellington, FL

Karin Landry, Managing Director, Spring Consulting Group, Boston, MA

Jay Ritchie Senior Vice President HCC Life Insurance Company Kennesaw, GA

Employer Members

46 September September2013 2013| The| Self-Insurer The Self-Insurer

Ryan Mitchell, CJA & Associates, Inc., Naples, FL

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