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February 2014


The Evolution of the

REVOLUTION of Referenced Based Pricing for Medical Benefits


February 2014 | The Self-Insurer

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


FEBRUARY 2014 | Volume 64

February 2014 The Self-Insurer (ISSN 10913815) is published monthly by Self-Insurers’ Publishing Corp. (SIPC), Postmaster: Send address changes to The Self-Insurer P.O. Box 1237 Simpsonville, SC 29681


ARTICLES 10 ART Gallery: Reports of a SIG Demise Were Exaggerated

Editorial Staff

12 ERISA Pre-emption Assault by States


Could Complicate Subrogation Rights



by Bruce Shutan

The Evolution of

the Revolution of Referenced Based Pricing for Medical Benefits by Dennis Casey


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

Benefit Mandates: Agency Guidance Strikes a Major Blow for Individual Policy Premium Reimbursement and Stand-Alone Health Reimbursement Arrangements

at Third Quarter 2013 by Douglas A. Powell

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

James A. Kinder, CEO/Chairman

30 RRGs Report Financially Stable Results


2014 Self-Insurers’ Publishing Corp. Officers

20 PPACA, HIPAA and Federal Health


Adding Autism Coverage Offers Self-Insured Employers Many Advantages at Little Cost by Lynn W. Gillis

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


The Self-Insurer | February 2014 3

The Evolution of the

REVOLUTION of Referenced Based Pricing for Medical Benefits

by Dennis Casey


February 2014 | The Self-Insurer

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


s the name implies, under a Reference Based Pricing (RBP) strategy a benefit plan defines a fixed dollar amount (the reference point) that is the maximum allowed for reimbursement by that plan for a service or procedure. Plan Participants would absorb charges, if any, that are “balanced billed” beyond the reference point and subsequent benefit plan payments. There has been an increasing interest over the past couple of years in the concepts surrounding RBP of the services and supplies for delivery of healthcare. Specific programs have been developed using RBP techniques for prescription drugs, colonoscopies, and joint replacement procedures, for example. WellPoint and Blue Cross and Blue Shield of Minnesota have programs in place that are broader in scope but do not attempt to pay all plan benefits subject to a reference price. AON Consulting has noted that over 60% of employers surveyed are strongly considering using RBP techniques for paying plan benefits in the near future (up from 8% currently using such programs). A growing number of Third Party Administrators (TPAs), most notably in Texas, Ohio, Minnesota, and North Carolina are abandoning traditional PPOs and using Medicare DRG Prospective Payment levels as the initial reference point and reimbursing providers at some point above that Medicare allowed amount, i.e. 130% to 170% of Medicare. This new and somewhat revolutionary approach has been precipitated by a natural reaction to the current marketplace and political climate. RBP also anticipates the need for Plan Sponsors and providers to recognize that an alignment of their incentives in a fair and transparent manner is a logical way for all parties to meet their objectives going into the future.

RBP was created to deal with a problem – the uncontrolled cost, and the rate of growth of such cost, of healthcare in The United States of America. The first step toward solving a problem is to recognize or acknowledge that such a problem exists. The United States, by any reasonable measure, has the most expensive healthcare delivery system on the planet. The US spends over $8,000 per capita and over 18% of its GDP on healthcare annually. The next highest amounts for developed nations are $5,400 per capita for Norway and 12% GDP for The Netherlands. The median levels among developed nations are $3,200 per capita and 9.5% GDP. One could argue that the above noted cost would be “worth it” if the outcomes were perceptibly better under the US model but that is not the case. There is simply no detectible ultimate health difference among the populations under review. Five year survival rates for cancers, asthma mortality rates, infant mortality rates, diabetes amputation rates, in-hospital fatality rates, longevity rates etc. do not show discernable differences in managing the ultimate health of the various populations. By almost every standard of measure it should be likely that healthcare delivery would be cheaper in the United States than in other developed nations. Our overall population demographics are significantly better, our rate of population aging is lower, our percentage of population that are smokers is significantly less, our access to doctor and hospital care is lower, our hospital discharge rates per 1000 are lower than median levels for other developed nations, the cost of generic drugs is significantly lower, and the availability of diagnostic imaging (MRI, CT, PET, Mammography etc.) is two to three times above the

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developed nation median (in a normal economic model the over-abundance of a service typically means that the price for such a service is low). The only measure that is detectable that adversely affects healthcare costs between the United States and other developed nations is our national obesity levels which are currently around 34% of the population versus a developed nation mean of about 16%. It should be noted that the much publicized cost of litigation and mal-practice insurance in this country, while not insignificant, doesn’t really move the needle very much in terms of population expenditures, about 1% of total healthcare spend annually or less than 2 billion dollars. By way of contrast, if we were able to restrict the use of anesthesiologists for healthy colonoscopy patients (a practice no other developed country condones) that alone would save 1.1 billion annually in this country. So why does healthcare cost so much more in this country? Simple – it’s the price we are charged for the services being delivered. Please note that we use the word price. In many cases the cost of particular goods and services are no different in the USA than elsewhere. Relative costs for training, relative costs for nursing care, the cost of supplies, the relative cost of support staff, and many more factors are the same or lower in the US versus other developed nations. It is unfortunately true that our system creates markets where we can be overcharged for some items such as brand name prescription drugs and implantable devices, for example. Lipitor costs, on average, $124 a month in the US and $6 in the New Zealand, Advair inhalers cost $300 in America and $45 in France and Nasonex is $108 here versus $21 in Spain (maybe that’s why I’m irritated The Self-Insurer | February 2014


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February 2014 | The Self-Insurer

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that their “spokes-bee” on TV has a Spanish accent). Implantable joints made by the same US manufacturer are sold to hospitals in Belgium for $4,000 and to United States facilities for $8,000. But what happens after that joint has been acquired? In Belgium the average hospital markup is $180. In the United States the hospital markup is commonly over $20,000. The price being charged ends up having little or no relationship to the underlying costs and traditional market forces are unable to control ultimate expenditures. This has been going on for a long time and benefit plans have employed a variety of tools to mitigate these costs over the last 35 years. A chronological summary of those efforts might include: • Late 1970s through early 1990 the proliferation of Self-Funded Benefit Plans. The benefit plan

will take on risk in order to manage final expenses. What will be the reaction of my plan members? • Late 1980s the advent of Utilization Review and Large Case Management programs. The benefit plan will initiate controls over how long or where a member can stay hospital confined. What will be the reaction of my plan members? • Mid 1990s the beginning of Managed Care and PPOs. The benefit plan will influence what providers the members will use. What will be the reaction of my plan members? • Mid 2000s the utilization of Disease Management initiatives. The benefit plan will involve itself with treatment plans for specific members. What will be the reaction of my plan members? • Mid 2000s the wide use of combined Consumer Directed and Defined Compensation models (FSA/HRA/HSA) for paying claims under the benefit plan. The benefit plan transfers significant risk on a tax preferred basis to members. What will be the reaction of my plan members? • Early 2010s increased proliferation of Wellness and Population Health Management techniques to control costs. The benefit plan inserts itself into the lifestyles of its participants. What will be the reaction of my plan members? • Mid 2010s the inauguration of Reference Based Pricing (RBP) models to limit plan payments on either a procedure or overall basis. The benefit plan puts a defined limit on payments, based on reviewable data, which it is willing to pay for services provided. What will be the reaction of my plan members?

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The Self-Insurer | February 2014


It is notable that of all the strategies described above only the RBP strategy gets to the heart of the real issue – the price charged. The benefit plan will employ a variety of educational, proactive and reactive support services for the members who may or may not end up with “balance bill” issues as mentioned above. Ultimately by moving the risk of unsupportable charges to members the plan is creating a new universe of consumers who will be engaged as never before with their providers and requiring such providers to defend their charged price in an open market. Dr. Harold D. Miller argues persuasively (www.paymentreform.org) for a significant reconsideration of the provider payment methodology used in this country. Fee for service payments, episode payments, comprehensive care payments, value based payments, and shared savings programs should all be carefully evaluated. Accountable Care Organizations (ACOs) hold promise in a laboratory but 93% of providers in an Opinion Leaders Survey by Modern Healthcare see the current financial interests of healthcare providers as either an “Extremely Significant” or “Very Significant” barrier to the ultimate success of ACOs. Until political will and market demand ultimately force some major reformation of our pricing systems, a process that is likely to take a considerable amount of time, RBP provides serious tools that benefit plans must consider carefully. n

Dennis Casey is the Sr. Vice President and Chief Operating Officer of ACS Benefit Services, Inc. in WinstonSalem, NC. He has been working in the employee benefits arena for more than thirty six years and has specific expertise in the areas of stop-loss insurance, integrated delivery healthcare systems and TPA operations.

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February 2014 | The Self-Insurer

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

The Self-Insurer | February 2014


ART GALLERY by Dick Goff

Reports of a SIG Demise Were Exaggerated


ou know how it is when a member of the family seems to be in trouble and you need accurate information. That was my quest, knowing that New York had barred new workers’ compensation self-insured groups (SIGs) and California seemed to be throwing up roadblocks. If the nation’s “bookend” states are targeting SIGs it seemed the entire industry may be threatened. Well, paraphrasing Mark Twain’s famous quote, reports of the death of SIGs have been greatly exaggerated. According to Duke Niedringhaus, chairman of SIIA’s Workers’ Compensation Committee and Vice President of J.W. Terrill of St. Louis, SIG business is thriving. “In general, the concept of preferred risk group programs is flourishing as much as ever,” he told me. “That would include SIGs, group captive workers’ compensation programs and medical stop-loss captives. Specifically, group captive programs are at record levels and beginning to impact the traditional markets to the tune of about $200 million annually.” That tune was music to my ears because I have long thought that captives could become a valuable part of the SIG structure. Captives designed to take the first level of excess coverage and push traditional excess


February 2014 | The Self-Insurer

insurance further out could benefit SIG members in a variety of ways. Duke said that this has been done successfully but is not without its challenges due to the long-tail nature of workers’ compensation claims. It’s well known that a few insolvent SIGs in New York amounting to losses of almost $900 million spelled disaster for the industry there. And I learned that a couple of SIGs in California are now in default. But according to Duke these developments have made surviving and new SIGs stronger. “It’s been disastrous for the SIGs that ran aground but the New York debacle has been a great learning experience for the SIG industry as it works to avoid those kinds of problems going forward,” Duke said. He added that challenges for the traditional workers’ compensation insurance industry have set the stage for a period growth for SIGs. “Traditional excess insurers experienced significant losses in 2010 and 2011, and are still trying to recoup those losses with higher premiums. That led to the current period of opportunity for SIGs.” Duke pointed out that many of today’s stronger SIGs exhibit three characteristics in common: good board governance, articulating their advantages more effectively to prospective members and using advanced technologies for more efficient management, summarized as follows: • Boards are making rational, practical decisions in their funding levels and still enjoying cost advantages compared with

traditional fully-insured programs. They are able to use information from their claims for better accident prevention programs and to build realistic surpluses. • SIGs are getting better at stating their advantages over fullyinsured programs. The availability of claims data is part of that. Another advantage is SIGs’ more efficient service with adjuster claim counts that are about half of the traditional industry average. By investing in lower case loads, SIGs can outperform the traditional industry. • Increased use of analytic tools helps SIG members identify trends in claims that could lead to adverse loss development and apply effective accidentprevention programs. Similar analytic tools can help identify the best doctors in a region and drive better outcomes for treatment and return-to-work. “If SIGs can effectively articulate those differences they can outperform the market and hold onto their membership,” Duke concluded. Even despite current regulatory challenges in California, Duke believes that the SIG industry there will see healthy growth. “In California we see an extremely cyclical traditional market and SIGs continue to provide increased value to their members,” he said. “SIIA recently profiled the California Agriculture Network (CAN) among the most successful SIGs nationally.” A positive development Duke said is beneficial to SIG members in California and elsewhere is recent

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multi-state arrangements to cover employees active elsewhere. “SIGs have either partnered with their excess markets or with a fronting program to insure out-of-state payroll exposure,” he explained. Duke advised all those interested in SIG developments to attend SIIA’s Self-Insured Workers Comp Executive Forum on May 20-21 in Miami. “We’ll have several sessions covering various aspects of SIGs,” he promised. Miami in May – not a bad concept. It’s an especially attractive prospect for those locked into colder winter climates with months of the deep freeze yet to survive. Maybe I’ll get a head start. n Readers who wish to comment on this column or write their own article may contact Editor Gretchen Grote at ggrote@sipconline.net. Dick Goff is managing member of The Taft Companies LLC, a captive insurance management firm and Bermuda broker at dick@taftcos.com.

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The Self-Insurer | February 2014


ERISA Pre-emption Assault by States Could Complicate Subrogation Rights by Bruce Shutan


here’s little doubt that the Employee Retirement Income Security Act is under siege in courts and statehouses 40 years after the landmark law’s passage, which is cause for alarm among self-insured health plan sponsors who will find countless devils lurking in the details.

Adam Russo, an attorney who co-founded the Phia Group, LLC in Braintree,

Mass., has seen “a deepening erosion of ERISA, whether it’s case law on a state or federal level.” He believes the effort extends beyond state insurance commissioners who want to dictate coverage terms to self-insured employers in a post-health care reform environment. “There have been three cases on subrogation in the last decade” argued

established health insurance carriers that charge monthly premiums. What’s worrisome is “plaintiff and regulator misinterpretation” of how these various state laws affect selffunded plan designs and sponsorship, Ron E. Peck, SVP and general counsel with the Phia Group, recently cautioned in an e-mail to SIIA’s Government Relations Committee.

before the U.S. Supreme Court, observes Russo, whose firm helps self-funded plan sponsors control health care costs and protect plan assets. Fueling this trend

New York state of mind

is the fact that ERISA doesn’t specify how subrogation should work in any given

One such culprit is New York, where a law was passed codifying a “collateral-source” rule, which not only excuses tortfeasors for damages they cause, but also eliminates subrogation or reimbursement efforts made by

state. “There are all kinds of gray area in regard to what’s pre-empted and what’s not, what’s regulating insurance,” he adds. There’s confusion about self-funding and ERISA across the Obama Administration, Russo believes – even among various federal agencies and health insurance brokers – because so many laws are tailored around fully insured coverage from


February 2014 | The Self-Insurer

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self-insured health plans. Proponents argue that ERISA pre-emption does not apply. Peck noted that these efforts, which often tend to be recycled rather than new, are promoted under the guise of “preventing health insurers from seeking unwarranted reimbursements, and removing the uncertainty hanging over future settlements in personal injury, medical malpractice and wrongful death cases.” Daran Kiefer, a health care subrogation attorney with Kreiner & Peters Co., L.P.A., in Cleveland, Ohio, and president of the National Association of Subrogation Professionals, believes many of these changes taking place at the state level “aren’t necessarily directly aimed at self-insurers or ERISA plans,” nor is the objective to eliminate their subrogation rights. The thinking is that any medical bills paid by self-funded health plans are deducted from the amount awarded to injured parties in jury trials who are prohibited from recovering on responsible tort fees or bills paid by self-funded plans under state collateral-source rules. While legislative activity at the state level seen as limiting the scope of ERISA pre-emption will not necessarily undermine self-insurance, “it certainly will impact the reality of self-funding,” adds David Adams, president of Caprock Health Group in Lubbock, Texas, which provides an integrated solution for self-funded health plan management.

Egregious billing in Texas Adams references a series of lawsuits brought in Texas over the past few years by hospital systems intended to bind self-funded employers to PPO

contracts. “The result was that the hospitals gained a tremendous upper hand using their leverage, which then had impact over a lot of the selffunded health plans,” he reports. It’s also worth noting that each of these cases ended up in state court rather than a federal jurisdiction because that’s where contract law issues are decided. The powerful hospital lobby in Texas has used state courts to advance other legislation, notes Adams, who says this venue means that technically speaking these cases do not involve ERISA pre-emption. “Some of the contracts are so onerous that they say that you can’t even request an itemized bill or negotiate outside of what the contract parameters say,” he explains. “And so you’ll end up with a very high dollar claim that is egregiously billed.” Hospital bills in the Lone Star State are averaging anywhere from 500% to 1,000% of Medicare and higher, Adams notes, with PPO contracts requiring provider payments in the neighborhood of 250% to 400% of Medicare. The upshot is that “it really leaves the self-funded plan with limited options on how they manage the cost, which obviously has a direct impact on the consumer,” he says, adding that many plans have been forced to consider eliminating PPO contracts and instead use a reference-based pricing model that is negotiated or a Medicare derivative reimbursement schedule. Adams spotlights the Texas Prompt Pay Act as a particularly aggressive piece of legislation whose rules and penalties are thought to supersede a self-insured health plan’s right under ERISA to examine claims and their fiduciary duty to ensure that only eligible claims are paid. “What’s happened is the legal

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community has seized upon the opportunity to aggressively go after all plan types by partnering with the hospitals to identify claims that may not have been paid exactly in the timely manner as the law requires, and chase down those dollars, plus the lost discount dollars, and then share them with the hospitals,” he explains.

Restricting stop-loss coverage Russo sees a trend toward restricting or considering restricting the availability of stop-loss coverage “spreading like wildfire” across several state lines, including California, Colorado, Utah, North Carolina and Rhode Island. “The more limitations there are in regards to people being able to purchase it, the less likely they are to be a self-funded plan,” he laments. He also cites another significant development at the state level in Vermont, where self-funded employers argued that ERISA preempted a state law requiring all health insurance plans to provide information on doctors and hospitals. “The interesting part about that case was the Department of Labor actually filed an amicus brief on behalf of the state, which is very strange,” Russo says. “Usually the Department of Labor sides with ERISA.” In Ohio, Kiefer says “sometimes third-party administrator licensing can be predicated on TPAs not writing or agreeing to policies that would allow for full reimbursement, despite the state law that says the injured party has to be made whole.” He has noticed a big push in this direction by the injury attorney bar, “especially in light of some of their losses on the ERISA side of things. They’re really looking at how to The Self-Insurer | February 2014


ratchet up states demanding or requiring, as well as legislators, that injured parties be made whole first before any recovery of subro.” There more than likely will be some reduction of the subrogation rights for attorney fees based on a formula or no recovery will be allowed if injured parties aren’t made whole under rules associated with the Affordable Care Act (ACA) and U.S. Department of Health and Human Services (HHS), Kiefer surmises. If this happens, “then there’ll be a ton of litigation over what that means, he says, including whether damages include pain and suffering beyond medical bills and lost wages. He predicts that plan costs “definitely” would rise as a result of recovery dollars plummeting. Kiefer says there also could be changes to subrogation rights for ERISA health plans that lose their grandfathered status or fall within the ACA if they run afoul of what HHS allows. While HHS hasn’t made any subrogation-provision recommendations, he says the key will be determining whether injured parties first have to be made whole. n Bruce Shutan is a Los Angeles freelance writer who has closely covered the employee benefits industry for 26 years.

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February 2014 | The Self-Insurer

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The Self-Insurer | February 2014



Autism Coverage Offers Self-Insured Employers

Many Advantages at Little Cost by Lynn W. Gillis


February 2014 | The Self-Insurer

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


utism rates have dramatically increased over the last 40 years. In 1975, one in 5,000 Americans was diagnosed with autism. Fast forward to 2012, and one in 88 people is diagnosed with an autism spectrum disorder (ASD), according to the Centers for Disease Control and Prevention. In one more recent study, the statistic has jumped to 1 in every 50 people diagnosed. Has the autism rate, in fact increased that dramatically, or as a society, have we made great strides in being able to more effectively identify ASDs? Most likely, the truth is somewhere in between. Families with a child who has an ASD, are often put in situations where the insurance coverage is not adequate to cover the needs of the child, or even nonexistent. In the past, the argument that an ASD is a learning disability and should thus be covered by the education system has been a barrier. However, as of December 2013, 34 of the 50 states have passed laws that require insurers to cover treatment of autism. However, many Americans remain uninsured for autism since self-funded companies are not required to comply with state mandates. This article will aim to capture some of the reasons why having autism coverage, regardless of funding, is becoming increasingly important. The most common area of contention in coverage for autism is for applied behavior analysis (ABA). According to Autism Speaks, an autism advocacy organization, there have been great strides made against the “evidence” argument in the last decade. For years, this form of treatment has been denied, coverage as it has been deemed “investigative and experimental.” However, ABA is the most commonly prescribed, evidence-based treatment for ASD. There are decades of research to demonstrate the effectiveness of ABA therapy for autism. “ABA uses behavioral health principles to increase and maintain positive adaptive behavior and reduce negative behaviors or narrow the conditions under which they occur,” says The American Academy of Pediatrics “ABA can teach new skills and generalize them to new environments or situations. ABA focuses on the measurement and objective evaluation of observed behavior in the home, school, and community.” Despite the effectiveness of ABA, many insurers still deny coverage for ABA based on the assertion that it is experimental. Without an autism benefit, many parents are forced to pay out-of-pocket to provide ABA therapy to their children. Often times, affected children will go without treatment or receive only a fraction of the prescribed treatment, because they can’t afford it. These children usually end up in expensive special education programs or even become wards of the state. The cost of offering an autism benefit to employees may be far less than the financial impact of not offering the benefit over the long term. Without appropriate treatment, the lifetime cost to the state is estimated to be $3.2 million per child with ASD, which covers special education, adult services, and decreased productivity. Because of these high costs, 34 states have adopted mandated insurance coverage for autism treatment since 2001. Indiana was the first state to pass an autism mandate in 2001, and Washington, D.C., most recently passed its autism mandate in July of 2013. Additionally, the Affordable Care Act brings three key changes to the table. Availability: insurers will be required to cover pre-existing conditions, including ASDs. Affordability, since families contending with an ASD cannot be charged higher premiums and Adequacy. This final change has yet to be fleshed out, but it will require plans to cover essential health benefits, including

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ABA. Currently, however, coverage of ABA is not part of the essential health benefits in some states, leaving families with ASDs without coverage. In states where autism insurance reform has been enacted, children are making remarkable progress. In addition, providers have joined adequate networks of participating providers and negotiated satisfactory reimbursement rates. Overall, the impact on healthcare premiums to cover the autism mandate has been negligible, averaging $0.31 per member per month in reporting states. Clearly, with more than half of the states in the country adopting an autism mandate, there is recognition that autism rates are increasing, regardless of whether or not it is prevalence-related or capabilityrelated (we can identify now what we could not identify earlier?). So, what about private companies that are self-insured? Of the Fortune 100 companies, 14 now provide autism benefits. Interestingly enough, none of the top five provides these benefits. Twenty-nine percent of all employers are self-insured and are not required to offer these benefits. However, because self-insured companies are the largest employers, this amounts to a large number of employees without access to coverage. There are two key components for a self-funded employer to consider when making the decision to cover autism benefits: cost savings and employee retention.

Cost Savings and Employee Productivity According to a recent article in The New York Times “no disability claims more parental time and energy than autism. “With ABA, children are able to achieve a higher level of functioning, which is a plus to The Self-Insurer | February 2014


companies offering these benefits. These children do better in school and need less family assistance, which results in higher employee productivity and decreased absenteeism. In addition, overall health care costs for a child with ASD will be lower, due to a higher level of functioning. The general consensus among self-funded employers that offer autism benefits is that the economic and social benefits of offering this coverage outweigh the cost (average of $0.31 per member per month in reporting states) because employees will be more productive because this worry will be alleviated.

Employee Retention With the rapid growth of autism prevalence, more employees than ever face the potential out-of-pocket costs associated with treatment. It is not uncommon for employees to remain


February 2014 | The Self-Insurer

with an employer due to benefits—or leave because of lack of benefits. That this coverage is offered voluntarily by some self-funded companies resonates well with employees. It sends the message that the company cares about its employees and their families. As ASDs continue to rise, self-funded companies will need to consider the offering of such a benefit as part of a competitive benefits package. There is currently a Congressional Bill known as the Achieving a Better Life Experience Act (ABLE Act – S. 313/H.R. 647), which would supplement the coverage under state mandates by giving families of disabled children, access to tax preferred savings accounts. At present, there are 60 cosponsors of this bill within the Senate, which is higher than ever. There is speculation that 2014 could be the year that the bill passes. Selffunded companies will be required to

truly consider the offering of an autism benefit as both mandates continue to grow on both the state and federal level. One thing is for certain, as the autism rate continues to increase, if coverage is not offered, the gap in care is only going to increase over the course of time. At this time, the answer is not clear, but what is certain is that this will continue to be a hot topic for self-funded insurers in the coming months and years. n Lynn W. Gillis is vice president, health and welfare, with Longfellow Benefits, a Boston-based benefits broker and consulting firm that serves many selfinsured employers. She can be reached at lgillis@lf-ben.com.

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The Self-Insurer | February 2014


PPACA, HIPAA and Federal Health Benefit Mandates:


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


Agency Guidance Strikes a Major Blow for Individual Policy Premium Reimbursement and Stand-Alone Health Reimbursement Arrangements


n September 13, the IRS and the Department of Labor (“DOL”) issued twin notices – IRS Notice 2013-54 and Technical Release 2013-03 (collectively, the “Agency Guidance”)1 – which adversely affect an employer’s ability to pay for major medical coverage issued in the individual market on a pre-tax basis and/or maintain a stand-alone defined contribution medical reimbursement plan, such as an HRA. The guidance created an explosion of interest within the employee benefits community with respect to such arrangements. This article provides an analysis of the Agency Guidance and its impact, including a summary reference chart of the arrangements that remain permissible and those that do not.

Practice Pointer: This Article uses the term “IM Coverage” to refer to major medical coverage issued in the individual market, including such coverage offered inside and outside the Federal and state public Exchanges. “IM Coverage” does not include policies that qualify as “excepted benefits.” The Bottom Line As discussed more fully below, the Agency Guidance precludes the use of any pre-tax funding mechanism to purchase IM Coverage for active employees (retiree-


February 2014 | The Self-Insurer

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only coverage is discussed below). The Agency Guidance specifically addresses the use of health reimbursement arrangements (“HRAs”) to purchase IM Coverage, and also introduces a new term – “employer payment plan.” The use of this new term is one reason the Agency Guidance has sparked so much discussion and potential confusion. As used in the Agency Guidance, the term “employer payment plan” is defined very broadly, and would include any pre-tax arrangement (including salary reduction funded cafeteria plans and premium reimbursement arrangements) used to purchase IM Coverage.

Practice Pointer: The Agency Guidance is generally effective for plan years beginning on or after January 1, 2014; however, there is language in the Agency Guidance that suggests that you cannot start a new plan year after September 13, 2013 if the arrangement is otherwise impermissible. We discuss the effective date issue in more detail below.

Quick Reference Chart The following chart provides a quick reference guide as to the types of arrangements that are permissible in light of the Agency Guidance. More detail regarding the analysis underlying these conclusions is provided following the chart.

Practice Pointer: For purposes of this analysis, we use the terms “DCP” to mean any defined contribution arrangement that reimburses medical expenses, which may include premiums but is not limited to premiums, and “PRA” to define arrangements that only reimburse premiums.

Underlying Basis for the Agency Guidance The conclusions reached in the Agency Guidance and summarized above are a product of two health insurance reform provisions – PHSA Section 2711, which prohibits annual and lifetime dollar limits on essential health benefits (EHB),4 and PHSA

Type of Arrangement

Permissible or Not Permissible2


Employer-funded, tax free payment of IM coverage. These are sometimes referred to as premium reimbursement HRAs or individual premium reimbursement accounts (“PRAs”). Some may refer to these as “61-146 arrangements.”3

Not permissible

See below regarding definition of “employer payment plan.”

Payment of IM coverage by employees with pre-tax salary reductions through a cafeteria plan.

Not permissible

See below regarding definition of “employer payment plan.”

Employer facilitation of after-tax payment of IM Coverage through payroll deduction

Permissible, but apparently only if not part of an employer sponsored ERISA plan.

Such an arrangement is permissible only to the extent ERISA’s voluntary plan safe harbor is satisfied. See DOL Reg. 29 CFR § 2510.3-1(j).

An employer funded defined contribution plan (“DCP”) for active employees that is not “integrated” with an employer’s traditional (i.e., defined benefit) group health plan.

Not permissible

“Integrated” is a term of art defined specifically in the Agency Guidance. Even arrangements that are connected with an employer’s defined benefit group health plan may fail to qualify as “integrated” if the rules in the Agency Guidance are not satisfied.

Permissible if...

Such an arrangement will be permissible to the extent that it qualifies as an “excepted benefit.”

Some have questioned whether payment of IM coverage through a cafeteria plan is permissible. Such an arrangement comes within the definition of an “employer payment plan” under the Agency Guidance, and thus appears to be prohibited.

Such a DCP might be referred to as a standalone HRA (if it allows a carryover) or a “MERP.” A defined contribution medical expense reimbursement arrangement funded by non-cashable employer contributions and/or employee pre-tax salary reductions.

Although a Health FSA need not be integrated (as defined in the Agency Guidance) if it is an excepted benefit, the same employer who sponsors the Health FSA must make major medical coverage available to FSA eligible participants in order to qualify as an excepted benefit.

These are often referred to as Health FSAs with employer credits.

Thus, a stand-alone Health FSA, i.e., where the employer does not also make major medical coverage available to eligible participants is not permissible. An employer funded DCP for active employees that is “integrated” with an employer’s defined benefit group health plan as defined in Q/A-4 of the Guidance.


The Agency Guidance creates a special definition of “integration,” which focuses on both the scope of employees allowed to participate in the DCP and the scope of expenses eligible for reimbursement.

Employer funded, tax free payment of excepted benefit coverage (such as hospital indemnity or cancer coverage)


Excepted benefits are not subject to the health insurance reforms at issue in the Agency Guidance.

Excepted benefit coverage funded by employees with pre-tax salary reductions.


A DCP or premium reimbursement arrangement limited to former employees (e.g., retiree only HRA)


The health insurance reforms at issue do not apply to plans for which participation is limited to former employees. Note, if the plan covers rehired “retirees,” the plan will be subject to the ACA reforms.

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The Self-Insurer | February 2014


Section 2713,5 which requires that non-grandfathered plans provide certain preventive services without cost-sharing. The Agency Guidance does not affect arrangements that are not subject to these ACA requirements. Thus, the Agency Guidance does not impact HIPAA excepted benefits, so that accident, cancer, hospital indemnity policies and other excepted benefit coverage (e.g., certain limited scope vision and dental) can still be funded on a pre-tax basis. In addition, the Agency Guidance does not affect plans that cover only former employees. Note that although such plans are commonly referred to as “retiree-only plans,” the technical exception is for plans that do not cover any active employees. For example, stand-alone HRAs that cover no active employees may be used to purchase IM Coverage. However, if a stand-alone HRA covers re-hired “retirees,” then the arrangement would not be permissible.

Practice Pointer: The Agency Guidance clarifies that an HRA for retirees will still qualify as minimum essential coverage as an eligible employer sponsored plan as defined in Code Section 5000A. Thus, such coverage will disqualify a retiree from receiving a subsidy in the exchange even though it does not provide minimum value. Such coverage will satisfy the individual mandate.

Arrangements That are NOT Integrated with a Group Health Plan

DC arrangement should be viewed in conjunction with the underlying IM coverage when determining whether the ACA mandates are satisfied.The Agency Guidance concludes that such DC arrangements cannot be “integrated” with IM Coverage.Thus, because defined contribution plans and premium reimbursement arrangements would need to rely on the underlying IM Coverage purchased through the arrangement to satisfy PHSA Section 2711 and/or 2713, such arrangements are not permissible. In reaching this result, the Agency Guidance reiterates that HRAs and Health FSAs are group health plans subject to Sections 2711 and 2713 (unless otherwise exempt from the health insurance reforms such as under the limited HIPAA exception for certain health flexible spending arrangements).6

Many advocates of defined contribution (“DC”) health plan arrangements have suggested that a

The Agency Guidance also provides a new term (an “employer payment plan”) for employer pre-tax funded IM

The Agency Guidance treats plans that are integrated with a group health plan differently from plans that are not integrated with group health plans. Each of these situations is discussed separately below.

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February 2014 | The Self-Insurer


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February 2014 | The Self-Insurer

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arrangements.7 An employer payment plan is defined as an arrangement that facilitates the direct or indirect payment (e.g., in accordance with Rev. Rul. 61-146) of IM Coverage premiums to the extent that such premiums are excluded from income under Section 106 of the Code. The Agency Guidance states that an employer payment plan does not include arrangements whereby employees may choose between cash or an after-tax amount to be applied toward health coverage, including forwarding post tax payroll deductions to the carrier, as long as the arrangement satisfies the voluntary plan safe harbor in DOL regulations (e.g., the employer does not endorse the IM Coverage by virtue of facilitating the after-tax payment or reimbursement). Thus, the Agency Guidance indicates that any arrangement that provides for the purchase of IM Coverage on a pre-tax basis will fail PHSA Sections 2711 and/or 2713.

Following is a discussion of common defined contribution arrangements and how they are impacted by the Agency Guidance. • Employer payment plan includes a cafeteria plan that allows payment of IM Coverage with pre-tax salary reductions. Although cafeteria plans are not specifically mentioned in the definition of “employer payment plan,” the definition is broad enough in scope to include cafeteria plans that facilitate the payment of IM Coverage. By definition, employer payment plans include arrangements that directly or indirectly pay premiums for IM Coverage where the premium payments are excluded from income under Code Section 106. Pre-tax salary reductions made through a cafeteria plan for accident and health insurance are excluded from income under Code Section 106. Perhaps more importantly, the only premium payment arrangements that the agencies make an effort to exclude from the employer payment plan definition are certain after tax premium payment arrangements, and then only to the extent they meet the voluntary plan safe harbor rules under ERISA. Thus, the definition of employer payment plan would include pre-tax cafeteria plan arrangements (even those funded exclusively by salary reduction).

Practice Pointer: Does a “private exchange” that utilizes insured coverage issued in the group market violate Sections 2711 and 2713? No. The Agency Guidance merely indicates that defined contribution arrangements cannot be integrated with IM Coverage. However, if the coverage through a private exchange uses insurance policies issued to the employer through the group market, then it can be integrated with a defined contribution arrangement.

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• DCPs and PRAs cannot be integrated with IM Coverage for purposes of PHSA Section 2711.8 Since DCPs are group health plans, they are subject to Section 2711 unless otherwise exempted. The Agency Guidance clarifies that DCPs and PRAs cannot be integrated with IM Coverage for purposes of Section 2711. • The Section 106(c)(2) exception to PHSA Section 2711 is only applicable to Health FSAs offered through a cafeteria plan.9 The Section 2711 regulations exempt Code Section 106(c)(2) health flexible spending arrangements, so such arrangements could still presumably survive Section 2711 if they qualified as a Code Section 106(c)(2) health flexible spending arrangement. The Agency

Guidance effectively shrinks this end-run around Section 2711 by indicating that future guidance will limit the Code Section 106(c) (2) exception to Section 2711 to Health FSAs offered through a cafeteria plan, and that this clarification will be retroactively effective to September 13, 2013. Since Health FSAs offered through a cafeteria plan cannot reimburse health insurance premiums, the agencies effectively close the door on PRAs. • DCPs and PRAs generally violate Section 2713, absent an exception. Like Section 2711, the Agency Guidance indicates that a DCP and a PRA will violate Section 2713 (presumably, only if it is no longer grandfathered). The specific wording in the Agency


Payment Compliance Solution

Guidance with respect to this conclusion (Q-3) provides that the arrangement violates Section 2713 because it doesn’t provide preventive services without cost sharing in all instances. We believe that this language suggests that a DCP fails to satisfy Section 2713 even if it reimburses preventive care; because the annual contribution limit causes it to fail to cover required preventive care in all instances.

Practice Pointer: As noted above, 2711 provides an exception for Health FSAs offered through a cafeteria plan. Unfortunately, unless grandfathered, such a Health FSA would not satisfy Section 2713 in light of the Agency Guidance.


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DCPs and PRAs cannot be integrated with IM Coverage for purposes of Section 2713.10 Much like the agencies did for purposes of Section 2711, the agencies clarify that a DCP and PRA cannot be integrated with the IM coverage for purposes of Section 2713. Thus, DCPs and PRAs that are non-grandfathered will fail to satisfy Section 2713.

What’s Left: Arrangements That are Integrated with a Group Health Plan • DCPs (such as HRAs) that are “integrated” with an employer’s compliant group health plan do not violate Section 2711 or 2713. A DCP is “integrated” if all of the following requirements are satisfied: –– The employer offers the employee coverage under a group health plan (other than the DCP) that is not limited to excepted benefits. –– Participation in the defined contribution arrangement is limited to those employees and dependents who also participate in an employer’s defined benefit group health plan.

Practice Pointer: The Agency Guidance clarifies that participation in a DCP does not have to be limited to a defined benefit health plan of the same employer – it can be integrated with a plan of another employer (e.g., the spouse’s employer). In that case, the employer would simply seek certification that the employee or spouse was covered under another defined benefit group health plan. ––

Employees and dependents must be offered the opportunity to opt-out and also permanently waive future reimbursements after coverage under the defined benefit group health plan ceases (e.g., if there is a spend down provision).

Practice Pointer: A DCP that is integrated with a defined benefit health plan that is voluntary would presumably satisfy the opt-out requirement by virtue of the individual’s choice to enroll (or not) in the defined benefit plan. –– If the scope of reimbursement under the DCP allows for reimbursement of anything other than the following expenses, then the defined benefit group health plan must provide minimum value coverage under the ACA rules: • Co-payments under an employer’s group health plan; • Co-insurance under an employer’s group health plan; • Deductibles under an employer’s group health plan; • Premiums under an employer’s group health plan [NOTE: don’t forget that Notice 2002-45 prohibits an HRA with a carry-over from paying premiums if the employee can also pay the premiums with pre-tax salary reductions]; and • Benefits that are not essential health benefits.

Practice Pointer: Can a PRA be integrated with an employer’s defined benefit group health plan? It appears at first glance that a PRA that paid for IM Coverage could be “integrated” to the extent that the employer’s ACA compliant defined

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benefit group health plan provides minimum value. However, the answer is somewhat unclear. ––

In addition, the Agency Guidance clarifies that an HRA that is otherwise integrated with an employer group health plan is still considered “integrated” for purposes of these rules if participants who cease to be covered under the employer group health plan are permitted to use any unused amounts allocated to the HRA while the HRA was integrated.

Effective Date Issues The Agency Guidance provides that it is effective the first plan year that begins on or after January 1, 2014. A further extension applies to the applicability date for certain governmental and tribal plans until the first day of the first plan year after the close of the legislative session of the applicable legislative body after September 13, 2013. Because the 2013 agency guidance does not specifically address its impact on the earlier FAQ guidance transition rule or its impact on HRAs that had previous waiver or class exemption relief its impact is unclear. Also, of specific interest to HRA sponsors who did not qualify for the FAQ transition rule, the waiver, or class exemption relief is the language that provides that the interim final regulation will be amended retroactively to September 13, 2013 to clarify that the Section 106(c)(2) FSA exemption is only applicable to FSAs offered through cafeteria plans. Exactly how the above concepts should be integrated is unclear, and would seem to leave a number of The Self-Insurer | February 2014


different applicability dates for existing HRA arrangements. By way of example: • HRAs eligible for the original HRA waiver or HRA class exemption relief would seem to be allowed to continue until the end of the plan year (as in place when the waiver or exemption applied) that commences prior to January 1, 2014; • Although unclear (due to language in the January FAQ referencing future guidance), it would seem that arrangements that satisfied the original January FAQ guidance transition rule could continue until December 31, 2013 with an allowable spend down of accrued benefits; and • HRAs that fail to qualify for class exemption/waiver or the January FAQ transition relief should take heed of the September 13, 2013 effective date for the narrow interpretation of the 106(c)(2) FSA exception in the interim regulations. This may not mean, however, that they need to wind up their affairs prior to September 13, 2013. The annual cap prohibition is a plan year limitation, and in the absence of further guidance, it may be reasonable to take the position that the narrower limitation applies to plan years on or after September 13, 2013.

So what if I don’t comply? For private employers, failure to comply with the provisions of the Agency Guidance could result in the $100 per day, per affected beneficiary excise tax imposed on failures to comply with health insurance reforms under Code Section 4980H. Presumably, each individual who offered an otherwise permissible arrangement is an affected beneficiary. While there is a cap on the 4980H of $500,000 for unintentional failures, no cap applies if the failure is intentional. CMS may impose a similar penalty on non-federal governmental employers. n Attorneys John R. Hickman, Ashley Gillihan, Johann Lee, and Carolyn Smith provide the answers in this column. Mr. Hickman is partner in charge of the Health Benefits Practice with Alston & Bird, LLP, an Atlanta, New York, Los Angeles, Charlotte and Washington, D.C. law firm. Ashley Gillihan, Carolyn Smith and Johann Lee are members of the Health Benefits Practice. Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner’s situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation. Readers are encouraged to send questions by email to Mr. Hickman at john.hickman@alston.com. Resources IRS Notice 2013-54 may be found at www.irs.gov/pub/irs-drop/n-13-54.pdf and Technical Release 2013-03 may be found at www.dol.gov/ebsa/newsroom/tr13-03.html. 1

“Not permissible” means that the arrangement violates Public Health Service Act Section 2711 (prohibition on annual and lifetime dollar limits) and/or Section 2713 (required preventive services), each of which will trigger a $100 per day per affected beneficiary excise tax under Code Section 4980D. See “So what if I don’t comply?” below for a more detailed discussion regarding the penalties. The Agency Guidance does NOT address the income tax exclusion associated with such arrangements. 2

Revenue Ruling 61-146 provides that if an employer reimburses an employee for the cost of coverage for an individual market policy, the amount of the employer reimbursement may be excludable from gross income under Code Section 106. Similarly, if an employer pays an insurer directly for the cost of coverage under an individual market plan, the employer payment is also excludable under Code Section 106. 3

A discussion regarding the definition of “essential health benefits” for purposes of this provision is beyond the scope of this article.


These sections, as well as other reforms added to the PHSA, are incorporated by reference into the Code and ERISA.


See Pg. 2 of TR 2013-03.


See Pg. 2 of TR 2013-03.


See Q-1 of TR 2013-04.


See Q-8.


See Q-3.


Needless to say, further agency guidance on these transition issues would be welcome.


February 2014 | The Self-Insurer

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

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

Directors Jerry Castelloe Vice President CoreSource, Inc. Charlotte, NC Robert A. Clemente CEO Specialty Care Management LLC Bridgewater, NJ Ronald K. Dewsnup President & General Manager Missoula, MT Elizabeth D. Mariner Executive Vice President Re-Solutions, LLC Wellington, FL

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

Committee Chairs CHAIRMAN, ALTERNATIVE RISK TRANSFER COMMITTEE Andrew Cavenagh President Pareto Captive Services, LLC Conshohocken, PA CHAIRMAN, GOVERNMENT RELATIONS COMMITTEE Horace Garfield Vice President Transamerica Employee Benefits Louisville, KY CHAIRMAN, HEALTH CARE COMMITTEE Robert J. Melillo VP Alternate Funding Strategies USI Insurance Services Meriden, CT

SIIA New Members Regular Members Company Name/ Voting Representative Arthur Marrapese, III, Esq., Partner, Hodgson Russ LLP, Buffalo, NY Jeffrey Fitzgerald, Vice President - Employee Benefits, Innovative Capital Strategies, Des Moines, IA Christian Clark, President & Chief Marketing Officer, MediNcrease, LLC, St. Petersburg, FL Robert Relph, Jr., CEO, Relph Benefit Advisors, Fairport, NY Kristin Jones, Director Large Group Marketing, Wellmark BCBS, Des Moines, IA

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

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The Self-Insurer | February 2014


RRGs Report Financially Stable Results at Third Quarter 2013

Financial analysis of Risk Retention Groups based on reported historical results through third quarter 2013. by Douglas A. Powell, Senior Financial Analyst, Demotech. Inc.

This article originally appeared in “Analysis of Risk Retention Groups” – Third Quarter 2013

Since RRGs are restricted to liability coverage, they tend to insure medical providers, product manufacturers, law enforcement officials and contractors, as


n reviewing the reported financial results of risk retention groups (RRGs), one gets the impression that this is a group of insurers with a great deal of financial stability. Based on third quarter 2013 reported financial information, RRGs continue to effectively provide specialized coverage to their insureds. Over the past five years, RRGs have remained committed to maintaining adequate capital to handle losses. It is important to note that ownership of an RRG is restricted to the policyholders of the RRG. This unique ownership structure required of RRGs may be a driving force in the strengthened capital position exhibited by RRGs.


February 2014 | The Self-Insurer

Figure 1 – RRG Balance Sheet Metrics at 9/30 (In billions)

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well as other professional industries. While RRGs have reported direct premium written in nine lines of business so far in 2013, nearly 60 percent of this premium was in the medical professional liability lines.

Balance Sheet Analysis Comparing the last five years of results, cash and invested assets, total net admitted assets and policyholders’ surplus have all continued to increase at a faster rate than total liabilities (figure 1). The level of policyholders’ surplus becomes increasingly important in times of difficult economic conditions, as properly capitalized insurers can remain solvent while facing uncertain economic conditions. Since third quarter 2009, cash and invested assets increased 25.9 percent and total net admitted assets increased 19.7 percent. More importantly, over a five year period from third quarter 2009 through third quarter 2013, RRGs collectively increased policyholders’ surplus 42.9 percent. This increase represents the addition of nearly $1.1 billion to policyholders’ surplus. During this same time period, liabilities increased only 6.1 percent, approximately $258 million. These reported results indicate that RRGs collectively are adequately capitalized 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 third quarter 2013 was approximately 66.4 percent. A value less than 100 percent is considered favorable as it indicates that there was more than $1 of net liquid assets for each $1 of total liabilities. This also indicates an improvement for RRGs collectively as liquidity was reported at 68.3 percent at third quarter 2012. Moreover, 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 unpaid LAE. This includes reserves for any

Figure 2 – RRG Income at 9/30 (In millions)

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 third quarter 2013 was 237.9 percent and indicates an improvement over third quarter 2012, as this ratio was 229.1 percent. These results indicate that RRGs remain conservative in terms of liquidity. In evaluating individual RRGs, Demotech, Inc. prefers companies to report leverage of less than 300 percent. Leverage for all RRGs, as measured by total liabilities to policyholders’ surplus, for third quarter 2013 was 127 percent. This indicates an improvement for RRGs collectively as leverage was reported at 131.9 percent at third quarter 2012. The loss and LAE reserves to policyholders’ surplus ratio for third quarter 2013 was 80.4 percent and indicates an improvement over third quarter 2012, as this ratio was 84.2 percent. The higher the ratio of loss reserves to surplus, the more an insurer’s stability is dependent on having and maintaining reserve adequacy. In regards to RRGs collectively, the ratios pertaining to the balance sheet appear to be appropriate.

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Premium Written Analysis RRGs collectively reported over $2.4 billion of direct premium written (DPW) through third quarter 2013, an increase of 3.9 percent over third quarter 2012. RRGs reported nearly $1.2 billion of net premium written (NPW) through third quarter 2013, an increase of 9.6 percent over third quarter 2012. These results are reasonable. The DPW to policyholders’ surplus ratio for RRGs collectively through third quarter 2013 was 90.6 percent and indicates an improvement over third quarter 2012, as this ratio was 91.1 percent. The NPW to policyholders’ surplus ratio for RRGs through third quarter 2013 was 44.2 percent and indicates a diminishment over 2012, as this ratio was 42.1 percent. Please note that both of these amounts have been adjusted to reflect projected annual DPW and NPW based on third quarter 2013 results. An insurer’s DPW to surplus ratio is indicative of its policyholders’ surplus leverage on a direct basis, without consideration for the effect of reinsurance. An insurer’s NPW to surplus ratio is indicative of its policyholders’ surplus leverage on a net basis. An insurer relying heavily on reinsurance will have a large disparity in these two ratios. A DPW to surplus ratio in excess of 600 percent would subject an The Self-Insurer | February 2014


Figure 3 – RRG Ratios at 9/30

individual RRG to greater scrutiny during the financial review process. Likewise, a NPW to surplus ratio greater than 300 percent would subject an individual RRG to greater scrutiny. In certain cases, premium to surplus ratios in excess of those listed would be deemed appropriate if the RRG had demonstrated that a contributing factor to the higher ratio was relative improvement in rate adequacy. In regards to RRGs collectively, the ratios pertaining to premium written appear to be conservative.

Income Statement Analysis The profitability of RRG operations remains positive (figure 2). RRGs reported an aggregate underwriting gain through third quarter 2013 of $28.4 million, a decrease of $15.8 million over third quarter 2012, and a net investment gain of $155.6 million, a decrease of $13.5 million over third quarter 2012. RRGs collectively reported net income of $163.9 million, a decrease of $20.4 million over third quarter 2012. The loss ratio for RRGs collectively, as measured by losses and loss adjustment expenses incurred to net premiums earned, through third quarter 2013 was 68.6 percent and is a diminishment over third quarter 2012, as the loss ratio was reported at 63.7 percent. This ratio is a measure of an insurer’s underlying profitability on its book of business. The expense ratio, as measured by other underwriting expenses incurred

to net premiums written, through third quarter 2013 was 23.8 percent and indicates an improvement over third quarter 2012, as the expense ratio was reported at 26.4 percent. This ratio measurers an insurer’s operational efficiency in underwriting its book of business. The combined ratio, loss ratio plus expense ratio, through third quarter 2013 was 92.4 percent and is a diminishment over third quarter 2012, as the combined ratio was reported at 90.1 percent. This ratio measures an insurer’s overall underwriting profitability. A combined ratio of less than 100 percent indicates an underwriting profit. Regarding RRGs collectively, the ratios pertaining to income statement analysis appear to be appropriate. Moreover, these ratios have remained fairly stable each of the last five years and well within a profitable range (figure 3).

Analysis by Primary Lines of Business The financial ratios calculated based on third quarter results of the various primary lines of business appear to be reasonable (figure 4). Also, the RRGs have continued to report changes in DPW within a reasonable threshold (figure 5). It is typical for insurers’ financial ratios to fluctuate year over year. Moreover, none of the reported results are indicative of a continuing negative trend.

Figure 4 – Key Ratios and Metrics – 9/30/13


February 2014 | The Self-Insurer

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Figure 5 – Direct Premium Written by Lines of Business (000’s omitted)

Jurisdictional Analysis Much like insurers, it is typical for jurisdictions to compete for new business. Some of the factors that may impact an insurer’s decision to do business in a certain jurisdiction include minimum policyholders’ surplus requirements and the premium tax rate. RRGs have continued to report changes in DPW, on a jurisdictional basis, within a reasonable threshold (figure 6).

Conclusions Based on Third Quarter 2013 Results Despite political and economic uncertainty, RRGs remain financially stable and continue to provide specialized coverage to their insureds. The financial ratios calculated based on the third quarter results of RRGs appear to be reasonable, keeping in mind that it is typical for insurers’ financial ratios to fluctuate over time. The third quarter 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 underwriting gains and net profits, they have also continued to maintain adequate loss reserves while increasing premium written year over year. RRGs continue to exhibit a great deal of financial stability. n Mr. Powell has nearly ten years of progressively responsible experience involving financial analysis and business consulting. Email your questions or comments to Mr. Powell at dpowell@ demotech.com. For more information about Demotech, Inc. visit www.demotech.com.

Figure 6 – Direct Premium Written by State (000’s omitted)

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The Self-Insurer | February 2014



Bringing it All Together on Behalf of the Self-Insurance/ART Industry


t the risk of stating the obvious, SIIA is a busy organization. Perhaps not so obvious is how its affiliated entities work in conjunction with the association and the different fund-raising strategies that are required to make the machine run on all cylinders.

Let’s connect some dots and talk strategy. A few years ago, SIIA launched the Self-Insurance Political Action Committee (SIPAC) to compliment the association’s federal lobbying activities. In order to be a real player in Washington, DC, the unfortunate reality is that companies and organizations need to be able to financially support key members of Congress. SIPAC provides such a vehicle for companies involved in the self-insurance marketplace. In accordance with federal law, SIPAC can only accept contributions from individuals or from other PACs, maintains a segregated in a separate bank account and can only use funds to make political contributions and related expenses. So when you hear from SIPAC asking for support please know that it has a very targeted mission, which is to help SIIA strengthen relationships with key members of Congress. A more established affiliated entity is the Self-Insurance Educational Foundation (SIEF). The foundation spearheads a variety of projects that assist SIIA to carry out is mission. Most recently it has been holding informational briefings on Capitol Hill, where congressional staff members are educated about self-insurance and captive insurance.

Finally, SIIA maintains a Legal Defense Fund, which is a segregated pool of money used to finance litigation activities, such the association’s current lawsuit against the state of Michigan. Since litigation is extremely expensive and unpredictable, this funding vehicle was created to enable to SIIA to raise supplemental financial support from our members on a voluntary basis for a critical purpose. We recognize that these multiple entities and funding approaches can seem a little complicated, but they are really not and it’s important to know they all have a specific purpose. And taken together they really expand SIIA’s reach and influence. With the dots now clearly connected, it’s time to get back to work. n

SIEF is a separate 501(c)3 organization with its own operating budget. It does not receive financial support from SIIA, so it depends on voluntary contributions from association members and other industry stakeholders. It also raises money through golf tournaments and other events. Please consider supporting SIEF when asked because it is doing important work, and all contributions are tax deductible.


February 2014 | The Self-Insurer

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The Self-Insurer | February 2014


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February 2014 | The Self-Insurer

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

Profile for SIPC

Self-Insurer Feb 2014  

Self-Insurer Feb 2014