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December 2014


Ride Care Act Coattails the

Industry expansion seen, business models debated

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DECEMBER 2014 | Volume 74

December 2014 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



6 TPAsAffordable

Ride Care Act Coattails


ART Gallery: NAIC’s Stop-Loss Attack from ‘Wonderland’


A Structured Settlement Annuity Almost Always Saves Money When Funding a Medicare Set-Aside


Industry expansion seen, business models debated

by Cindy L. Chanley


by Bruce Shutan


by Cori M. Cook

EDITORIAL ADVISORS Bruce Shutan Karrie Hyatt

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



PPACA, HIPAA and Federal Health Benefit Mandates: 2014 Health Plan Sponsor Year End Checklist


Proposed Rules for FHLB Membership Could Bar Captives

RRGs Report

2014 Self-Insurers’ Publishing Corp. Officers James A. Kinder, CEO/Chairman Erica M. Massey, President Lynne Bolduc, Esq. Secretary

Non-Quantitative Treatment Limitations Under the Mental Health Parity and Equity Act

Financially Stable Results Through Second

Quarter 2014

by Douglas A Powell

by Karrie Hyatt


SIIA Chairman’s Message

36 SIIA President’s Message

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The Self-Insurer | December 2014 3

SIIA CHAIRMAN’S MESSAGE A New Leadership Team Takes the Field for 2015


nother year of successful SIIA events has gone by and my time in SIIA volunteer leadership positions will conclude at the end of this month.

I feel a great sense of pride when looking back at SIIA’s accomplishments over recent years. I am also very appreciative of the opportunity to serve as your President and then Chairman of the Board of Directors. There is not any other industry group with as broad a franchise as SIIA. Furthermore, there is not any other industry group with a Government Affairs office with our capability and magnitude to represent the interests of the self-insurance industry. None of the accomplishments and success would be possible without our dedicated volunteer leadership. I would like thank all of the volunteers that have served on SIIA’s Committees for all of their hard work and dedication, especially the Committee Chairs: - Andrew Cavenagh, Alternative Risk Transfer Committee

Les Boughner

I am confident of SIIA’s continued progress representing the self-insurance industry, not only in the United States, but Internationally. For those of you who do business internationally the 2015 International Conference in Panama is a uniquely positioned event to broaden your franchise. For those of you who do not it is an opportunity to investigate the possibilities.

- Horace Garfield, Government Relations Committee - Rob Melillo, Health Care Committee - Greg Arms, International Committee - Duke Niedringhaus, Workers Compensation Committee You have been essential in the success of all SIIA events and your commitment and hard work is appreciated! I would also like to welcome our new Committee Chairs: - Jeff Simpson, Alternative Risk Transfer Committee - Jerry Castelloe, Government Relations Committee - Bob Repke, International Committee - Stu Thompson, Workers Compensation Committee I also want to thank our outgoing Director’s, Jerry Castelloe and Liz Mariner with whom I have had the pleasure of serving with over the past several years. They are recognized and committed professionals in our industry and SIIA has benefited greatly from their wisdom and during their tenure.

I wish you and your families all the best for the Holiday Season, a prosperous New Year and look forward to continuing to see you at future SIIA events! n

We will be replaced by Duke Niedringhaus, Andrew Cavanaugh and Adam Russo who are equally committed to SIIA’s continued success. Finally SIIA would not be as focused and successful without the hard work of Mike Ferguson, our President and CEO and the SIIA staff. They are a great team and a pleasure to work with.


December 2014 | The Self-Insurer

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The Self-Insurer | December 2014



Ride Care Act Coattails the

Industry expansion seen, business models debated by Bruce Shutan


December 2014 | The Self-Insurer

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here’s a consensus among TPAs that the past two years have “never been better for self-funding, and as a result, it’s never been better for those who are involved in self-funding,” observes Steve Rasnick, president of Self-Insured Plans, LLC, whose business has doubled in size during that timeframe. He credits the Affordable Care Act (ACA) with being a catalyst of “great administrative opportunities for TPAs.” One such example is the creation of accountable care organizations or ACOs, which he calls a byproduct of cost-saving strategies under Medicare. Chip Sernyak, the northeast regional president at CoreSource, is also bullish about continued growth in the TPA space. “We are seeing an increased interest in self-funding as a result of the Affordable Care Act, particularly in the smaller end of the spectrum where we normally work,” he says. Beyond that, he points to new opportunities involving backroom processing for other carriers and health insurance exchanges, as well as a possible role in the shifting government-sector market of sponsored health care. CoreSource has been growing at a rate of 8% to15% over the past four years, Sernyak reports. He attributes the steady growth to a combination of contraction in the TPA marketplace and care-management investments made in solutions to reducing an employer’s health care spend.

of a good TPA – with the capabilities of data analytics, transparency, and specialized provider networks and contracting,” he explains. Services clearly are trickling down market at a time when self-insured employers can use as many helping hands as possible. Dave Parker, SVP at Aetna-owned Meritain Health, notes a significant amount of interest during the past two years in selffunding or captives among groups of 25 to 200 employees. But despite being the beneficiary of ACA growth, the industry’s image may be subject to debate. “There still is a phobia or concern when you mention TPA,” Parker observes. Noting that “it’s been a long time since we’ve seen major TPA indicted or criminal issues occurring,” he believes this fear is largely unfounded but also adds that not all TPAs are created equal.

Competing Business Models Indeed, industry insiders have been debating for years the merits and pitfalls of hiring insurance carrierowned TPAs vs. independent TPAs. The former tout their size and scale, as well as provider network ownership and discounts, Rasnick notes. While acknowledging that carriers do negotiate better discounts in some regions of the country, he cautions that they often involve narrow networks that limit patient choice.

Tremendous growth opportunities include newer provider reimbursement methodologies, population health management and consultative service offerings, adds Ron Dewsnup, president and general manager of Allegiance Benefit Plan Management, which is owned by Cigna.

Adds Sernyak: There needs to be a firewall between carrier-owned TPAs and their parent company to avoid any perceived conflicts of interest within their service channels. Concern about the ACA’s minimum loss ratio has certainly created a new awareness among carriers about the advantages of being in the ASO business, Rasnick says.

“The key is being able to provide flexibility and service – the hallmarks

Dewsnup sees a competitive leg up for self-funded clients that have

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access to a TPA parent’s provider network, sales connections and financial resources to help create and manage growth as long as the TPA can maintain its value proposition of independence, flexibility and service. “One concern is that insurance companies have a tendency over time to try to recreate the TPA in their image,” he says, the danger being a loss of flexibility and becoming an appendage of the insurance company. His larger point is it’s important for these TPAs to un-bundle services if that’s what the client wants. “An example that my boss likes to use is the TPA is an airport, and an insurance company is an airline,” he says. “I’m in an industry that has a special value proposition. If we concentrate on what the client wants, then there’s room and there is appropriateness for both models.” Perhaps no one is more qualified to weigh the differences between these two models than Parker, who spent most of his 25-plus year career working on the independent TPA side and was skeptical of transitioning to the carrier-owed side of the business in June 2011. “I would have said to you prior to the acquisition that the independent TPA route was the only way to go, and now I would completely tell you the opposite is the case,” he says. Parker lauds Aetna’s corporate culture and significant level of sophistication, as well as access to the carrier’s expansive provider network and discounts. But perhaps of equal or greater importance is Aetna’s insistence on maintaining the flexibility and pricing from Meritain’s independent years. “We have flexibility, which not all ASO carriers offer,” he says, calling the arrangement the best of both worlds. “We will allow an unbundled service, whereas not every carrier will allow that to occur.” The Self-Insurer | December 2014


Noting independent TPA involvement in population health management, Rasnick says they’re perfectly positioned to provide an administrative mechanism for helping reward physicians and hospitals based on health outcomes rather than a traditional fee-for-service basis. He says another issue to consider is that they work more closely with providers as part of a changing business model through which they have more of a vested interest in keeping patients healthy. Indie TPAs have a better understanding of “how to spend other people’s money, whereas carriers have a difficult time in an ASO environment realizing that they’re not spending their own money,” Rasnick explains. When competing with carrier-owned TPAs, CoreSource emphasizes increased levels of flexibility in giving options to client, including working with multiple tier-one carrier network partners such as Aetna and Cigna that provide a greater level of credibility. If one component of the administration isn’t working (i.e., risk management, stop loss or network), the TPA has an ability to switch it out independently. Another point Sernyak raises is that carrier-owned TPAs often focus on expanding network membership at the expense of other factors, particularly as they are trying to develop their value for Wall Street. As a mutual-owned company, CoreSource doesn’t need to concern itself with shareholder value. “Our business is solely the service to our clients,” he says.

A Consultative Role The TPA marketplace is changing rapidly, with the secret to success no longer measured by how quickly and accurately health care claims are paid. Today’s

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climate is “much more complicated” and requires key differentiators that often involve a more consultative approach that stresses employee wellness, Rasnick says. “That’s where the role between the consultant and TPA begins to turn a little bit grey as opposed to black and white,” he says. “We want to see that every participant receives the right treatment at the right time from the right physician who’s doing the right thing. And without all four of those legs on that chair, it’s going to fall over.” In short, Rasnick says the aim is to identify care gaps and keep patients healthier, which, in turn, reduces an employer’s costs and increases satisfaction. He believes independent are better positioned than carrier-based ASO programs to accomplish these objectives because they’re historically more focused on population health. A key component is if broker and consultant partners provide the right information and resources to fully implement winning strategies on behalf of their clients, Sernyak says. “The more that we have been able to invest to be able to help their strategies be effective has been a differentiator between us and a market that has commoditized,” he explains. One example is the 2010 acquisition of HealthFitness Corporation, one of the nation’s largest health and wellness companies, by CoreSource’s parent company, Trustmark Mutual Holding Company. The move has since targeted midmarket employers. Most of AmeriBen’s opportunities come through fairly sophisticated broker consulting channels that respect TPAs taking a more collaborative approach over the past five years, though the focus is on customer

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The Self-Insurer | December 2014



December 2014 | The Self-Insurer

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service rather than a consultative role, according to Jon Aubrey, the TPA’s EVP. The firm also tends to work with networks that most TPAs eschew or offer on a limited basis and isn’t beholden to a particular provider network, “so we’ve been able to carve out some unique network relationships because of the size of client that we work with,” he reports.

secret to continued growth in the TPA market. In his role as a regional officer, he’s able to avoid the “much taller vertical to work through” and higher levels of authority and approval needed among carrier-owned TPAs when fulfilling client commitments. And as a result, he’s better able to tap into a full tool box of key resources to help control an employer’s health care spend and implement strategies over a period of time.

Since TPAs enjoy extraordinary access to health plan data and a keen understanding of how to use that information, Dewsnup believes many forward-thinking consultants and advisers are partnering with TPAs to present the information and analytics to their employer clients. “In a couple of cases,” he says, “we’re actually combining our reports into a single package, and then presenting them jointly to the client in the meeting.”

Other Measures of Success Whether providing consultations or focusing on administration, TPAs are under increasing pressure to deliver results. Checking client references are an “extremely important” metric for self-insured employers when shopping for a TPA or deciding to switch carriers, according to Rasnick – particularly former customers in a climate where business is turning over all the time. “You’re going to get the most accurate service opinions from people who have terminated who no longer have a vested interest in staying,” he says. It’s also critical to “par tner with an agent who really understands self-funding,” Rasnick suggests. He says key issues that arise include ensuring that stop-loss contracts pass muster from both a financial and risktolerance perspective.

It’s also worth paying close attention to roads less traveled. Unlike a number of TPAs, for example, Meritain has avoided reference based pricing or Medicare-like rates primarily because of concerns about provider balanced billing, challenges to membership and lack of client interest in these strategies. One area shunned thus far by Aubrey’s larger clientele (whose average group size is about 1,700 employees) is a defined contribution under private health insurance exchanges, which he describes as “a glorified self-service online enrollment tool.” And while some TPAs emphasize growth through acquisitions, AmeriBen’s model favors organic or controlled growth. “We end up declining as many RFPs as we quote on just because we’ve made commitments to our customers that we won’t grow so much that we’ll negatively impact existing clients,” Aubrey explains. “A lot of employers are fearful of the TPA acquisition because it means changing claims platform and usually a degradation in service.” n Bruce Shutan is a Los Angeles freelance writer who has closely covered the employee benefits industry for more than 25 years.

Sernyak believes an ability to honor client promises or commitment is the

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The Self-Insurer | December 2014


ART GALLERY by Dick Goff

NAIC’s Stop-Loss Attack from ‘Wonderland’


nce again, the National Association of Insurance Commissioners has taken us “through the looking glass” into a wonderland of its own devising when it issued for comment a draft whitepaper, “Stop-Loss Insurance, Self-Funding and the ACA.” If adopted, such a paper would become recommended policy for state insurance regulators with the result of undermining the self-insured employer health plan universe. This is not breaking news. SIIA, for example, immediately issued a strong rebuttal in the form of a letter from its CEO Mike Ferguson. Today’s commentary is my first opportunity to weigh in due to the long lead-time of this monthly publication. At first reading, I was stunned by the draft’s apparent lack of understanding of how self-insurance works and how stop-loss insurance makes it affordable for a broad spectrum of employers. And I was piqued by the pettiness and unwarranted conclusions the draft whitepaper reflected. An analogy might be a guidance manual provided to major league umpires by a committee whose members were ignorant of the rules of


December 2014 | The Self-Insurer

baseball. Or standards for architects by a committee giving no thought to how structures are supported. In their day jobs insurance regulators routinely review and approve stop-loss insurance policies in the real world, but when they gather as a tribe of elders to issue guidance to their peers, they go completely off the track.

Then it occurred to me: this is not just about stop-loss insurance. This is the regulators’ national organization’s tantrum against self-insured employer health plans operating under federal protection provided by ERISA. State insurance regulators don’t like any form of insurance outside of their control. ERISA plans appear to them to erode their authority within state lines. But they can’t really do anything about that. Oh, except ambush the stop-loss policies that make employer health plans possible for millions of employees and dependents. With that motivation, the NAIC’s opposition to stop-loss insurance all makes a distorted kind of sense. It’s their strategy of weakening self-insurance by weakening stop-loss insurance. And in their zeal, the NAIC brain trust sometimes confuses the two. On page 14 of the NAIC draft a reader will find this head-scratching passage: “Some stop-loss insurance policies do not include a standard benefit package, and some benefits such as prescription drugs may not be covered unless the employer opts into the coverage. Small employers should be made aware of these types of exclusions before they purchase a stop-loss policy.” Huh? Can it be true that the purportedly wisest heads of the NAIC can’t tell the difference between the concepts of “health plan” and “stop-loss policy?”

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Of course stop-loss policies don’t include standard benefit packages: they don’t include any benefits at all. Their use is to indemnify the employer against losses of the health plan above certain levels. It should be assumed that this is common knowledge among all state insurance department staff members, and most certainly all insurance commissioners.

going forward but not retroactively. Here’s a real cheap shot on page 11 of the draft: “Some stop-loss insurers... may market to employers with as few as 10, or even 5, employees.”

And here’s another example of NAIC ignorance. On page 18 of the draft it states, “No rate guarantees. Most stop-loss insurance policies state that premiums can increase at any time or even retroactively during the policy year... ”

In our world that is unlikely, first, because of increasing minimum employee groups dictated by the various states, and, second, because of their unlikelihood of a stop-loss marketer opening itself to professional liability recourse by an employer. That said, there do exist small, highly profitable companies or professional practices that could easily afford a self-insured plan and appropriate stop-loss insurance.

The NAIC is playing fast and loose with the truth by implying the prevalence of retroactively rated contracts. The great majority of stoploss policies are fixed price contracts unless there is a significant change in the covered population or in benefit design, and then premiums may be revised

These are just a few examples of the NAIC’s misguided, even misleading, attack on stop-loss insurance in this draft white paper.The danger, of course, is that elements of the draft will survive scrutiny and comment by the industry and lead to new draconian standards that state commissioners would feel compelled to

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adopt or risk losing their places at the NAIC’s frequent banquet tables. And all this mischief is being committed by an organization that has no legislative or regulatory authority of its own, an organization that is nothing more than a professional trade association of bureaucrats who fancy themselves to be the rulers of our industry. Each of us will have an opportunity to meet with our own domicile’s regulator for a calm, friendly chat on why attacks on stop-loss insurance are unnecessary and, in the extreme, quite damaging to the employer health plans covering millions of Americans. n Readers who wish to comment on this column or write their own article are invited to contact Editor Gretchen Grote at Dick Goff is managing member of The Taft Companies LLC, a captive insurance management firm at

The Self-Insurer | December 2014


A Structured Settlement Annuity Almost Always Saves Money When Funding a Medicare Set-Aside by Cindy L. Chanley


ince the late 1990s, attorneys and claims handlers have taken caution when settling workers’ compensation claims that involve someone who is either a Medicare beneficiary, or will become a beneficiary in the foreseeable future. A Medicare Set-Aside (MSA) allocation is a tool one can use to prevent the burden of future medical care from being shifted to Medicare. Given the issues an MSA presents, more claims professionals and attorneys are looking at a structured settlement as a way to fully fund an MSA and avoid potential problems for the parties post settlement.


What is an MSA?

Medicare Set-Aside Arrangement (MSA) for workers’ compensation purposes (WCMSA) as a “financial agreement that allocates a portion of a workers’ compensation settlement to pay for future medical services related to the workers’ compensation injury, illness, or disease” (cms. gov). Although not required by The Medicare Secondary Payer Act, 42 U.S.C. §1395y(b)(2), and federal regulations 42 C.F.R. §411.20 et. seq., most employers and insurers use an MSA as a tool to determine and fund future medical expenses otherwise reimbursable by Medicare for a workers’ compensation settlement.

The Centers for Medicare and Medicaid Services (CMS) defines a

CMS has published guidelines for determining an appropriate MSA

December 2014 | The Self-Insurer

amount for workers compensation cases. An MSA can be prepared by the employer or its insurer, an attorney, or by a company that specializes in providing this service. A typical MSA report includes a projection of future Medicare related medical and prescriptions determined by a comprehensive review of medical and prescription records and payment histories, physician recommendations and standard of care. The medical projection will be based on a workers’ compensation fee schedule or “usual and customary”, depending on the state of jurisdiction. The prescription drugs are priced based on Redbook Average Wholesale Price (AWP). Many insurers have

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established procedures and/or approved vendors for developing MSA reports and submissions to CMS, in addition to specific claim handling procedures and required language for settlement agreements when resolving claims involving future medicals to ensure Medicare’s interests are protected.

How is an MSA Funded? The Centers for Medicare and Medicaid Services (CMS) guidelines allow parties some latitude when funding an MSA. Under current CMS guidelines, an MSA can be funded in one of two ways: • Lump Sum for the entire MSA amount; or • Structured Settlement Annuity (includes cash and an annuity) to pay the MSA over the injured party’s life expectancy Funding an MSA with a structured settlement annuity almost always saves money over the lump sum option. Research suggests that structured settlement funding of MSAs saves an average of 37% as opposed to cash funding.

CMS Guidelines When Funding with an Annuity CMS guidelines require that when a structured settlement annuity is used, the MSA be funded as follows: • Seed – an initial deposit, or lump sum, to cover two years’ worth of medical and prescription payments, a first surgery, procedure, or replacement. • Annuity – MSA less the seed amount is distributed evenly, payable annually, over the injured party’s life expectancy through the purchase of a structured settlement annuity contract Detailed information regarding these guidelines is spelled out in the Workers’ Compensation Medicare Set-aside Reference Guide, which is accessible on the CMS website. An important note: CMS must be notified of the employer/insurer’s intention to fund the MSA with an annuity during the submission process.

Types of Annuities to consider when funding an MSA The combination of cash and an annuity to fund an MSA almost always saves money over funding it as a lump sum. There are a number of different types of annuities an employer or its insurer can purchase to meet CMS requirements in spreading out the annuity over an injured party’s life expectancy, or lifetime. • A Temporary Life Annuity provides an annual MSA payment for the injured party’s life expectancy, only if the injured party is living. This is usually the least expensive annuity used in funding an MSA annual payment. The disadvantage of this type of annuity is that the payments stop at the death of the injured party and there is no residual value or payment that can pass to an injured party’s beneficiary or as a refund to the employer or its insurer. For example, if an employer pays $100,000 to provide $1,000/year for 30 years and the injured party dies after one year, the employer has paid $100,000 for a $1,000 payment. This type of annuity is attractive for small MSA amounts. • A Life Only Annuity will provide an annual MSA payment for the injured party’s lifetime. All payments cease on the death of the injured party/

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annuitant. This annuity is usually slightly more expensive than a Temporary Life Annuity. As with a Temporary Life Annuity, all payments cease on the death of the injured party. There is no opportunity for recovery of any funds by the employer or the possibility of the injured party’s beneficiary receiving anything on the death of the injured party. • A Life with Cash Refund Annuity will provide an annual payment for the life of the injured party, but provides a refund of the unused portion of the annuity premium in the event of the death of the injured party. For example, if the employer spends $100,000 for the annuity and the injured party dies after $50,000 of payments have been paid out, the injured party’s beneficiary or the employer will receive $50,000 on the injured party’s death. • A Period Certain Annuity will provide an annual payment for the injured party’s life expectancy, whether or not the injured party is living. This payment is guaranteed to be paid to the injured party’s beneficiary or the employer on the injured party’s death. On death, the payments will continue to be paid to the beneficiary (injured party’s family member or the employer’s insurer). As an alternative, many life insurance companies that offer structured settlement annuities provide a commutation product that allows the beneficiary or the employer to receive a lump sum of the commuted value of any remaining payments on the death of the injured party/annuitant. The Self-Insurer | December 2014


Pros and Cons of Annuity Types There are advantages and disadvantages to each of the annuity types used to fund the MSA annual payments or to fund the annual fee to pay for professional administrative services for the MSA. It is important to discuss these options with a structured settlement consultant to ensure the injured party and/or employer’s interests are handled appropriately.

is knowledgeable about the issues relating to the current liability and/or workers’ compensation issues relating to Medicare Set-Aside Allocations. A knowledgeable structured settlement consultant is a valuable asset to all the parties, from the negotiation stage to CMS approval.

Using annuities to fund an MSA annual payment and/or MSA professional administrative fees provides advantages to the injured party and the employer. From the injured party’s perspective, whether or not the injured party is a Medicare beneficiary, settlement dollars provided for Medicare related medical expenses are restricted and must be used exclusively for that purpose. With a lump-sum MSA, a Medicare beneficiary must spend the entire amount of the MSA before Medicare will cover Medicare expenses relating to the work injury. With the annuity option, Medicare will cover any expenses over and above the injured party’s current MSA balance each year.


Administration of an MSA Funded By an Annuity An MSA funded via an annuity can be administered either by a third party or by the injured party. It is important to note that regardless of how it is administered, the injured party is ultimately responsible to ensure MSA funds are properly paid from the account to cover Medicare reimbursable services and are related to the injury. If the MSA is funded with an annuity, it is essential to be aware of the CMS guidelines related to the account, whether it is self-administered by the injured party or professionally administered by a third party. • The MSA administrator must be competent to administer the account.

From the employer’s perspective, the annuity option is almost ALWAYS less expensive than paying the MSA in a lump sum, providing the possibility for saving claims dollars and/or having an opportunity to have extra dollars for negotiation purposes. In addition, the employer or its insurer can negotiate the settlement to receive the possibility of a refund or the commuted value of remaining payments, in the event the injured party dies before the end of the injured party’s life expectancy.

• The MSA should be established within thirty (30) days of the disbursal of settlement funds. Information regarding the establishment of the MSA should be sent to CMS if the MSA has been reviewed and approved.

The parties should involve a structured settlement consultant that

• The administrator must maintain accurate records of the distributions and expenditures from the MSA account.

December 2014 | The Self-Insurer

• The MSA administrator must also deposit the total sum of the MSA funds into an interest bearing account for which the injured party is the sole beneficiary. This would include all funds from the seed money and subsequent feed money funds. • All funds from the MSA should be properly exhausted before Medicare resumes payment of medical expenses related to the medical claims covered under the settlement. In cases of an annuity, this may result in periodic depletion and notice to CMS. It is also required that the administrator notify CMS when annuity money is deposited into the account. At that point, the MSA should resume payment for reimbursable medical care and treatment.

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ING U.S. is transitioning to Voya FinancialTM throughout 2014

We can’t stop misfortune. We can stop loss. Becoming a top tier Stop Loss carrier doesn’t just happen. For 35 years, our dedication to creative solutions has made us the top choice for our clients. Not all Stop Loss carriers are created equal. Today’s businesses have unique needs that demand expert-level service. That’s been the foundation of our Stop Loss offering from the beginning. We know it’s not just the plan; it’s the team behind it. Your business is unlike any other. It’s time for a Stop Loss carrier that’s unlike any other, too. Our mission as Voya Financial is to make a secure financial future possible for employers and employees nationwide.

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Stop Loss insurance products are underwritten by ReliaStar Life Insurance Company (Minneapolis, MN) and ReliaStar Life Insurance Company of New York (Woodbury, NY). Within the state of New York, only ReliaStar Life Insurance Company of New York is admitted, and its products issued. Both are members of the Voya family of companies. Product availability and specific provisions may vary by state. © 2014 ING North America Insurance Corporation. LG11566 03/28/2014 169553

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The Self-Insurer | December 2014


© 2013 Helmsman Management Services LLC.


Thankfully, catastrophic and complex claims don’t happen often. But when they do, they can result in significant losses for your business and significant injury to your valued employees. A compassionate claim professional with the right resources and experience can make all the difference in bringing about a positive outcome for you and your injured worker. To learn more, ask your broker or visit


December 2014 | The Self-Insurer

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• The only allowable “non-medical” expenses that are reimbursable from the MSA are for associated taxes, banking fees, mailing fees or documentcopying charges related to the MSA. The funds in the MSA may not be used to pay premiums for Medicare supplemental insurance (e.g. – “Medigap”) for the beneficiary. • The administrator must make every effort to obtain and pay for medical care and treatment for their injuries covered herein from medical providers that will accept payment pursuant to the funding methodology used in the development of the MSA (Workers’ Compensation Medical Fee Schedule or “usual and customary”). • If a provider, physician or other supplier refuses to accept payment under the applicable funding methodology or a claim is denied, he/she agrees to consult the Medicare Regional Office in order to determine whether Medicare should pay the claim. If a determination to deny the claim is made by the Medicare Regional Office, then Medicare’s regular administrative appeals process for claim denials would apply to the claim. • The administrator of the MSA is required to submit an annual accounting to CMS. This accounting is required to take place and be submitted within thirty (30) days after the close of the annual accounting period, which is the anniversary of the funding of the MSA. A final accounting is required to take place within sixty (60) days of the MSA funds being completely depleted. These accountings shall include, but not be limited to, the retention of receipts for medical care and treatment received and paid with funds from the MSA.

Do you aspire to be a published author? Do you have any stories or opinions on the selfinsurance 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


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Using an annuity with some cash is a cost effective way to fund an MSA or future medicals, whether or not the parties decide to seek a CMS recommendation. A knowledgeable structured settlement consultant can provide proposals to fund the MSA by utilizing annuities that work best for the parties during the negotiations. Funding an MSA with an annuity almost always saves money over a lump sum option, saving significant claim dollars or freeing up money for settlement negotiations. As a result, claim best practices are being developed across the insurance, self-insurance and TPA marketplace. n

world. The Self-Insurer has

Cindy L. Chanley, Certified Structured Settlement Consultant (CSSC), an associate with Ringler Associates, managing its Louisville and southern Indiana offices. She can be reached at

been delivering information to the self-insurance/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

The Self-Insurer also has advertising opportunities available. Please contact Shane Byars at for advertising information.

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The Self-Insurer | December 2014


Non-Quantitative Treatment Limitations Under the Mental Health Parity and Equity Act by Cori M. Cook, J.D., CMC Consulting, LLC


he final regulations regarding the Mental Health Parity and Equity Act (MHPAEA) were published on November 13, 2013, and are generally applicable for plan years beginning on or after July 1, 2014. The MHPAEA does not mandate coverage of any mental health and/or substance use disorder benefits. However, if a plan chooses to provide coverage for mental health and/or substance use disorders, it must do so in compliance with the applicable Federal and/or State laws. The following plans are subject to MHPAEA: group health plans offering medical and surgical benefits and mental health or substance use disorder benefits; a health insurance issuer offering health insurance coverage for mental health and/ or substance use disorder benefits in connection with a group health plan; and a health insurance issuer offering individual health insurance coverage. There are limited exemptions allowed for certain plans: small employer group health plans (those employing 50 or fewer employees); self-funded non-federal governmental plans (those employing 100 or fewer employees) if they choose to “opt out;” retiree only plans; an employer that can qualify for the increased cost exemption; and plans that provide only “excepted benefits.” The MHPAEA prohibits certain group health plans and health insurance issuers offering coverage from imposing financial requirements and treatment limitations


December 2014 | The Self-Insurer

that are more restrictive for mental health or substance use disorders than the predominant requirements or limitations applied to substantially all medical and surgical benefits. In determining parity, plans must review several benefit classifications in order to evaluate the financial requirements and treatment limitations between medical and surgical and mental health and/or substance use disorder benefits. To wit: • Inpatient, in-network • Inpatient, out-of-network • Outpatient, in-network -- Office visits and -- All other outpatient items and services

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• Outpatient, out-of-network -- Office visits and -- All other outpatient items and services • Emergency Care • Prescription Drugs These classifications cannot be combined and no other classifications are permitted, and the determination must be made separately for each classification of benefits. If a plan provides mental health and/ or substance use disorder benefits in any classification, the coverage must be provided in all classifications where medical and surgical benefits are provided.

Financial Requirements As a general rule, financial requirements include deductibles, co-payments, co-insurance and out-of-pocket maximums, and plans may not apply separate cost-sharing arrangements to mental health or substance use disorder benefits.

Treatment Limitations Treatment limitations may include annual, episodic, and lifetime day and visit limits, as well as other similar limits, and in determining if a plan provides parity, the MHPAEA requires plans to meet treatment limitation thresholds in two categories: Quantitative Treatment Limitations (QTLs) and Non-Quantitative Treatment Limitations (NQTLs). Generally speaking, QTLs are expressed numerically and are permissible where a limitation or provision applies to at least 2/3 of the benefits in a classification and the predominant limitation applies to more than 50% of the benefits in the classification. NQTLs, which otherwise limit the scope or duration of benefits for treatment under a plan

or coverage, are distinct from the numerical analysis for QTLs and may be more difficult to evaluate.

• Exclusions based on failure to complete a course of treatment; and

Plans have the flexibility to determine to what extent medical management techniques and other NQTLs apply. However, it is important to understand that the plan processes, strategies, evidentiary standards or any other factors used in applying an NQTL to mental health and/or substance use disorder benefits must be comparable to, and applied no more stringently than, the plan processes, strategies, evidentiary standards or any other factors used in applying the limitation to medical and surgical benefits in the classification. This holds true both under the terms of the plan as written, as well as in the administration and operation of the plan.

• Restrictions based on geographic location, facility type, provider specialty, and other criteria that limit the scope or duration of benefits for services provided under the plan or coverage.

Below is an illustrative list of NQTLs from the final regulations: • Medical Management standards limiting or excluding benefits based on medical necessity or medical appropriateness, or based on whether the treatment is experimental or investigative; • Formulary design for prescription drugs; • For plans with multiple network tiers (such as preferred providers and participating providers) network tier design; • Standards for provider admission to participate in a network, including reimbursement rates; • Plan methods for determining usual, customary and reasonable charges; • Refusal to pay for higher-cost therapies until it can be shown that a lower-cost therapy is not effective (also known as fail-first policies or step therapy protocols);

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By way of example, it is permissible for a plan to require prior authorization that a treatment is medically necessary for all inpatient medical and surgical benefits and for all inpatient mental health and/ or substance use disorder benefits. However, if in practice, inpatient benefits for medical and surgical conditions are routinely approved for seven days, and for inpatient mental health and/or substance use disorder benefits routine approval is given only for one day, the application of a stricter NQTL for mental health and substance use disorder benefits would likely violate the MHPAEA. Likewise, a plan may require prior approval to determine medical necessity for medical/surgical, mental health and/or substance use disorders benefits, and use comparable criteria in determining such. However, failure to obtain prior approval for mental health and/or substance use disorders will result in no benefits being paid, yet failure to obtain prior approval for medical/surgical only results in a 25% reduction in benefits would likely violate the MPHAEA. Although the same NQTL applies to both medical/ surgical and mental health and/or substance use disorders, that being medical necessity, it is not applied in a comparable way. In comparison, for a plan applying concurrent review to inpatient care where there are high levels of variation in length or stay (as measured by a The Self-Insurer | December 2014


coefficient of variation exceeding 0.8), the application of which affects 60 percent of mental health conditions and substance use disorders, but only 30 percent of medical/surgical conditions, would likely be compliant with the MHPAEA due to the fact that the evidentiary standard utilized by the plan is applied no more stringently for mental health and/or substance use disorders than for medical/surgical benefits, even though the overall results differ in the application. It is important for TPAs and those administering medical management services to clearly understand the MHPAEA regulations as they apply to these NQTL standards. It is fairly easy to review the terms of a plan document and determine if there is parity upon initial observation, but in

large part, when it comes to the NQTLs, parity is determined by the application of policies and procedures that are not defined in the plan but in the administration and operation thereof. n This article is intended for general informational purposes only. It is not intended as professional counsel and should not be used as such. This article is a high-level overview of regulations applicable to certain health plans. Please seek appropriate legal and/or professional counsel to obtain specific advice with respect to the subject matter contained herein. Cori M. Cook, J.D., is the founder of CMC Consulting, LLC, a boutique consulting and legal practice focused on providing specialized advisory and legal services to TPAs, employers, carriers, brokers, attorneys, associations and providers, specializing in healthcare, PPACA, HIPAA, ERISA, employment and regulatory matters. Cori may be reached at (406) 6473715, via email at, or at

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The Self-Insurer | December 2014


PPACA, HIPAA and Federal Health Benefit Mandates:


The Affordable Care Act (ACA), 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 ACA, HIPAA and other federal benefit mandates.


2014 Health Plan Sponsor Year End Checklist


s 2014 draws to a close, we thought it would be helpful to provide a high level recap of the year’s guidance and plan sponsor compliance requirements. Many of the issues discussed herein have been addressed in more detail in prior articles throughout the year.

Indefinite Delay for Health Plan Identifier Number and HIPPA EDI Compliance Certification Health plans with annual receipts of more than $5 million were required to obtain a health plan identifier number (“HPID”) by November 5, 2014. Health plans with annual receipts of less than $5 million have until November 5, 2015 to obtain an HPID. HPIDs for fully-insured plans will be obtained by the insurer, and HPIDs for self-insured plans must be obtained by the sponsor. Based on informal agency FAQ guidance, an HPID is not required for many health reimbursement accounts (“HRAs”) and healthcare flexible spending accounts (“FSAs”). Once an HPID is obtained, large plans are required to certify their HIPAA compliance to HHS by December 31, 2015 and small plans are required to certify within a year of obtaining their HPID. On October 31st, CMS announced that it is suspending enforcement of the HIPAA HPID requirement until further notice. The following statement is on the


December 2014 | The Self-Insurer

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CMS website at

Register for and Pay Transitional Reinsurance Fees Self-insured health group plan sponsors as well as health insurance issuers are responsible for paying this annual fee. Registration was initially required by November 17th (first weekday after November 15th). On November 14th CMS announced a delay until December 5th for reinsurance fee registration. The-Transitional-Reinsurance-Program/Reinsurance-Contributions.html The first installment of the fee, which is $52.50 per covered life, is still due no later than January 15, 2015 and the second installment is due by November 15, 2015. Sponsors and issuers may also choose to pay the entire $63 fee per covered life by the January 15th deadline if desired.

Pay PCORI Fee Although the Patient-Centered Outcomes Research Institute Trust Fund fee (“PCORI” fee) is not a new requirement, the applicable dollar amount was recently announced as being $2.08 per covered life for plan years ending after September 30, 2014 and before October 1, 2015. Payment of the fee was due July 31, 2014 and is again due on July 31, 2015.

Cafeteria Plan Amendment Deadlines The following changes to cafeteria plans are permitted, but amendments are required as noted below: Mid-year Election Changes to Allow Group Health Coverage and Exchange Elections Under IRS Notice 2014-55 cafeteria plans are allowed, but not required, to permit plan participants to revoke their group health plan coverage and elect other minimum essential (MEC) coverage in the following situations: 1. An employee who was expected to average 30 hours of service or more per month experiences an employment status change such that the employee is no longer expected to average 30 hours or more each month but does not otherwise lose eligibility under a group health plan that provides minimum essential coverage. 2. An employee is eligible to enroll in a Qualified Health Plan offered in the Marketplace (i.e., “Exchange”) during the Marketplace’s special or annual election period. Plans who wish to permit these election changes must amend their plan by December 31, 2015, or if later, the end of the plan year in which the changes are allowed. Employers who permit these election changes must notify participants of the new election change provision in order for the amendment to be effective. Healthcare FSA Contribution Limits An employee’s annual salary reduction contributions made to a health FSA are capped at $2,500 by the ACA. While this requirement has been in place for plan years commencing on or after January 1, 2013, some plans

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may not have yet been amended to reflect this. The amendment must be adopted by December 31, 2014. Also, the cost of living adjustment for health FSAs has increased the limit to $2550 for plan years commencing on or after January 1, 2015. See IRS Rev. Proc 2014-61. Healthcare FSA carryovers Cafeteria plans are allowed, but not required, to provide for a carryover of upCto $500 in unused healthcare FSA contributions to be applied to reimburse health expenses in subsequent plan years. This represents a change from the previous rule, which required that all unused contributions as of the end of the plan year be forfeited. This amendment cannot be adopted if the cafeteria plan provides a grace period allowing employees to use their FSA funds to cover eligible expenses incurred during a two and a half month period following the last day of the plan year. In order to allow the carryover the plan must be amended to terminate the grace period. If an eligible cafeteria plan wishes to adopt the amendment, it must do so by the last day of the plan year from which amounts can be carried over.

Employer Responsibility Requirement (aka “Employer Mandate” or “Pay or Play” Requirement) Beginning January 1, 2015, most employers with at least 100 full-time employees (or full-time equivalent employees) will be subject to an excise tax penalty under Section The Self-Insurer | December 2014


4980H of the Code if they fail to 1) offer coverage to 70% (95% after 2015) of their full-time employees and their dependent children, or 2) offer coverage that is both affordable and provides minimum value (i.e., generally provides “bronze level” type or 60% coverage). Final regulations were issued in February of 2014 and employers will need to check their eligibility and coverage requirements to ensure compliance. Transition Rule Exceptions Employers with between 50 to 99 full-time and full-time equivalent employees in 2014 may not be subject to this requirement until 2016 if certain conditions are met. Additionally, employers that have maintained a noncalendar year plan as of December 27, 2012 may have until the first day of their 2015 plan year to comply if certain requirements are met.


December 2014 | The Self-Insurer

Prepare for New Reporting Requirements Code Sections 6055 and 6056 include two sets of new health care coverage reporting requirements regarding minimum essential coverage and applicable large employers. While the first reports are not due until January 2016, employers will want to prepare now so that the required information will be tracked throughout 2015 and available to be reported. One important action item for 2014 will be the collection of taxpayer identification numbers from employees and their covered dependents, discussed below. Minimal essential coverage reporting (found in 6055) requires both issuers and sponsors of health plans to file information returns with the IRS and provide statements to covered individuals. Large employer reporting (found in

6056) requires employers subject to the employer coverage mandate to file information returns with the IRS and provide statements to their full-time employees. If large employers offer self-insured minimum essential coverage, they may provide a combined report. Both reports require taxpayer identification numbers (“TINs”). To comply with large employer reporting, the TIN of each full-time employee must be provided. To comply with the minimal essential coverage reporting, the TIN of every covered individual must be provided. This may prove difficult if you have not previously collected the Social Security numbers for covered spouses or dependent children. The IRS will allow plans to report the date of birth of those covered individuals if they are not able to procure a TIN after reasonable efforts. The IRS will consider the

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The Self-Insurer | December 2014


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December 2014 | The Self-Insurer

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following as a reasonable effort: 1) plans should request the TIN by December 31, 2014, and, if the TIN is not provided at that time, they must 2) make a second request by December 31, 2015. If the second request is unsuccessful, plans may use the date of birth in place of the TIN for the individual in question.

Existing Notice Requirements As a reminder, employers are required to distribute certain notices to new employees within 14 days of hire (the Marketplace notice), and enrollment notices prior to or once coverage begins (COBRA, HIPAA Privacy, and Special Enrollment Rights notices, as well as the Summary of Benefits and Coverage). They must also provide participants and beneficiaries with certain annual notices (Women’s Health and Cancer Rights Act, Medicare Part D, and CHIP Premium Assistance notices).

Communicate Any Plan Changes Any plan changes should be timely communicated to eligible employees via either a Summary of Material Modifications (“SMM”) or an updated Summary Plan Description (“SPD”). Furthermore, the ACA requires that a revised Summary of Benefits and Coverage (“SBC”) be issued at least 60 days before a material modification to an SBC becomes effective. n

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Attorneys John R. Hickman, Ashley Gillihan, Johann Lee, Carolyn Smith, and Dan Taylor provide the answers in this column. Mr. Hickman is partner in charge of the Health Benefits Practice with Alston & Bird, LLP, an Atlanta, New York, Los Angeles, Charlotte and Washington, D.C. law firm. Ashley Gillihan, Carolyn Smith and Johann Lee are members of the Health Benefits Practice. Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner’s situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation. Readers are encouraged to send questions by email to Mr. Hickman at

The Self-Insurer | December 2014


RRGs Report

Financially Stable Results Through Second


December 2014 | The Self-Insurer

Quarter 2014 by Douglas A Powell, Senior Financial Analyst, Demotech, Inc.

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This article originally appeared in “Analysis of Risk Retention Groups – Second Quarter 2014”


review of the reported financial results of risk retention groups (RRGs) reveals insurers that continue to collectively provide specialized coverage to their insureds. Based on second quarter 2014 reported financial information, RRGs have a great deal of financial stability and remain committed to maintaining adequate capital to handle losses. It is important to note that ownership of RRGs is restricted to the policyholders of the RRG. This unique ownership structure required of RRGs may be a driving force in their strengthened capital position. The financial metrics and ratios presented below have been materially impacted by a Contribution Agreement of an RRG that transpired in the first quarter 2014. On January 1, 2014, Attorney’s Liability Assurance Society Inc., RRG (ALAS) entered into a Contribution Agreement with its parent, ALAS Investment Services Limited (AISL). ALAS assumed significant assets and liabilities of the parent. According to the filed first quarter 2014 statement of ALAS, as a result of the transaction, “loss reserves historically ceded by (ALAS) to the parent…were reassumed by the company.” More than $2 billion in total assets and more than $1.5 billion in total liabilities were contributed to ALAS. The most significant liability assumed by ALAS was $1.2 billion of loss reserves. The net capital contribution of this transaction was more than $513 million.

Balance Sheet Analysis During the last five years, cash and invested assets, total admitted

Figure 1 assets and policyholders’ surplus have increased at a faster rate than total liabilities (figure 1). The level of policyholders’ surplus becomes increasingly important in times of difficult economic conditions by allowing an insurer to remain solvent when facing uncertain economic conditions. Since second quarter 2010, cash and invested assets increased 61.4 percent and total admitted assets increased 43.7 percent. More importantly, over a five year period from second quarter 2010 through second quarter 2014, RRGs collectively increased policyholders’ surplus 56.1 percent. This increase represents the addition of nearly $1.5 billion to policyholders’ surplus. During this same time period, liabilities increased 35.9 percent. These reported results indicate that RRGs are adequately capitalized in aggregate and able to remain solvent if faced with adverse economic conditions or increased losses. Liquidity, as measured by liabilities to cash and invested assets, for second quarter 2014 was approximately 66.1 percent. A value less than 100 percent is considered favorable as it indicates

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that there was more than a dollar of net liquid assets for each dollar of total liabilities. This also indicates an improvement for RRGs collectively as liquidity was reported at 69.3 percent at second quarter 2013. This ratio has improved steadily each of the last five years. Loss and loss adjustment expense (LAE) reserves represent the total reserves for unpaid losses and LAE. This includes reserves for any incurred but not reported losses as well as supplemental reserves established by the company. The cash and invested assets to loss and LAE reserves ratio measures liquidity in terms of the carried reserves. The cash and invested assets to loss and LAE reserves ratio for second quarter 2014 was 234.5 percent and indicates an improvement over second quarter 2013, as this ratio was 231.3 percent. These results indicate that RRGs remain conservative in terms of liquidity. In evaluating individual RRGs, Demotech, Inc. prefers companies to report leverage of less than 300 percent. Leverage for all RRGs combined, as measured by total liabilities to policyholders’ surplus, for second quarter 2014 was 138.8 The Self-Insurer | December 2014


percent and indicates a diminishment compared to second quarter 2013, as this ratio was 130.4 percent. The loss and LAE reserves to policyholders’ surplus ratio for second quarter 2014 was 89.5 percent and indicates a diminishment compared to second quarter 2013, as this ratio was 81.4 percent. The higher the ratio of loss reserves to surplus, the more an insurer’s stability is dependent on having and maintaining reserve adequacy. Regarding RRGs collectively, the ratios pertaining to the balance sheet appear to be appropriate and conservative.

Premium Written Analysis Since RRGs are restricted to liability coverage, they tend to insure medical providers, product manufacturers, law enforcement officials and contractors, as well as other professional industries. RRGs

reported direct premium written in eleven lines of business through second quarter 2014. RRGs collectively reported nearly $1.5 billion of direct premium written (DPW) through second quarter 2014, a decrease of 13.4 percent over second quarter 2013. RRGs reported nearly $900 million of net premium written (NPW) through second quarter 2014, an increase of 16.3 percent over second quarter 2013. The DPW to policyholders’ surplus ratio for RRGs collectively through second quarter 2014 was 72.1 percent, down from 101.3 percent at second quarter 2013. The NPW to policyholders’ surplus ratio for RRGs through second quarter 2014 was 43.3 percent and indicates a decrease over 2013, as this ratio was 45.3 percent. Please note that these ratios have been adjusted to reflect projected annual DPW and NPW based on first quarter results. An insurer’s DPW to surplus ratio is indicative of its policyholders’ surplus leverage on a direct basis, without consideration for the effect of reinsurance. An insurer’s NPW to surplus ratio is indicative of its policyholders’ surplus leverage on a net basis. An insurer relying heavily on reinsurance will have a large disparity in these two ratios. A DPW to surplus ratio in excess of 600 percent would subject an individual RRG to greater scrutiny during the financial review process. Likewise, a NPW to surplus ratio greater than 300 percent would subject an individual RRG to greater scrutiny. In certain cases, premium to surplus ratios in excess of those listed would be deemed appropriate if the RRG had demonstrated that a contributing factor to the higher ratio is relative improvement in rate adequacy. In regards to RRGs collectively, the ratios pertaining to premium written appear to be conservative.

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The results of RRGs indicate that these specialty insurers continue to exhibit financial stability. It is important to note again that while RRGs have reported net income, they have also continued to maintain adequate loss reserves while increasing premium written year over year. RRGs continue to exhibit a great deal of financial stability. n

Figure 2

Douglas A Powell is a Sr. Financial Analyst at Demotech, Inc. Email your questions or comments to For more information about Demotech visit

Income Statement Analysis RRGs collectively reported a $41.4 million underwriting loss through second quarter 2014 (figure 2). The second quarter result was impacted heavily by the underwriting loss reported by ALAS due to the Contribution Agreement the company entered into. The collective underwriting losses were offset by strong investment gains and other sources of income. RRGs reported an aggregate net investment gain of $115.1 million and a net income of $74 million. The loss ratio for RRGs collectively, as measured by losses and loss adjustment expenses incurred to net premiums earned, through second quarter 2014 was 78.9 percent, an increase over 2013, as the loss ratio was 69.1 percent. This ratio is a measure of an insurer’s underlying profitability on its book of business. The expense ratio, as measured by other underwriting expenses incurred to net premiums written, through second quarter 2014 was 21.3 percent and indicates an improvement compared to 2013, as the expense ratio was reported at 24.2 percent. This ratio measurers an insurer’s operational efficiency in underwriting its book of business. The combined ratio, loss ratio plus expense ratio, through second quarter 2014 was 100.2 percent and indicates a diminishment compared to 2013, as the combined ratio was reported at 93.3 percent. This ratio measures an insurer’s overall underwriting profitability. A combined ratio of less than 100 percent indicates an underwriting profit. Regarding RRGs collectively, the ratios pertaining to income statement analysis appear to be appropriate. Moreover, these ratios have remained fairly stable for each of the last five years and within a profitable range.

Conclusions Based on Second Quarter 2014 Results Despite political and economic uncertainty, RRGs remain financially stable and continue to provide specialized coverage to their insureds. The financial ratios calculated based on the reported results of RRGs appear to be reasonable, keeping in mind that it is typical and expected that insurers’ financial ratios tend to fluctuate over time.

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The Self-Insurer | December 2014


Proposed Rules for FHLB Membership Could Bar Captives by Karrie Hyatt


n September 2nd, the Federal Housing Finance Agency (FHFA) proposed substantial changes to rules governing membership in the Federal Home Loan Bank (FHLB) system which would effectively bar captive insurance companies from participating. The proposed rule changes come during a three month moratorium on accepting captives as members to the 12 FHLBs that began in June. In May, the FHFA director, Mel Watt, warned in a speech at the FHLBs Directors Conference that captive insurance membership raised a number of red flags “related to the safety and soundness and access to the system.” The changes proposed in September includes establishing a “quantitative test” requiring all members to hold at least one


December 2014 | The Self-Insurer

percent of the assets in home mortgage loans on an on-going basis; requires certain members subject to ten percent residential mortgage loans adhere to the requirement on an on-going basis; clarifies the definition of an insurance company’s primary business place to determine regional membership; and defines “insurance company” as a company that primarily underwrites insurance for nonaffiliated third parties. This last rule change would effectively bar captive insurers from participating in the program. Companies not able to meet the last requirement would be gradually removed from membership over five years. The FHLB system was established in 1932 by Congress to be a steady source of funding in the housing market through good and bad economies. It is a cooperative system made up of twelve regional lending institutions that are owned by their members – more than 7,500 financial institutions in the United States – and is regulated by the federal government. FHLBs have been regulated by the FHFA since 2008 when that agency was created through the Housing and Economic Recovery Act of 2008. The 12 FHLBs are conservatively managed with a long-term view of financial investments. Because they are cooperatives, they reinvest any profits, keeping costs low. Small financial institutions and community banks rely on loans from FHLBs to help maintain liquidity. The FHLB system is worth over $800 billion and, after the U.S. Treasury, is the biggest U.S. bond borrower. According to the speech made by Watts in May, loans made by FHLBs to insurance company members have increased from one percent in 2000 to 14 percent in 2013.

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Insurance companies have always been allowed membership in the FHLB system, but are now accounting for a larger portion of the loans awarded.The growth in member insurance companies receiving loans is reflected in the growth of the insurance sector in the overall financial marketplace. Yet lingering concerns remain about the health of the insurance marketplace after the financial fallout in 2008. The proposed change to membership rules by the FHFA are meant to make sure that FHLBs can continue to safely support the housing financing marketplace, according to Director Watts. The types of captives that would primarily be affected if the rule changes go into effect are those owned by real estate investment trusts (REITs) – private or publicly held companies that own or finance income producing real estate. By themselves, REITs are not allowed membership into the FHLB system, but they can access the system through their captives. As FHLBs can generally offer better terms than traditional banks and bond markets for dependable funding, it can be an important source of liquidity for the alternative risk transfer market. As seen in recent months, the suggested rule changes by the FHFA might be construed as a backlash against the exponential growth captive insurers in recent decades. As described recently in previous issues of The SelfInsurer, captives have been getting a lot of negative attention lately – from the National Association of Insurance Commissioners to the Federal Insurance Office to independent associations and researchers. Much of the extra scrutiny has been due to the fast growth of captives and because critics feel that they operate “under the radar” or are not fully regulated by their domicile. According to Mike Teichman, a partner with the law firm of Parkowski, Guerke & Swayze, P.A, the FHFA is concerned that “Captive insurance companies are not regulated in a transparent manner relative to traditional insurance companies and may

be at greater risk of failure if its parent company becomes financially impaired, because the captive serves its parent rather than third parties.” “These concerns are misplaced,” he continued, “While captive insurers are regulated in a manner that is typically more streamlined and efficient than the regulation of traditional insurance companies, captive insurers are nevertheless closely and carefully regulated by state insurance departments and their capital requirements are established independently of the relative financial condition of the parent-insured.” Richard Smith, president of the Vermont Captive Insurance Association (VCIA), doesn’t think there is a real threat from captives that are members of the FHLB, “But I think [the proposed membership rule changes are] a mix of potential real concerns on certain captives that might be participating in the FHLB and more broadly misunderstanding of captives and how they are regulated.” The VCIA issued a legislative alert to its members a few days after the proposed changes were announced. The letter expressed concern about the changes stating that the new membership definition “categorically excludes captives that might otherwise qualify to participate in the FHLB program. It provides no legitimate reason to keep captives out of this market.” Many banks, insurers and mortgage investment firms are also expressing dismay with the FHFA’s changes. The initial comment period was limited to sixty days, which would have ended November 12, but was extended by an additional sixty days to January 12, 2015, due to industry pressure. The U.S. Senate Banking Committee held a hearing on September 16, 2014 titled, “Examining the state of small depository institutions.” While the hearing was not specifically about the proposed rule changes by the FHFA, many of the industry insiders testifying took the opportunity to condemn them. Representatives from Independent

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Community Bankers of America, Credit Union National Association, National Association of Federal Credit Unions, and the Center For Responsible Lending spoke out against the proposed changes. Jeff Plagge, the president and CEO of Northwest Financial Corp. and chairman of the American Bankers Association was particularly expressive in his dissent. In his testimony, he stated, “The proposal would also redefine captive insurance companies as no longer eligible for system membership. The types of entities eligible for membership in the system are delineated in the statute, including insurance companies. The proposed rule, therefore, runs counter to the plain meaning of the statute and declares captive insurance companies ineligible... Access to liquidity, particularly for community banks, is critical. This rule is unnecessary, runs counter to the authorizing statute, and would potentially put at risk an important source of liquidity for banks at a time when such liquidity is vitally necessary.” To many industry representatives, the rule change could negatively affect an already stalled housing market. The FHLB financial model has been very successful over the course of its more than eighty years in operation. For the FHFA to implement these major changes in membership requirements now appears to be creating a solution for a problem that doesn’t exist. “If the proposed rule is implemented,” said Teichman, “It would deprive captives, in particular those affiliated with REITs, of an important source of liquidity. As to the REITs, the disallowance of funding REIT-owned captives through FHLB advances may impede the willingness and ability of REITs to assume mortgage credit risk. A consequence that seems contrary to the federal housing finance system.” At this time it is unclear whether the new membership rules will be implemented. The opposition has been vociferous and fairly united. As of early November, there were already more than 160 comments already registered on the FHFA website ( n The Self-Insurer | December 2014


SIIA PRESIDENT’S MESSAGE Well-positioned to do Bigger Things and Make More of a Difference


o another year has flown by, but his has not been just any year for SIIA. In fact, it has been a remarkable time period in the association’s three-decade history.

We started off the year with a series of leadership meetings focused on how SIIA needs to be positioned to best represent the interests of it members during this time of continual changes in the marketplace and regulatory environment. Consensus was reached that the top priority was to further build out the association’s government relations capabilities. So we went to work developing an expansion plan, which we will announce next month. In order to finance this expansion, we asked many companies to upgrade their SIIA membership (Silver, Gold or Diamond). And many did – you may have noticed the numerous upgrade announcements over the past several months. In addition to the many companies who chose to upgrade their memberships, several Diamond members have made additional financial contributions, or have pledged to do so in 2015, on a voluntary basis because they want to do even more to support SIIA. Those companies are listed below... I like to refer to them as our “Diamond-Plus” members.

Michael W. Ferguson

- Berkley Life & Health, LLC - Companion Life Insurance Company - CoreSource - HCC Life Insurance Company - HealthSmart - Meritain Health - Sun Life - Symetra We should also acknowledge the Health Care Administrators Association (HCAA), which has made a significant financial contribution this year and has signaled a similar intent for next year. So it has been a very eventful year indeed. We now look forward to the next 12 months and beyond when the association will be well-positioned to do bigger things and make more of a difference form companies involved in the self-insurance/alternative risk transfer marketplace. n Stay tuned...

Michael W. Ferguson President &CEO


December 2014 | The Self-Insurer

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Schedule of


March 4-5, 2015

J.W. Marriott Camelback | Scottsdale, AZ

The educational focus for this event will be to address the interests of plan sponsors, in addition to third party administrators and stop-loss entities.

International Conference April 13-15, 2015 Hilton Panama | Panama City, Panama SIIA’s International Conference provides a unique opportunity for attendees to learn how companies are utilizing self-insurance/alternative risk transfer strategies on a global basis. The conference will also highlight self-insurance/ART business opportunities in key international markets. Participation is expected from countries all over the world.




Self-Insured Health Plan Executive Forum



Self-Insured Workers’ Compensation Executive Forum May 12-14, 2015 Windsor Court Hotel | New Orleans, LA SIIA’s Annual Self-Insured Workers’ Compensation Executive Forum is the country’s premier association sponsored conference dedicated to self-insured Workers’ Compensation employers and group funds. In addition to a strong educational program focusing on such topics as analytics, excess insurance, wellness initiatives and risk management strategies, this event will offer tremendous networking opportunities that are specifically designed to help you strengthen your business relationships within the self-insured/alternative risk transfer industry.


Self-Insured Taft-Hartley Plan Executive Forum April 29-30, 2015 Marriott Metro Center | Washington, DC Taft-Hartley plans refer to the multi-employer pension plans collectively bargained by a union and a group of employers, usually in related industries. Taft-Hartley plans are governed by a trust, half of whose trustees are appointed by the employers and half by the union. This retirement plan model has enabled tens of thousands of small and medium-sized businesses to provide workers with the traditional defined benefit pensions that used to be standard among larger employers, but have now virtually disappeared in the non-unionized private sector.

35th Annual National Educational Conference & Expo

October 18-20, 2015 Marriott Marquis | Washington, DC SIIA’s National Educational Conference & Expo is the world’s largest event dedicated exclusively to the self-insurance/ alternative risk transfer industry. Registrants will enjoy a cutting-edge educational program combined with unique networking opportunities, and a world-class tradeshow of industry product and service providers guaranteed to provide exceptional value in three fastpaced, activity-packed days. © Self-Insurers’ Publishing Corp. All rights reserved.

| December 2014 For more information visit The Self-Insurer


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

2014 Board of Directors CHAIRMAN OF THE BOARD* Les Boughner Executive VP & Managing Director Willis North American Captive and Consulting Practice Burlington, VT PRESIDENT* Mike Ferguson SIIA Simpsonville, SC VICE PRESIDENT OPERATIONS* Donald K. Drelich Chairman & CEO D.W. Van Dyke & Co. Wilton, CT VICE PRESIDENT FINANCE/CFO* Steven J. Link Executive Vice President Midwest Employers Casualty Co. Chesterfield, MO

Directors Jerry Castelloe Vice President CoreSource, Inc. Charlotte, NC Robert A. Clemente CEO Specialty Care Management LLC Bridgewater, NJ Ronald K. Dewsnup President & General Manager Allegiance Benefit Plan Management, Inc. Missoula, MT


December 2014 | The Self-Insurer

SIIA New Members Regular Members Company Name/ Voting Representative

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

David Vizzini President & CSO 6 Degrees Health Beaverton, OR

Jay Ritchie Senior Vice President HCC Life Insurance Co. Kennesaw, GA

Kimberly Langer Chief Product Officer Allevion Inc. Aventura, FL John Capasso President & CEO Captive Planning Associates LLC Marlton, NJ

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

Leigh Anne Massey Claims Manager Employers Risk Services Bowling Green, KY

CHAIRMAN, GOVERNMENT RELATIONS COMMITTEE Horace Garfield, Vice President Transamerica Employee Benefits Louisville, KY

Matt Kelley Managing Director RH Administrators Lubbock, TX

CHAIRMAN, HEALTH CARE COMMITTEE Robert J. Melillo 2nd VP & Head of Stop Loss Guardian Life Insurance Company Meriden, CT

Gregg Lehman CEO The Difference Card White Plains, NY

CHAIRMAN, INTERNATIONAL COMMITTEE Greg Arms, Chief Operating Officer Accident & Health Division Chubb Group of Insurance Companies Warren, NJ CHAIRMAN, WORKERS’ COMPENSATION COMMITTEE Duke Niedringhaus, Vice President J.W. Terrill, Inc. St Louis, MO

Marty Jaramillo Founder & CEO Yingo Yango New York, NY

Employer Member Clarence Batts Chief Financial Officer AZO Services Inc. Kalamazoo, MI Brian Thornquist Insurance Analyst ICL - Performance Products LP St. Louis, MO

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