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December 2015

The Supreme Court Seeks

Solutions to the Latest Challenges to

Subrogation Rights in Montanile Case

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December 2015 Volume 86

The Supreme Court Seeks


RRGs Report Financially Stable Results Through Second Quarter 2015

to the Latest Challenges to


INside the Beltway SIIA Members Advance Self-Insurance in Events Hosting Sen. Burr and Rep. Roe


OUTside the Beltway Texas Flood Doesn’t Stop SIIA Members from Commenting on Draft Stop-Loss Regs


From the Bench Mock Mediation SIIA Program Draws Significant Interest

Solutions Subrogation Rights in Montanile Case Catherine Dowie


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PPACA, HIPAA and Federal Health Benefit Mandates New HSA Erroneous Contribution Guidance: A More Reasonable Approach to the Nonforfeitability Rule for HSA Contributions


Population Health Management: Next Big Thing or Pet Rock?


SIIA Endeavors Looking Ahead to 2016...

STANDARDS for Industry with

Code of Ethics Karrie Hyatt

December 2015 | The Self-Insurer


The Supreme Court Seeks

Solutions to the Latest Challenges to

Subrogation Rights in Montanile Case


he facts of the latest healthcare subrogation challenge on the Supreme Court’s docket (Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan) will be familiar to many. As you may recall from the June 2015 article,“The Road to Recovery: Subrogation Gets Its Day in Court... Again,” following a motor vehicle accident, Robert Montanile’s health plan paid over $120,000 on his behalf, subject to all plan terms, including a subrogation and reimbursement provision. Mr. Montanile hired an attorney to bring a claim on his behalf and that attorney

Written by Catherine Dowie 4

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SUBROGATION RIGHTS | FEATURE secured a settlement of $500,000.00. Mr. Montanile hired a second attorney to negotiate with the Plan to resolve its equitable lien by agreement. When those negotiations reached an impasse, Mr. Montanile’s attorneys notified the Plan that they would be disbursing funds directly to Mr. Montainle unless the Plan filed suit within 14 days. Eventually, though outside of the requested 14 day timeframe, the Plan did file suit to enforce its rights and found itself facing the argument that its rights were no longer enforceable because Mr. Montainle had spent the settlement proceeds by the time suit was filed. Both the district court and 11th Circuit Court of Appeals in Atlanta sided with the Plan and ordered full reimbursement.

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Mr. Montanile appealed to the United States Supreme Court, seeking to resolve a question that has divided courts across the country for years: “Whether an action by an ERISA fiduciary against a plan participant to recover an overpayment by the plan seeks “equitable relief ” within the meaning of ERISA Section 502(a) (3), 29 U.S.C. 1132(a)(3), where the fiduciary has not identified a particular fund that is in the participant’s possession and control at the time that the fiduciary asserts its claim.” The split amongst the federal circuits on the current question is wide, with some jurisdictions holding that funds that have been comingled with a plan participants general assets can no longer be recovered by a benefit plan (Bilyeu v. Morgan Stanley Long Term Disability Plan, 683 F.3d 1083 (9th Cir. 2012)), to others where judges have suggested that participants and/ or their attorneys be jailed after disbursing funds and refusing to live up to reimbursement obligations outlined in plan terms (Central States v. Lewis,

745 F.3d 283 (7th Cir. 2014)). The latter case is probably the most entertaining reading in all of ERISA caselaw. Subrogation recoveries play a huge role in keeping self-funded health plans viable. Every year hundreds of millions of dollars come back into plans for the payment of future benefits for plan participants via the subrogation recovery process. By holding other parties and insurance carriers responsible for the damages they and their insureds have caused, self-funded benefit plans are able to keep costs to participants down. A significant factor in getting as much money back into the Plan as possible is the keeping the recovery process itself cost-effective, by ensuring that injured participants and their attorneys don’t create unnecessary hoops for the plan to jump through or insist that they incur unreasonable or unnecessary costs. Mr. Montainle proposes a dramatic change to that structure, which would require plans to invest significantly more time and resources to pursue recoveries and give participants who can spend their recoveries quickly a mechanism to escape their obligations under the terms of their benefit plan. Recognizing the devastating impact such a decision could have on the viability of self-funded plans across the industry, the National Association of Subrogation Professionals (NASP) and the Self-Insurance Institute of America (SIIA) filed an Amici Curiae brief with the United States Supreme Court in support of the Board of Trustees of the National Elevator Industry Health Benefit Plan. The brief can be viewed at uploads/2015/10/14-723_amicus_resp _NationalAssociationofSubrogation Professionals.authcheckdam.pdf.

Appropriate Equitable Relief The basis of the dispute is that

relief under section 502(a)(3) of ERISA is limited to ‘appropriate equitable relief ’ to enforce the terms of the plan. In prior cases the Supreme Court has decided this means the type of relief ‘typically available in equity’ and has specifically restricted a plan from seeking to collect from the general assets of a plan participant, instead allowing the plan to enforce an ‘equitable lien by agreement’ (the agreement being the plan terms) on a ‘specifically identifiable fund’, distinct from the general assets of the plan participant. In the context of healthcare subrogation, the specifically identifiable fund is typically a tort settlement. In many cases, plans, participants and attorneys work together to appropriately distribute a tort settlement in a manner agreeable to all involved. The question here is if a participant and an attorney disburse and spend those funds, with knowledge of the plan’s claim, does that disbursement defeat the plan’s reimbursement claim because there is no longer a ‘specifically identifiable fund’ in the participant’s possession and control? Or does the lien attach immediately at the point at which the participant gains control of settlement funds, such that later spending the money is irrelevant to, or indeed a violation of, the plan’s rights? Usually a participant comes into control of a settlement fund by directing an insurance carrier to issue a check to the participant or their attorney. Mr. Montanile and his supporters have argued that, practically, there are few if any cases where funds will be disbursed if a plan properly notifies interested parties of its lien because attorneys are ethically bound to hold disputed funds in trust for the protection of their clients as well as third parties like a health plan. Ironically, Mr. Montanile makes that claim despite December 2015 | The Self-Insurer


SUBROGATION RIGHTS | FEATURE the fact that he and his attorneys did just that, disbursing the funds while fully aware of the plan’s interest!

The Problem for Plans While there are many reasonable and ethical attorneys out there, there are also many who are unwilling to do the extra work that may be required to appropriately resolve an equitable lien by agreement, especially if funds are limited. The vast majority of tort cases are accepted by plaintiff ’s attorneys on a contingency fee basis, typically one-third of the gross recovery. This means that resolution of liens is often functionally wasted time for an attorney who has already earned their fee on a case. Threats to disburse funds and let the plan and the (often uninformed or confused) patient come to an agreement are all too common. There are multiple states where the code of professional responsibility does not require that a plaintiff ’s attorney (or, for that matter, a defendant or insurance carrier on notice of a plan’s interest) hold funds in trust pending amicable resolution or a court order. Other states allow an attorney to disburse the funds to their client if they believe there may be any possible defense to the interest asserted by the plan, no matter the actual merit of that defense if it is later adjudicated. As a practical matter, enforcing a reimbursement interest after funds have been disbursed will never be a first choice for plans and will rarely lead to an optimal recovery. So, if, as counsel for the Plan freely admitted during oral argument, this is a ‘secondbest’ remedy that plans will seek to avoid if possible, is the outcome really that important for self-funded employers seeking to keep their plans affordable? Absolutely! As anyone regularly involved in 6

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the negotiation of reimbursement and subrogation actions will be able to tell you, most if not all plan participants against whom a plan might seek to recover are functionally judgment proof once settlement funds have been spent because of the large sums typically involved. It is therefore vital, first, that the Plan act quickly to protect its interest, but second, that the involved parties not be incentivized to race to spend the settlement funds to frustrate the interests of the plan and the purpose of ERISA.

Do Plans Have Other Realistic Options? In oral argument, many of the justices focused on the practical aspects of pursuit of a plan’s interest were Mr. Montanile to succeed. A number of arguments were presented regarding alternatives plans may have to enforce their rights, including intervening in state court tort actions, filing temporary restraining orders to prohibit a participant or attorney from disbursing funds or filing suit immediately upon settlement of a claim for adjudication of a lien. Justice Breyer seemed particularly interested in potential plan remedies directly against a malfeasant attorney, rather than against a judgment-proof plan participant. Unfortunately, that particular potential remedy is actually the subject of a separate disagreement between federal courts and may need to be heard by the Supreme Court in the near future. Thankfully, assumptions that it would ‘probably be pretty easy’ to monitor tort claims for all plan participants were quickly corrected in two relevant and common contexts.

Locating Cases for Potential Intervention First, there are cases where a participant has retained an attorney and a lawsuit has been filed. While there are some systems, like WestLaw, that can provide some national coverage for searching for state civil suits, there are some states with no state court docket coverage on these systems (14 with no access on WestLaw) and not every state with some coverage has full coverage. The vast majority of tort actions will be filed in state court and so many plans, particularly large plans with participants in multiple states, would face substantial challenges even locating these actions to potentially intervene. These records are generally compiled on the city or county level and not all courts provide access electronically. Certainly it would not be as straightforward to monitor all potential lawsuits, as was suggested by one of the justices, as just ‘punching in’ a participant’s name. Second, there are the majority of subrogation cases in which no suit is ever filed, even if the participant has an attorney. There are no public records for these cases. Imagine the all too common scenario where a participant is so injured that it is immediately clear that the relevant policy’s limits would be insufficient to compensate for a loss. In those cases it’s common for settlement to occur within 45 days from the date of injury or loss. There are circumstances under which a health plan may not even have been billed by providers within that timeframe, let alone have the capacity to ensure proper handling of the funds by the participant in advance of dissipation. Both of these situations were thoroughly addressed in an Amici Curiae Brief filed by the NASP and SIIA in favor of the plan. The plan’s attorney pointed the court to statistics provided in that brief regarding the fact that more than 50% of personal injury claims resolve without any filing of suit and the even greater

December 2015 | The Self-Insurer


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SUBROGATION RIGHTS | FEATURE number that resolve without trial and, therefore, without any judgment. When funds are exchanged quickly it can make it easy for plans to remain in the dark until the funds have been disbursed and parties would have every incentive to do so if Mr. Montanile is successful in this case.

Impact on Other Types of Plans A question raised by the two sides in oral argument is whether or not a decision in this case will bind reimbursement/overpayment actions in the context of pension and disability cases. In pension cases, payments are generally made in error by the plan so that small computational errors result in additional funds being paid with each benefit check. With disability cases, payments are made by the Plan for eligible claims, but under federal law, the plan cannot impose a lien on the social security disability benefits later received by a participant even though those benefits are considered a double recovery relative to the benefits under the plan. It was suggested that half of the cases that create the basis for the circuit split that the court was asked to resolve in Montanile relate to disability benefits and so any rule would need to address both types of interest. Mr. Montanile spent substantial time discussing the apparent inequities of reimbursement in such cases, when participants on fixed incomes sometimes need to repay plan benefits they had been receiving for decades. The Supreme Court declined to hear the appeal in a disability case, Bilyeu, a few years ago after being presented with the argument that Bilyeu would present a poor vehicle to resolve the question ultimately presented in Montanile. The question of what ‘specifically identifiable fund’ the plan seeks reimbursement from is unclear in the disability and pension contexts, unlike the healthcare subrogation context. Ultimately, the question of reimbursement for disability claims may need to be answered in another case as some courts, including the 9th circuit in Bilyeu have found that there was no ‘specifically identifiable fund’ for the Plan to assert its lien on and so dissipation is not the relevant question in that context.

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Challenges to Plans Ability to Enforce Their Rights in Court One more point raised in the NASP/SIIA brief is the increasing complexity of private, self-funded ‘ERISA’ plans being able to enforce their rights in state court and intervene as Montanile and his supporters suggest they should. Earlier this year, in another case in which NASP and SIIA filed an Amici Curiae brief advocating for review, the Supreme Court declined to hear a case (Wurtz v. Rawlings Company, LLC, 761 F.3d 232 (2nd Cir. 2014)) which would resolve a circuit split on whether complete preemption applies to subrogation matters. This split creates problems for plans that may not be able to enforce their rights in certain ‘anti-subrogation’ state jurisdictions, but would be left without the ability to remove an action to federal court to see their rights enforced. Similar arguments have been made in other circuits which call into question the Plan’s clear ability to enforce its rights before settlement funds are disbursed, see Walsh, Knippen, Pollock & Cetina, Chartered v. International Union of Operating Engineers, Local 399 Health and Welfare Trust Fund, No. 14 C 8232 (N.D. Ill. Apr. 15, 2015), finding that removal to federal court of an action adjudicating the enforceability of state law contrary to the terms of the plan was improper because the patient’s attorney, not the Plan, was the plaintiff in the action.

Ultimately, because plans, with the support of NASP and SIIA, have been successful in protecting rights outlined in their plan documents, some participants and attorneys are going to continue to attempt to defend extreme strategies when it comes to finding ways around reimbursement. In particular, many participants and attorneys have pushed back following the Supreme Court’s decision in US Airways, Inc. v. McCutchen, 133 S. Ct. 1537, (2013), in which the court determined that with the appropriate language a plan may even have the ability to enforce a lien for the entire amount of the settlement, such that a participant and their attorney receive no portion of the recovery. While such provisions certainly help to control plan costs and maintain the viability of establishing these self-funded plans, participants and attorneys continue to push back as they see what they believe to be increasingly unfair results in individual cases. We’re looking forward to the Supreme Court’s ruling in Montanile, which will likely be released in Spring 2016. ■ Catherine Dowie advanced from The Phia Group’s recovery department to The Phia Group’s legal team in 2014. As a Paralegal and Legal Liaison, Catherine is responsible for handling complex subrogation and recovery cases and recovers millions of dollars each year for self-funded employers. Catherine also spearheads legal research efforts for The Phia Group’s recovery team, ensuring that The Phia Group can assist health plans in taking full advantage of their recovery rights. Catherine is currently working toward her Juris Doctorate at Suffolk University School of Law, where she attends classes in the evenings. Catherine earned her Bachelor of Arts from Smith College and is also a Certified Subrogation Recovery Professional (“CSRP”). December 2015 | The Self-Insurer


RRGs Report Financially Stable Results Through Second Quarter 2015 This article originally appeared in “Analysis of Risk Retention Groups – Second Quarter 2015”


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 2015, 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.

Balance Sheet Analysis

Written by Douglas A Powell, Sr. Financial Analyst, Demotech, Inc. 10

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During the last five years, cash and invested assets, total admitted assets and policyholders’ surplus have increased at a faster rate than total liabilities. 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 2011, cash and invested assets increased 77.2% and total

admitted assets increased 62.3%. More importantly, over a five year period from second quarter 2011, through second quarter 2015, RRGs collectively increased policyholders’ surplus 60.3%. This increase represents the addition of nearly $1.8 billion to policyholders’ surplus. 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 2015 was approximately 69%. A value less than 100% is considered favorable as it indicates that there was more than a dollar of net liquid assets for each dollar of total liabilities. This also indicates an increase for RRGs collectively as liquidity was reported at 66.9% at second quarter 2014. 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 2015, was 216.4% and indicates a decrease over second quarter 2014, as this ratio was 220.8%. 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%. Leverage for all RRGs combined, as measured by total liabilities to policyholders’ surplus, for second quarter 2015, was 152.3% and indicates an increase over second quarter 2014, as this ratio was 144.3%. The loss and LAE reserves to policyholders’ surplus ratio for second quarter 2015, was 102% and indicates an increase compared to second quarter 2014, as this ratio was 97.7%. 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

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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 collectively reported over $1.8 billion of direct premium written (DPW) through second quarter 2015, an increase of 4.6% over second quarter 2014. RRGs reported $1.2 million of net premium written (NPW) through second quarter 2015, an increase of 6.9% over second quarter 2014. These increases are favorable and appear reasonable. The DPW to policyholders’ surplus ratio for RRGs collectively through second quarter 2015, was 78.7%, up from 73.8% at second quarter 2014. The NPW to policyholders’ surplus ratio for RRGs through second quarter 2015, was 51.6% and indicates an increase over 2014, as this ratio was 47.4%. Please note that these ratios have been adjusted to reflect projected annual DPW and NPW based on second 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% would subject an individual RRG to greater scrutiny during the financial review process. Likewise, a NPW to surplus ratio greater than 300% 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.

Income Statement Analysis RRGs collectively reported a $53.5 million underwriting loss through second quarter 2015.The collective underwriting losses were offset by strong investment gains and other sources of income. RRGs reported an aggregate net investment gain of $130 million and a net income of $80.7 million. The loss ratio for RRGs collectively, as measured by losses and loss adjustment expenses incurred to net premiums earned, through second quarter 2015, was 81%, a decrease over 2014, as the loss ratio was 84%. 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 2015, was 18.2% and indicates a decrease compared to 2014, as the expense ratio was reported at 19.2%. This ratio measurers an insurer’s operational efficiency in underwriting its book of business. The combined ratio, loss ratio plus December 2015 | The Self-Insurer


expense ratio, through second quarter 2015, was 99.2% and indicates a decrease compared to 2014, as the combined ratio was reported at 103.2%. This ratio measures an insurer’s overall underwriting profitability. A combined ratio of less than 100% typically 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 Financial 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 year-end 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. 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. ■Douglas A Powell is a Senior Financial Analyst at Demotech, Inc. Email your questions or comments to For more information about Demotech visit

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December 2015 | The Self-Insurer



the Beltway Written by Dave Kirby

SIIA Members Advance Self-Insurance in Events Hosting Senator Burr and Representative Roe


embers of Congress who are pivotal to passing legislation in the interests of self-insurance joined with SIIA members and staff in two special events under the auspices of the Self-Insurance Political Action Committee (SIPAC). A Washington DC dinner was hosted for Senator Richard Burr (R-NC), who is a member of both the Senate Finance Committee and the Committee on Health, Education, Labor and Pensions (HELP), both of which deal with legislative matters affecting important aspects of self-insurance including employee health plans and enterprise risk captives (ERC). “We enjoyed a wide-ranging discussion with Senator Burr on our concerns including the Self-Insurance Protection Act (SIPA), the Cadillac tax provisions of the Affordable Care Act and possible legislation regarding enterprise risk captives,” said Ryan Work, Senior Director of Government Relations. SIIA members attending were SIIA board member Bob Clemente, Government Affairs Committee Chairman Jerry Castelloe, SIPAC Trustee Chair Bob Tierney and Government Affairs Committee member Matt Kirk. Co-hosts were John Capasso and Debra Gaglioti of


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Captive Planning Associates and Kevin Myers of Oxford Risk Management. The dinner was also supported by Keith Langlands of Synergy Captive Strategies, Jarid Beck of Risk Management Advisors and Josh Miller’s team at KeyState. “We were well received by Senator Burr and I think we moved our issues higher in his awareness,” Capasso noted following the meeting. “Captives are a largely unknown industry in Congress,” added his colleague Gaglioti. The Senate Finance Committee last February surfaced draft legislative language for a possible bill that would affect ERCs of small and medium sized businesses that operate under IRS code 831(b). Following an informational meeting with SIIA and others, the Committee invited SIIA to provide example legislative language that it could consider in shaping a future bill. SIIA provided suggested legislative language last spring.

“We were a little disappointed at the apparent slow pace of the ERC issue,” Capasso said. “The Senator indicated that the bill could be taken up again in mid-January.” He said that Sen. Burr acknowledged the economic development opportunities for states with vigorous captive industries. North Carolina began licensing captives in recent years.

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Myers of Oxford Risk Management said, “Senator Burr was very gracious even at the end of an apparently long day of legislative business. Our group engaged him on issues ranging from the ART (alternative risk transfer) side to the self-insured benefits side. I think we can be confident that he’ll understand these issues when they come up in his committees.” A “meet and greet” event was held by SIIA members with Dr. Phil Roe, M.D. (R-TN), the primary sponsor of the Self-Insurance Protection Act (SIPA) which was prompted by SIIA to protect stop-loss insurance from being defined as health insurance by federal and state governments. A long-time physician and member of the key House Education and Workforce Committee, Dr. Roe has been a steadfast supporter of self-insurance throughout his legislative career. Joining Dr. Roe in the event were the above-mentioned Bob Clemente, Jerry Castelloe, Matt Kirk and Bob Tierney. The political process is playing an increasing role in the regulatory and compliance environment in

Bob Clemente, Bob Tierney, Dr. Roe, Jerry Castelloe and Matt Kirk

which we operate, Kirk wrote in a message to SIPAC members following these events. “SIPAC provides SIIA members the opportunity to participate in educating lawmakers about the critical role self-insurance plays in the complex healthcare environment and helps ensure that our interests are considered when decisions are being made.

political engagement a key part of our advocacy efforts, Kirk concluded. SIIA members always have the opportunity to meet with their Congressional representatives either in Washington or in their home districts. For scheduling and support information, contact Ryan Work at or (202) 595-0642. ■

“It is personal interactions like our recent events that make policy and December 2015 | The Self-Insurer



the Beltway Written by Dave Kirby

Texas Flood Doesn’t Stop SIIA Members from Commenting on Draft Stop-Loss Regs


ast fall’s deluge that flooded much of the Southwest didn’t deter SIIA members and others from offering their comments to elements of a draft rewrite of Texas employee health insurance regulations – focused closely on stoploss insurance for self-insured plans – at an informational meeting in Austin.


“I was pleased to see so many members of the industry come out in those conditions,” said Robyn Jacobson, chief operating officer of TPA Entrust in Houston. “The Austin airport and many roads were closed. We had to drive off the roads on detours and we saw plenty of cars underwater.” In all, about 40 industry figures attended in person or by phone the informal hearing led by Doug Danzieser, Deputy Commissioner, Life, Health and Licensing of the Texas Department of Insurance (TDI). SIIA Director of State Government Relations Adam Brackemyre led a SIIA member delegation that included Robyn Jacobson along with three members who attended by phone, Jeff Gavlick, Vice President of Product Development and Management for


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Stop-Loss of AIG; Ted Kennedy, Deputy Head of AIG Federal and State Government Affairs; and Marc Marion, Vice President of Strategic Alliances for stop-loss insurance carrier American Fidelity Assurance Company of Oklahoma City.

for adoption sometime next year. The draft that the TDI circulated for comment borrowed heavily from model stop-loss regulations that have been proposed for adoption by the states by the National Association of Insurance Commissioners (NAIC).

The hearing was an early step in the process the TDI will follow in promulgating new stop-loss regulations that appear to be targeted

Following the hearing, SIIA forwarded a letter of comment to the TDI. Brackemyre listed some of SIIA’s concerns for The Self-Insurer :

In general, SIIA is very concerned that some employers would lose their health plans and others would see stop-loss premium increases. Of specific concern is a possible small business minimum aggregate of $4,000 per enrollee. SIIA members report that that requirement is simply too expensive for small businesses. Larger employers would likely see cost increases as well if the TDI were to prohibit lasering. To protect these plan sponsors, SIIA spoke at the hearing in support of eliminating the minimum products standards from the draft. Also, as currently drafted, a stop-loss carrier must disclose TPA fees, which is information a stop-loss carrier may not have, in the stop-loss contract. In addition, the summary plan document should govern health plan eligibility and claims determination. As drafted, these are ‘employer’ decisions. These are just two of the smaller items that need to be addressed.

TDI staff have expressed their commitment to an open process and SIIA looks forward to working with them. We believe there will be significant revisions to the draft regulation, Brackemyre added. Deputy Commissioner Danzieser commented at the hearing that no new elements would be added to the draft regulations, but that some revisions and reductions of elements could be made. An industry source that has not been confirmed reported that the stop-loss elements could be separated from the body of the regulations to be developed on a slower track. Marc Marion of American Fidelity commented: “This was a draft of a proposed future regulation in its very early stage and this hearing was really the department’s opportunity to hear reactions that will help inform later versions. The self-insurance market works well in Texas and this was our opportunity to help the department understand how the market accomplishes that. “The TDI seems to be saying that there’s an awful lot of self-insurance activity out there that we’re curious about and this draft proposal was a good place to start learning about it,” Marion added. “I think we got an open-minded hearing and where it goes from here is anyone’s guess. But we feel this was a good opportunity for the industry to participate at the formative stage rather than when a regulation is too far down the line for us to affect. We will continue to participate going forward and we appreciate the leadership on this issue provided by SIIA.”

“From the employers’ perspective, they need the opportunity to expand benefits unfettered by limits on stoploss,” Jacobson added. “Such limits would hurt employees and their dependents – the very people that the TDI is hoping to help. But stringent rules for stop-loss could drive carriers out of the state and drive employers into the health care exchange.” Self-insuring Texas employers and SIIA members are encouraged to convey their thoughts on the importance of self-insurance to Danzieser of the TDI. Support materials and the draft Texas regulation will continue to be available from Adam Brackemyre in SIIA’s Washington, DC, office, (202) 463-8161 or ■

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Robyn Jacobson agreed, saying she is confident the TDI will adopt workable regulations, in part because of the strong turnout of SIIA members and Texas

insurance and business organizations. “It’s apparent the TDI’s interest in self-insurance has increased as it now has been adopted by over 80% of the state’s employers.

December 2015 | The Self-Insurer


Bench From the

Mock Mediation SIIA Program Draws Significant Interest


e had a “standing room only” crowd for the first of the two sessions of our mock mediation program at the SIIA National Meeting last month and a full room of 200+ for the second session. If you missed it, you may find the fact pattern of interest. On the dais were lawyers for the Group, the TPA and the Carrier, a client representative for each and a highly regarded full-time mediator. Below is the copy of the “problem” that was distributed to the participants and the audience. The case is entirely fictional and each of the participating role players were merely “actors” in the play; none of the positions taken by any of them necessarily reflect the positions they might take in a “real life” case.1

Written by Thomas A. Croft, Esq. 18

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I designed the dispute so that it included “something for everyone”

in terms of issues: several aspects of disclosure; timing of payment; TPA advice to the Group; alleged bad faith by the Carrier; usual and customary charges and TPA investigation thereof; an eligibility issue involving Plan interpretation; and a “late COBRA” issue. As it turned out, there was simply insufficient time for the parties to argue in any depth the last three issues. This mediation would likely have lasted a full day (or even more) were it not a mock demonstration. What we wanted to get across was the process – not so much the substantive issues of stop-loss law involved. We believe we accomplished this much well.

The Dispute

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Stop-loss Carrier (“the Carrier”) issued an excess loss policy effective January 1, 2016 - December 31, 2016, to the Group in late February 2016. This was the first year the Carrier had this group. The policy was a “12/12” policy with no run ins or run outs. It had no provisions disqualifying persons disabled or not actively at work on the effective date. The proposal, sent and accepted in mid-November, required a Disclosure Statement (“DS”) no earlier than 30 days prior to the effective date. Among the requirements of the DS was a requirement that all claims paid in excess of 50% of the proposed specific deductible (spec. in this case was $50,000) during the previous plan year through the date of the DS be disclosed, with name, diagnosis, etc. This requirement did not specifically refer to billed but unpaid claims. However, it required disclosure of any participant or dependent whose diagnosis met one of the ICD-9/ICD10 codes listed on the DS as being required to be disclosed and also of any potential claimant whose total costs could reasonably be expected to exceed 50% of the specific deducible during the coming Plan year.

The TPA provided an accurate paid claims report through December 15, 2015, to the Carrier on December 27, 2015, which included all claims paid in excess of 50% of the spec., i.e., $25,000, during the previous Plan year. The TPA did include Claimant “X” on the report because his paid claims to date were $30,000 due to a surgery for a gastrointestinal problem in June. The DS was signed by the group and the TPA and submitted to the Carrier on 12/15/2015. Both the TPA and the Group representative signing believed these to be accurate at the time they signed them. Claimant “X” was injured in an automobile accident sustaining serious injuries on December 13, 2015. The TPA received an initial bill from the hospital in the amount of $75,000 on January 10, 2016, which included ICD-9/ICD-10 codes required to be disclosed by the DS. The TPA did not supplement its DS, nor was there any specific requirement in the DS that it be supplemented if events after the date it was signed and submitted be disclosed. During the quoting/proposal process, the TPA asked for and received a copy of the Carrier’s form policy. In mid-January, after the policy effective date but before the policy had been formally issued, someone at the TPA noticed the section that required notification to the carrier of any “potentially catastrophic claim” within ten days of the date it appears the claim will exceed 50% of the specific deductible. The TPA immediately notified the Carrier of Claimant “X”’s claim pursuant to this provision. This occurred on January 27, 2016. Meanwhile, the policy issuance department at the Carrier, having an approved DS, an application and having the initial premium in hand, issued the policy on February 1, 2016, effective January 1, 2016. The policy

issuance department was unaware of the “50% Notice” regarding catastrophic claims that another department at the Carrier had received on January 27, 2016. In March, 2016, the TPA filed a claim on behalf of the group in the amount of $125,000 in respect of Claimant “X”. The Carrier denied the claim for lack of proper disclosure regarding Claimant “X.” Subsequent to the denial, which the Group protested. Claimant “X” incurred an additional $500,000 in claims during 2016. These were not paid by the Group/TPA until early 2017, nor did the TPA/Group file any claims in respect of them, reasoning that the previous disclosure denial would make the submission of additional claims futile. The Group elected not to pay these claims within the policy period because it was running low on cash and its TPA had advised it, based on case from the Southern District of Ohio, it was excused from doing so. See uploads/2013/06/From-the-Bench-byThomas-A-Croft-Esq.pdf. The group then filed claims for the additional $500,000, which was also denied. The group then sued both the Carrier and the TPA in federal court in late 2017 in the “State of Misery.” All parties were diverse, so that there was no question of federal jurisdiction. The Group sought recovery from the Carrier for $625,000, plus another $375,000 for “bad faith” damages as provided by Misery law for “unreasonable” claims denials. In the alternative, the Group sued the TPA for $625,000, alleging the advice about not having to pay the $500,000 in claims was defective in the event it was determined that the Group did have to pay those claims within the policy period. If the case December 2015 | The Self-Insurer


must be tried, it will be tried to the Court without a jury, as no party filed a timely jury demand. There is also a dispute about the cost of claims. The stop-loss policy defines “Usual and Customary” charges as “the usual charge made by the provider... not to exceed the usual charge made by the majority of like providers for the same or like service in the same geographical area in which the service or treatment is performed... .” It excludes charges in excess of that. The Plan Document states that “all covered expenses are paid at the negotiated rate or based on reasonable customary charges.” The Plan also excludes “services and supplies in excess of reasonable and customary charges or the network negotiated fee.” The TPA paid all the claims without any investigation into “Usual and Customary,” but in its denial letter the Carrier “reserved its rights” on this issue, claiming to be still investigating. The suit sought a declaration by the Court that the claims were not in excess of “Usual and Customary” under the S/L policy language. Finally, there is a potential eligibility issue. Claimant “X” was put on FMLA leave retroactively to the date of his accident (he had no accrued vacation or sick leave) but was otherwise eligible for FMLA. The Plan provided for twelve weeks of FMLA leave and no other type of leave of absences and required that an employee be actively working for a minimum of 35 hours per week to be eligible for benefits under the Plan. In its denial, the Carrier also reserved its rights as to whether, at the end of 12 weeks after the date of the accident, FMLA expired and Claimant “X” should have been offered COBRA. No offer of COBRA coverage was ever made to Claimant “X” by the Group (nor did the TPA suggest that one be made) until early 2017. Claimant “X”


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timely accepted the offer when it was made; the Group paid all back premiums for him. The S/L policy had a standard “late COBRA” clause, providing an exclusion if the Group did not timely offer COBRA. The Group responded by pointing out that its Employee Handbook provided for up to eighteen months of medical leave. The Handbook was not provided at underwriting, nor was it referenced in the Plan. However, the Carrier did not ask for it during the underwriting process. Further, the Plan contained language which gave the Plan Administrator (here, the Group) “complete and absolute discretion” to determine all matters regarding eligibility, “consistent with the employer’s leave policy.” On the other hand, the S/L policy contained language indicating that its interpretation of the Plan was determinative, despite any discretionary language in the Plan.

The parties sought and obtained a 60 day stay of the case, pending a voluntary mediation prior to any discovery. Not included in the description of the problem was the following-Unbeknownst to the Carrier or the TPA was the fact that, on the day of the accident, the wife of Claimant “X” went to her neighbor’s home and discussed it with her. Her husband, who also worked for the Group, went to work the next day and informed Claimant “X’s” supervisor of the seriousness of the accident and the supervisor notified someone in HR. This notification occurred on 12/14/2016, but was not passed along to Ms. Schoen, the head of HR, until a few days after she signed the DS on 12/15/2016. No parties other than the Group were aware of this fact at the time of the mediation, as there had been no discovery in the case yet, nor was this fact disclosed to the mediator.

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How it Played Out Initially, all the parties and their counsel met in a “plenary session” with the mediator, introduced themselves and their roles to each other and stated in summary fashion their respective positions on the issues involved in the case. The mediator explained the ground rules, including the confidentiality of the proceedings (e.g., nothing said during the mediation could later be used in the trial of the case if a settlement was not reached, etc.) Expectedly, the Group took the position that it was entitled to the amount of the unpaid claims and bad faith damages, totaling $1 million. The Group’s “theme” was that it had paid its premium and was entitled to coverage and to the extent its payments were late in 2007, that was the result of the negligence of its TPA, who should make up any shortfall from the amount paid by the Carrier.

The TPA took the position that, through its own diligence, it noticed the “catastrophic claim” notification provision in the form policy and notified the carrier of the claim prior to the issuance of the policy, such that the carrier had notice of the claim when it issued the policy and could have protected itself from the previous lack of disclosure. The Carrier argued that the disclosure was defective and that it had properly and reasonably denied the claim under the circumstances according to contractual language. It further argued that the Group’s 2007 payments were per se untimely and the exception in the Ohio case the Group was relying on did not apply because, due to cash constraints, the Group was not “ready, willing and able” to pay prior to the expiration of the Benefit Period as required by that case. At this point, the parties and their counsel met with the mediator privately, with the other parties and counsel offstage and out of the hearing of the private caucus. The audience was privy to these private caucuses. The mediator met privately with each of the parties and their counsel several times during the course of the afternoon. Perhaps the biggest breakthroughs were when the Group dropped its demand for bad faith damages and when the Carrier and the TPA began discussing a joint offer to the Group and a split between themselves as to the amount. Looming large in the whole process was the prospect of attorneys’ fees for discovery and trial, which were variously estimated at $100,000-$150,000 per party. Late in the second session, an agreement was reached for a settlement at $350,000, to be shared 40% by the TPA and 60% by the Carrier, plus some other incidental terms. Author’s Comment: Obviously,

had the mediation taken place after the depositions of the Group personnel, the balance of power in the mediation would have changed significantly. This is one risk of mediating before any discovery. On the other hand, early resolutions to cases can save significant sums for all concerned, as there are not always critical facts “hiding in the bushes,” as there were here. Clearly, the undisclosed facts about HR’s imputed knowledge prior to the signing of the disclosure statement provided a powerful incentive for the Group to get a settlement done at the mediation rather than proceed to discovery. Solicitation for Comments/Questions Whether you attended the sessions or not, the panelists and I would be interested in the readers’ comments about the “problem” and their insights December 2015 | The Self-Insurer




It took a visionary company like HM Insurance Group to demonstrate stability and smart risk assessment for producers guiding their self-funded clients. We anticipate what others don’t see, and craft Stop Loss policies with the highest attention to detail. Because once a client is grounded in certainty, it inspires confidence and opens a world of possibilities. Learn more about our innovative approach to Stop Loss at



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Do you aspire to be a published author? Do you have concerning it. Perhaps a follow-up article containing some of those insights would be in order next month, optionally including a brief discussion of the aspects of the dispute that did not get discussed at the presentation – U&C, eligibility and “late COBRA.” If you would like to participate, please email me at ■ Tom Croft is a magna cum laude graduate of Duke University (1976) and an honors graduate of Duke University School of Law (1979), where he earned membership in the Order of the Coif, reserved for graduates in the top 10% of their class. He returned to Duke Law in 1980 as Lecturer and Assistant Dean (1980-1982) and as Senior Lecturer and Associate Dean for Administration (1982-1984). He also taught at the University of Arkansas-Little Rock law school, where he was an Associate Professor of Law (1990-91), earning teacher of the year honors.

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Until 2004, when he specialized in medical stop-loss litigation and consulting, Tom practiced general commercial litigation. He was a partner in the litigation section of a major Houston firm in the late 1980s and moved to the Atlanta area in 1991. He has been honored as a Georgia “Super-Lawyer” by Atlanta Magazine for the last eight years running and holds an AV® Preeminent rating from Martindale-Hubble®. Tom currently consults extensively on medical stop-loss claims and related issues, as well as with respect to HMO Excess Reinsurance, Medical Excess of Loss Reinsurance and Provider Excess Loss Insurance. He maintains an extensive website analyzing more than one hundred cases and containing more than fifty articles published in the Self-Insurer Magazine over many years. See He regularly represents and negotiates on behalf of stop-loss carriers, MGUs, Brokers, TPAs and Employer Groups informally, as well as in litigated and arbitrated proceedings and has mediated as an advocate in many stop-loss related mediations. Tom can be reached at References The Group was represented by Mike Coakley, Esq. of Miller, Canfield, Paddock & Stone of Detroit, Michigan and Sharon Schoen, Senior Stop-loss Auditor for International Specialty Underwriters of Jacksonville, Florida; the TPA was represented by Dan Alter, Esq., of Gray Robinson in Ft. Lauderdale, Florida and Kim Englehardt, Vice-President/Operations, of TRU Services, LLC, an MGU in Beverly Mass; and the Carrier was represented by Jonathan “Dirk” Holt, Esq., of Scheer & Zehnder, LLP in Seattle, Washington and Bob Baisden, owner of International Assurance of Tennessee, an MGU in Nashville, Tennessee. Our mediator was Terrence Lee Croft of JAMS in Atlanta, who has resolved more than 3500 disputes during his career.


any stories or opinions on the self-insurance and alternative risk transfer industry that you would like to share with your peers?

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STANDARDS for Industry with

Code Ethics of


n May, the North Carolina Captive Insurance Association (NCCIA) Board approved a Code of Ethics for its membership, considered the ďŹ rst of its kind for the captive insurance industry. The code is aspirational in nature and meant to be a guide to good corporate governance for NCCIA members. In adopting the Code, the NCCIA aims to take a leadership position on corporate governance and to open up a dialogue about best practices for captives.

Written by Karrie Hyatt

NCCIA CODE of ETHICS | FEATURE “A Code of Ethics can help the industry as a whole by demonstrating to clients and regulators that those adopting a code of ethics take these matters seriously,” said NCCIA Board Chairman Martin Eveleigh. North Carolina is one of the newer captive domiciles in the United States. The state’s first captive law was passed in June 2013 with the domicile’s initial captives approved by January 2014. The new domicile has been gaining ground among its competitors and by this past fall had more than fifty captives domiciled in the state. Many of those are established captives that chose to redomesticate to the state. The state updated its captive law this past June. NCCIA was established prior to the passing of the state’s captive law and its members played an important role in advocating for it.

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Code of Ethics As a new captive association, NCCIA has been working to define its mission and role within the nascent North Carolina captive industry. As part of their mission, “The Board decided that North Carolina should take a leadership position in developing some rules of the road towards prudent captive management and corporate governance,” said Jonathan R. Reich, an attorney with Womble Carlyle Sandridge & Rice, LLP in North Carolina and a board member for NCCIA. The Association’s purpose is to represent the private sector’s interest in captive insurance in North Carolina, as well as to educate business both inside and outside the state about North Carolina’s captive program, to be an advocate for its members and to help “maintain professional standards of our service provider members,” said NCCIA Chairman Eveleigh, who is also the chairman

of Atlas Insurance Management. “It is this last that the Code of Ethics seeks to address. Of course, an aspirational code is just that.” “The Association has no regulatory or disciplinary function,” continued Eveleigh. “However, we do expect service provider members to read the code and to consider their own ethical standards as they do so.” The NCCIA believes that its Code of Ethics is the first of its kind for captives. “If you look at basically every other profession in the country there is a code of ethics or code of conduct, whether an engineer, attorney, or accountant. The list goes on and on. Captives have been around for several decades, but no one to our knowledge has promulgated a code and started a dialogue within the industry,” according to Reich. Accountants, lawyers, actuaries and others involved in the industry are required to adhere to the respective ethics codes of their individual disciplines. The NCCIA code is not intended to conflict with any existing codes of conduct, but to augment them. Reich continued,

“We’re here to spread the gospel of captive insurance generally and for North Carolina specifically. We believe that a natural part of the maturation for the industry is for someone to define what it means to be a captive insurance professional in an ethical manner and how they are supposed to conduct themselves.” In establishing the code, the association hopes to open a discussion which will help elevate how the captive industry is perceived. “Our goal is to create a dialogue in the industry and to get people talking about the topic,” said Reich. “The more people that are talking and thinking about it the better the code of conduct will be. This not the end game, this is the starting point.” In recent years, best practices for the captive industry has become a hot topic amongst industry professionals. With increased criticism by state and federal lawmakers and regulators, captive insurance supporters are looking for ways to enhance industry credibility. “There are only positives that can come from increased dialogue regarding corporate governance and captives ethics issues for the industry as a whole,” Reich continued. Eveleigh added that, “NCCIA believes that best practices and ethical conduct are very closely related and promulgation of the Code is our constructive contribution to the industry. We hope others will follow suit.”

The Ten Canons The Code consists of ten canons meant to encompass good corporate governance for captive professionals. The canons cover a wide range of issues, from not willingly breaking the law to promoting the professionalism of the individual and of the industry. Many of the ideas encompassed in the Code December 2015 | The Self-Insurer


NCCIA CODE of ETHICS | FEATURE most people would understand as basic tenants of doing business, yet NCCIA included them in order to codify them. “The Code was not designed to address any specific known issues but rather to provide guidance as to conduct,” said Eveleigh, “In some cases, the guidance may seem very obvious, but I do think that suggestions as to how to resolve a conflict of interest are particularly helpful.”


Captive professionals should endeavor to elevate the public image of captive insurance and to improve the public understanding of captive insurance.


The captive professional shall retain the autonomy to make independent decisions, exercise judgment and give advice in the best interest of his or her client.

8 9

The captive professional should aspire to be open, frank and veracious in communications with the client.

The tenants of NCCIA’s Code of Ethics are straightforward. Each canon is stated clearly followed by a “Comment” which explains its practicality. Below is the list of the ten canons. More information and the full comments are available at

1 2

Captive insurance professionals should continually and regularly improve their skills and competence, as professional competency relates to captive insurance or risk management.

Captive professionals must not willfully violate any laws or regulations, in both their personal conduct and in their advice to clients. Captive professionals should be familiar with the laws of the domiciles where they advise clients and operate captives, as well as applicable federal law. Captive professionals should avoid conduct or activities that are reasonably certain to cause unjust harm to others.

3 4 5 26

Captive professionals shall be reasonably diligent in their interactions with clients and prospective clients and be reasonably diligent and prompt in their occupation and duties on behalf of clients. The captive professional should seek to raise ethical standards within the profession and to raise their own standard of professionalism. Captive insurance professionals shall seek to maintain dignified and honorable relationships with other insurance professionals and members of other professions.

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To the best of his or her knowledge, a captive professional should fully and frankly disclose any conflicts of interest, or situations which could be perceived as a conflict of interest, with each client. After this disclosure, the professional should seek the informed consent of each client before continuing a business transaction or relationship.


If a captive professional’s ethical obligations conflict with a statute, administrative regulation, or other professional code of ethics or conduct, the captive professional should inform the appropriate parties of the conflict between this aspirational code of ethics and the other authority. The captive professional should then initiate a conversation and seek to take steps to resolve the conflict. If the conflict cannot be amicably resolved, the captive professional and this code of ethics should yield to the other professional licensing or accreditation board or governmental authority. ■ Karrie Hyatt is a freelance writer who has been involved in the captive industry for more than ten years. More information about her work can be found at:


TO THE BENEFIT OF BENEFITS. Do a good deed today. Back in the day, “benefit” meant “good deed.” It still can. Because Sun Life’s group and voluntary plans are not only easy for employers to administer, they’re easy for employees to understand— and value. When your clients get coverage, whether it’s life, short- and long-term disability, accident, critical illness, dental, or stop-loss, we show them that benefits aren’t just about attracting great employees. Benefits do real good for people. And that feels great.

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Life’s brighter under the sun 877-736-4739 In all states except New York, group insurance policies are underwritten by Sun Life Assurance Company of Canada. In New York, group insurance policies are underwritten by Sun Life and Health Insurance Company (U.S.). Product offerings may not be available in all states and may vary depending on state laws and regulations. Accident and Critical Illness products are not available in New York. © 2014 Sun Life Assurance Company of Canada, Wellesley Hills, MA 02481. All rights reserved. Sun Life Financial and the globe symbol are registered trademarks of Sun Life Assurance Company of Canada. PRODUCER USE ONLY. BRAD-5066 SLPC 24719 02/14 (exp. 02/16)

December 2015 | The Self-Insurer


PPACA, HIPAA and Federal Health Benefit Mandates:



New HSA Erroneous Contribution Guidance: A More Reasonable Approach to the Nonforfeitability Rule for HSA Contributions


ne problematic issue for employers and administrators with respect to Health Savings Accounts (“HSAs”) is that balances in HSA accounts are nonforfeitable once made. This means that contributions to HSAs generally cannot be returned. This includes all

contributions made to an HSA, whether made by the employer, the individual or another person on the individual’s behalf. In addition, this rule applies even after an employee leaves employment with an employer; former employees cannot be required to return HSA contributions made during their employment (even if such funding was “frontloaded” in the beginning of the year). This rule raises the issue of what happens when a mistaken contribution is made to an HSA.


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A September 9, 2015 Information Letter (the “Letter”) from the IRS provides that if there is “clear documentary evidence demonstrating that there was an administrative or process error,” corrections can be made. Although not binding,2 this guidance seems to express IRS’ view that in certain circumstances, a mistaken HSA contribution can be reversed. This article discusses the three major exceptions to the nonforfeitability rule available to employers as a result of prior guidance and the new Letter, including some nuances of which employers should be aware. Please note that because of the detailed nature of the HSA rules, employers should contact experienced legal counsel before attempting to recoup funds from HSA trustees in the event of a mistaken contribution.

Situation 1: The Individual was Never Eligible for HSA Contributions The IRS Notice 2008-59 (the “Notice”) provides that employers may request that HSA trustees return funds contributed for an individual who was never eligible to make HSA contributions, for that particular calendar year. In this case, the funds would need to be adjusted for any earnings, losses and/ or administrative fees affecting the balance of the account. This might sound incongruous with the nonforfeitability rule; however, in the IRS’ view, an HSA never existed because the employee was never eligible to establish one, so the nonforfeitability rule would not apply. If the balance of the account (including earnings) has not been returned by the end of the calendar year, the amounts would be included in the employee’s W-2 for the year (i.e., gross income and wages). Note that this only applies in the current taxable year – it does not apply to correct any mistakes made in previous taxable years. If such a mistake is not discovered until the next calendar year, the employer must issue a corrected W-2 to reflect the imputed income for income and employment tax purposes and the employee would need to re-file his or her tax return for the year in question.

Situation 2: The Employer Contributes More than the Annual Maximum Statutory Limit

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The second example from the Notice provides that if, because of an error, the amount contributed by an employer exceeds the maximum annual statutory contribution allowed, an employer may request that the HSA trustee return the excess contributions to the employer.

Practice Note: The HSA contribution limits for 2015 are $3,350 (single coverage)/$6,650 (family coverage). For 2016, they are $3,350 (single coverage)/$6,750 (family coverage). What if the employer had only planned to add $1,000 to an employee’s HSA and accidentally adds $5,000? This guidance would not allow the employer to take back any amounts except those over the annual limit – which means that any difference between the intended amount and the annual maximum is essentially forfeited by the employer.

NEW Situation 3: There is Clear Evidence of Administrative or Process Error While it was not specifically addressed in Notice 2008-59, the IRS Letter provides that the Notice “was not intended to provide an exclusive set of circumstances in which an employer may request the return of contributed amounts.” If there is an “administrative or process error” and “clear documentary evidence” demonstrating this is the case, the employer can request funds back from the custodian, in order to put the parties in the same position as they would have been before the mistake. In other words, an erroneous contribution of the wrong amount to an employee’s HSA because of a simple data entry mistake can be returned (if the trustee permits). In order to rely on this Letter, employers should maintain documentation related to the mistake. Below are some examples from the IRS that illustrate what it believes are administrative or process errors. In our annotations below, assume that all employees who contribute to an HSA are eligible to do so under the HSA rules.

An amount withheld and deposited in an employee’s HSA for a pay period that is greater than the amount shown on the employee’s HSA salary reduction election. If Meredith elects to contribute $100 per pay period to her HSA but her December 1st payroll reflects a $150 contribution, her employer may request that the trustee return the $50* (i.e., the difference between the contributed amount and the correct amount). December 2015 | The Self-Insurer



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An amount that an employee receives as an employer contribution that the employer did not intend to contribute but was transmitted because an incorrect spreadsheet is accessed or because employees with similar names are confused with each other. John Smith participates in the company’s medical plan with single coverage. Joan Smith participates in the company’s medical plan with family coverage. The company provides $50 per month to individuals with single coverage and $200 per month to individuals with family coverage. If the payroll department contributes $200 (rather than $50) to John Smith and $50 (not $200) to Joan Smith, because an employee accidentally confused their names when processing that month’s payroll, the employer can request that the trustee return the $150 erroneously contributed to John. The employer would then contribute this amount to Joan’s account.

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An amount that an employee receives as an HSA contribution because it is incorrectly entered by a payroll administrator (whether in-house or third-party) causing the incorrect amount to be withheld and contributed. Steven is currently contributing $50 per payroll period to his HSA. The payroll administrator, impatient to leave the office for a long weekend, accidentally keys in a $500 contribution to Steven’s HSA. Steven’s employer may request that the payroll administrator return the $450 (i.e., the difference between the contributed amount and the correct amount).

An amount that an employee receives as a second HSA contribution because duplicate payroll files are transmitted. Under the terms of its group health plan, Carolyn’s employer contributes $50 per pay period to her HSA. If the employer’s August 1st payroll reflects a double employer contribution for health plan participants, the employer may request that the trustee refund the $50 for Carolyn (and all of the other employees affected by the duplicate payroll file).

An amount that an employee receives as an HSA contribution because a change in employee payroll elections is not processed timely so that amounts withheld and contributed are greater than (or less than) the employee elected. Renee decides to contribute $200 per pay period to her HSA in the beginning of the year to cover an expected medical procedure in April. If Renee submits the paperwork to reduce her election to $50 per pay period in May, but this is not processed in a timely manner, her employer can request that the trustee refund the $150 (the difference between the actual contribution and the amount the contribution should have been, under Renee’s payroll election) per month that the election change was delayed.

Practice Note: What is “timely” processing? The guidance doesn’t specify. Clearly, employers must be able to make reasonable cutoff dates after which salary reduction elections cannot be changed (e.g., June 10th is the last day for changes to the June 15th payroll). A delay of longer than one pay period could arguably be deemed “untimely,” but further guidance on this issue would be helpful. An amount that an employee receives because an HSA contribution amount is calculated in-correctly, such as a case in which an employee elects a total amount for the year that is allocated by the system over an incorrect number of pay periods. The payroll department of an employer accidentally calculates that the year has 27 payroll periods, when based on their payroll schedule, there actually should be 26 payroll periods that year. Ashley elected to contribute $90 per pay period. Because of the employer’s mis-take (i.e., the extra payroll period contribution), $90 extra is contributed to Ashley’s HSA that year. The employer may request that the trustee return the $90 (and corresponding amounts for the other employees who were affected by this mistake). December 2015 | The Self-Insurer


An amount that an employee receives as an HSA contribution because the decimal position is set incorrectly resulting in a contribution greater than intended. If Dan has elected to contribute $30 per pay period but the contribution is processed at $300 for a particular pay period, his employer can conclude that this is clearly a mistake in the decimal point that resulted in a contribution greater than Dan intended and request that the trustee return $270 (i.e., the difference between the contributed amount and the correct amount). What do all of these examples from the Letter have in common? In the IRS’ words, they are “administrative or process” errors – essentially, clerical mistakes in the HSA contribution process. In almost all cases, the employer would have clear


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documentation that the amounts contributed were mistakes; for example, payroll election paperwork that did not match what was actually contributed through payroll. It is important to note that this new guidance does not mean that all contributions can be refunded from a trustee. Thus, this Letter provides some flexibility for situations in which it is clear that HSA contributions were the result of clerical or administrative errors, but employers should keep in mind that exceptions to the general nonforfeitability rule should be carefully considered. ■ 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. Attorneys John R. Hickman, Ashley Gillihan, 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 Dan Taylor 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 References Stacy Clark, Esq. an associate in Alston & Bird’s Atlanta office assisted with the preparation of this article.


2 According to Section 2.04 of IRS Rev. Proc. 2015-1, Information Letters call attention to certain general principles of law and are not binding on the Service.

Would you climb a mountain without a guide?

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Healthcare is complicated. As a risk management expert, Berkley Accident and Health can guide you in the right direction. Our creative, nimble approach to risk, backed by the strength of a Fortune 500 company, gives us a unique perspective. Count on Berkley to show you the way. Stop Loss | Group Captives | Managed Care | Specialty Accident Insurance coverages are underwritten by Berkley Life and Health Insurance Company and/or StarNet Insurance Company, both member companies of W. R. Berkley Corporation and both rated A+ (Superior) by A. M. Best. Coverage and availability may vary by state. ©2015 Berkley Accident and Health, Hamilton Square, NJ 08690. All rights reserved. BAH AD-2014-0140

December 2015 | The Self-Insurer


Population Health Management: Next Big Thing or Pet Rock? This article represents “commentary” and represents views of the authors. We welcome other opinions on the subject.


opulation Health Management (PHM) is the newest solution to what ails health financing and delivery. If we can only learn how to group people into better categories and develop customized communications and organize health services specific to each group, we can defeat the two-headed monster of poor health and escalating costs. Sounds good, but shouldn’t it worry us that population health management first arrived on the healthcare scene as a legal and regulatory criterion for consolidation of physicians and hospitals (“clinical integration” is its more benign description), a Federal Trade Commission requirement to overcome anti-trust objections? As with so much in healthcare, could PHM be merely a new, more sophisticated smoke screen used to permit the ongoing concentration of service delivery into regional or national mega-systems?

Written by Tom Kelly 34

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Or perhaps PHM is just another healthcare fad – like disease management, or care coordination, or health information exchanges – that throws public and private funds at what all too soon morphs into a self-perpetuating and expensive, but not very useful, appendage to the health system? A pet rock with attitude?

As with so much in daily life, we are left to sort out the good from the bad, to recognize and remedy the imperfections or limitations and to defend against potential misuse and dysfunction. Our task is therefore to take the best of what PHM offers, to make it an integral part of how services are organized and delivered and then to prune and discard what PHM renders redundant or counterproductive.

What We Should Like About PHM Population Health Management does merit consideration. Probably most importantly, it attacks the “one size fits all” bias implicit in healthcare delivery. In addition, it recognizes that healthcare needs vary dramatically. These are not new discoveries, but they are all too often not prioritized or addressed. PHM seems to work best with populations that have significant healthcare needs, usually a significant minority (no more than about 20%) of an insured population. PHM helps segment this higher need population into groups with common health issues. PHM is particularly relevant and helpful to highneed groups that lack organized systems of care – when physicians and other healthcare providers have not organized themselves to care for the group. Groups might include persons with multiple chronic conditions, e.g. diabetes, congestive heart failure and substance abuse, or persons with a serious and expensive episodic condition such as cancer treatment, joint replacement and extreme prematurity. These groups particularly benefit from better communication and cooperation among the health professionals that serve them. For those with multiple chronic conditions, this might take the form of a primary care setting that includes physical and behavioral health services, possibly dieticians or pharmacists; and that takes a team-based approach to care planning and oversight.

What’s Not So New or Interesting PHM seems a lot less interesting and relevant for the mildly symptomatic and well-managed populations, another significant minority of everyone. This population includes persons with asthma or diabetes or depression, but with just one significant condition or with multiple conditions that are well managed. This population has usually found the healthcare providers they need and established a care pattern that is routine and effective. For this population, the provider team is fewer in number and more often than not, virtual. The need for communication and coordination is limited and has been met, whether by patient or provider efforts.

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PHM is eager to count and classify this group (under the notion that everything must be put in a bucket!) despite the fact that it may not contribute significantly to an improvement in the organization or effectiveness of care. Finally, in almost any insured population, the majority of members use relatively few services, primarily focused on health maintenance and minor illnesses or injuries. This majority, whether commercially-insured, or Medicaid moms and kids, is often a substantial majority (80% or more) of the population. With this basically healthy population, the measure of PHM’s relevance or effectiveness is whether people do a better job of accessing preventive medicine that is appropriate to their age, sex and specific physical condition, thus providing some combination of improved personal engagement and a well-functioning primary care system.

Use or Discard? The adoption and use of Population Health Management, as is true with any proposed system for organization and management, should be based upon demonstrable improvements to existing organization and management. It must continue and preserve what is done well, introduce one or more new approaches that significantly improve results, replace or integrate efficiently with current approaches and deliver a significant net value or return. PHM, like so many programs that have preceded it, is built on the assumptions that health delivery is fragmented, communication among physicians and other clinicians is idiosyncratic and ineffective and that these attributes are unlikely to improve without direct ongoing intervention. Even though it is tempting to do so, we should not agree with this assumption so easily. Instead, we need to compare and evaluate the effectiveness of PHM along with other initiatives that could impact the effectiveness of health delivery such as health homes/ patient-centered medical homes, care management programs and electronic health records and data exchange. The problem is that the health industry has a habit of promoting redundant and conflicting solutions, then allowing these solutions to find a durable place in administration, adding layers and cost. Insurers for example have taken on a broad-based supervisory role in health delivery – setting clinical policy, authorizing high cost services, measuring service and clinical quality and managing gaps in care. But all of these activities directly intrude into the practice of medicine; and many bring with them data sources, reports and reminders not integrated in a provider’s workflow. Also, each December 2015 | The Self-Insurer


insurer has its own unique processes, technologies and requirements so that the cost to providers and to beneficiaries of this confusing, complex, non-standard business arrangement is substantial. In a world where both insurer and provider are aggressively protective of their role, there has been little progress toward standardization and even more importantly, of permitting an environment in which providers can establish and defend their own accountabilities for service and clinical quality.

Health Homes An alternative to PHM is the health homes concept, which addresses many of the same issues as PHM but in a fundamentally different way. Most importantly, health homes change the way in which primary health services are delivered. A health home employs a multi-disciplinary group of providers,

usually co-located, with the range of skills needed to address the physical, behavioral and social challenges of persons with significant healthcare needs – the same segment of the population that is served best by PHM. Health homes often feature a single medical record, a team-developed and executed care plan and care delivery outside a clinical setting at home or in the community as needed. In addition, health homes are accountable for the appropriateness and effectiveness of care, with the ability to self-report quality and outcome scores. Not surprising for many of us who have spent our adult lives in the health industry, PHM and health homes are being rapidly deployed, often at the same time and addressing the same population. The rush is to do something and to seize the initiative (and of course “own” the attached revenues and recognition).

Where health homes exist and function today, PHM is purely redundant and an extravagance. Where health homes are in the works – partly formed, acquiring capabilities – PHM is a helpful but expensive tool, with other less expensive and more relevant tools competing for the same resources.

Care Management Programs Another alternative is care management programs which have had a long presence in programs that service high risk/high cost populations, particularly special needs populations, e.g., the fragile elderly, the seriously mentally ill and the developmentally or physically disabled. Even in healthier groups, typically 3%-5% of the population is responsible for 35% to 50% of the healthcare costs. Care management programs can be fairly viewed as a predecessor of

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PHM, focused as it is on a narrow high need/high cost group rather than an entire population while using many of the same disciplines, e.g., health risk appraisals, claim analytics, risk profiling and predictive modeling. Care management, when done well, is a hands-on effort (I have always referred to it as a “contact sport”) in which clinical and non-clinical personnel work closely with individuals, family care-givers and medical personnel to “connect the dots,” thus ensuring that needed referrals are made (and appointments kept), results are shared, pharmacy regimens are coordinated and community resources, e.g., transportation, homecare, meals on wheels and personal care, are made always available.

Electronic Health Records (EHRs) and Data Exchange

Care management is designed to create an orderly and consistent care experience, reducing avoidable admissions and trips to the emergency room and easing the burden on family caregivers. In fact, PHM done well adopts and delivers care management as a core activity. However, PHM’s focus on analytics and reporting can dominate leadership attention and divert resources and attention away from the population most likely to benefit.

Pet Rock It Is!

The past decade has seen a dramatic shift in care delivery (surgery, diagnostics and infusion care) to community, non-hospital settings and new and broader responsibilities for hospital outcomes (never events and readmissions). Among the most important of these changes is the modernization of the physician office. The move to electronic health records, broadly incentivized through direct federal subsidies to primary care physicians, has ushered in an era of more standardized and evidence-based practice and will ultimately permit the easy and direct sharing of personal health information (data exchange) among physicians and other providers. Disease registers and care gap identifiers, once the exclusive province of insurers and administrators, are now just routine EHR output. Just as quickly, the era of health claims providing the best, most complete and accessible data about healthcare is coming to a close. All too often, the data foundation of PHM is the medical claim, whether retrieved from the insurer after adjudication, or grabbed on its way to the insurer (a timelier and more expensive source). Never used or relied upon by physicians, claim data will be pushed to the periphery of clinical decision-making as EHRs offer a more complete and focused source.

For all its glitzy features and connection to a so-admired “Big Data” future, Population Health Management must be seen as an artifact of a passing era when insurers supervised and directed health care. The role and the not insignificant revenues attached to it, will be sorely missed as data-sharing among providers of healthcare now becomes standard practice. In the same way, a dominant regional health system, anxious to clothe itself in the protective garb of PHM, will find itself exposed as the monopolist with no clothes. ■

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Tom Kelly is CEO of HealthSmart. A longtime healthcare executive and community leader, Mr. Kelly has a Bachelor of Arts from Wesleyan University and a Master of Science from New York University. For more information on Healthsmart, visit

December 2015 | The Self-Insurer


SIIA Endeavors Looking Ahead to 2016...


s a successful 2015 comes to an end, we now look ahead to 2016. As you might expect, SIIA has an excellent line up of educational and networking events planned for the coming year. Everything kicks off with the Self-Insured Health Plan Executive Forum, March 21-23, 2016, at The Westin New Orleans Canal Place in New Orleans, LA. The Self-Insured Health Plan Executive Forum (formerly known as the TPA/MGU Excess Insurer Executive Forum) will expanded its usual focus and address the interests of plan sponsors, in addition to third party administrators and stop-loss entities. SIIA International will continue to focus on Latin America, with the International Conference April 5-7, 2016, at the Costa Rica Marriott Hotel San Jose in San Jose, Costa Rica. This event is focused on helping U.S.-based companies identify and understand potential business opportunities related to self-insurance/captive insurance in key countries throughout Latin America and the Caribbean. In addition, the event will provide a truly unique networking environment designed to connect U.S. attendees with attendees from Latin America for


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purposes of exploring partnership and/or business development opportunities. We continued the success of the newly created Self-Insured Taft-Hartley Plan Executive Forum May 18-19, 2016, at the Sheraton Chicago Hotel & Towers in Chicago, IL. The majority of Taft-Hartley health plans operate on a self-insured basis, which provides certain advantages over fully-insured arrangements. This executive forum was developed to help plan trustees and administrators maximize these advantages though educational sessions led by top industry experts. The event will also feature unique networking opportunities. Join us May 24-26, 2016, at the stunning JW Marriott Scottsdale Camelback Inn Resort & Spa in Scottsdale, AZ for SIIA’s Annual Self-Insured Workers’ Compensation Executive Forum, the country’s premier association sponsored conference dedicated exclusively to self-insured Workers’ Compensation. In addition to a strong educational program focusing on such topics as excess insurance 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. We end the year with the 35th Annual National Educational Conference & Expo, September 25-27, 2016, at the JW Marriott Austin in Austin, TX. 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 four fast-paced, activitypacked days. This is truly a can’t miss event! For more information, including registration, networking and advertising opportunities and exhibiting info, please visit ■

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December 2015 | The Self-Insurer


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

2015 Board of Directors CHAIRMAN OF THE BOARD* Donald K. Drelich Chairman & CEO D.W. Van Dyke & Co. Wilton, CT CHAIRMAN ELECT* Steven J. Link Executive Vice President Midwest Employers Casualty Co. Chesterfield, MO

Jay Ritchie Senior Vice President HCC Life Insurance Company Kennesaw, GA Adam Russo Chief Executive Officer The Phia Group, LLC Braintree, MA

Committee Chairs

PRESIDENT Mike Ferguson SIIA Simpsonville, SC

ART COMMITTEE Jeffrey K. Simpson Attorney Gordon, Fournaris & Mammarella, PA Wilmington, DE

TREASURER & CORPORATE SECRETARY* Ronald K. Dewsnup President & General Manager Allegiance Benefit Plan Management, Inc. Missoula, MT

GOVERNMENT RELATIONS COMMITTEE Jerry Castelloe Principal Castelloe Partners, LLC Charlotte, NC


HEALTH CARE COMMITTEE Leo Garneau Chief Marketing Officer, SVP Premier Healthcare Exchange, Inc. Bedminster, NJ

Andrew Cavenagh President Pareto Captive Services, LLC Philadelphia, PA Robert A. Clemente CEO Specialty Care Management, LLC Bridgewater, NJ Duke Niedringhaus Senior Vice President J.W. Terrill, Inc. Chesterfield, MO

INTERNATIONAL COMMITTEE Robert Repke President Global Medical Conexions, Inc. Novato, CA WORKERS’ COMP COMMITTEE Stu Thompson Fund Manager The Builders Group Eagan, MN *Also serves as Director


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SIIA New Members Regular Members Company Name/ Voting Representative

Simon Kilpatrick President Advantage Insurance Management (USA), LLC Charleston, SC Michael Burns VP Sales First Choice Health Seattle, WA William Hepscher Regional Sales and Marketing Director Global RxManage Zephyrhills, FL Vidar Jorgensen Grameen PrimaCare Woburn, MA Anil Pillai Founder/CEO HealthLucid Fremont, CA Fred Malek Chief Executive Officer Hospitality Benefits Arlington, VA John Palumbo CEO MD Aligne Conshohocken, PA Kenneth Di Bella President & CEO SimplifiHC Westerville, OH Christopher Kempton Director-Group Benefits Walsh Duffield Companies Inc. Buffalo, NY

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