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February 2015


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Lessons Learned from

TRIA Unplugged Februar y 2015 | The Self-Insurer 1

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4 Lessons Learned from Bruce Shutan

February 2015 Volume 76 ART Gallery Cleaning Out the News In-Basket From the Bench Florida Federal Court Keeps TPA as Third-Party Defendant in Suit Between Stop Loss Carrier and Group: A Walk Through the Procedural Thicket

TRIA Unplugged

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16 20 PPACA, HIPAA and Federal Health Benefit Mandates Health Care Reform Litigation Update: SCOTUS Takes Another Look at the ACA; The House of Representatives Takes Aim at The President SIIA Endeavors New Opportunities to Network with Industry Colleagues and Peers in 2015 Opportunities in Self-Funding in Response to the ACA

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Februar y 2015 | The Self-Insurer


Lessons Learned from

TRIA Unplugged

T Written by Bruce Shutan 4 The Self-Insurer | www.sipconline.net

he foot soldiers of self-insured captives and workers’ comp programs waited patiently along the outskirts of a political battlefield riddled with fear and anxiety, breathing a collective sigh of relief upon learning that the Terrorism Risk Insurance Act of 2002 (TRIA) finally had been reauthorized. An unanticipated legislative roadblock that caused the landmark legislation to lapse for about a month after Congress adjourned for the 2014 holiday season became a distant memory as industry insiders rejoiced. TRIA, which was created in response to the Sept. 11, 2001, terrorist attacks, allows the U.S. government to repay

TRIA | FEATURE business costs exceeding $100 million that are traced to acts of terrorism. The biggest lesson learned was that the self-insured industry will need to do a better job planning ahead for the possibility of TRIA not being reauthorized in the future, observes Patrick Theriault, managing director of Strategic Risk Solutions. “I would expect to see the majority of contracts having provisions that would take consideration possible nonrenewal and with automatic adjustments under that scenario,” he says. “We may also see even more folks adjusting the effective dates of their agreements to have their policies coincide with the next TRIA expiration date. Bottom line: I think we’ll be better prepared for the non-renewal situation.” Marketplace angst over TRIA’s uncertain fate, albeit short-lived, demonstrates just how fragile the situation had become, and as such, the importance of building captive policies that are mindful of it happening again, adds David Provost, deputy commissioner of captive insurance for the Vermont Department of Financial Regulation. Many state regulators huddled late in the fall of 2014 to devise an alternative to TRIA in case it wasn’t reauthorized, but Provost reports that there wasn’t enough funding. “You need something the size of the federal government to come up with that kind of money on short notice,” he says. A company that files a claim if TRIA should lapse in the future would “have whatever assets and reinsurance outside the federal backstop, and the policies will respond appropriately and to the extent that they can,” he observes. His assumption is that “the captive would close up or be recapitalized after that claim. In some respects, that’s how we operate with a lot of captives. They are capitalized at a level that’s appropriate for the expected losses at some level of adversity, but they’re not capitalized for the absolute worst-case scenario in every case.” Most Vermont captives took a waitand-see approach to TRIA renewals and didn’t want to risk losing whatever coverage they had, though Provost recalls how one particular arrangement was made for other terrorism coverage during a mid-summer renewal. “They weren’t waiting until December or January to see if Congress was going to act,” he says. “They didn’t have the option of waiting.” Some of Theriault’s clients were savvy enough to add provisions within their captive programs that would automatically take effect even if TRIA wasn’t reauthorized, though they immediately faced a reduction in coverage and increase in price. One company ended up paying nearly four times its anticipated captive/reinsurance program premium for a direct program last year. “They ended up running out of time putting the captive program in place because the lenders basically forced them to place coverage in the commercial market in order to finalize the real estate transactions,” he says. Others clients instructed their brokers to investigate whether they needed to switch to commercial coverage. about an attempt to assassinate the isolated country’s dictator, Kim Jongun. The second, which happened when the Senate overwhelmingly approved TRIA’s reauthorization just as the House did the previous day, involved a terrorist attack in Paris that left 12 people dead at a satirical magazine that had poked fun at Islam and was deemed France’s deadliest such incident in more than 50 years. If the Sony attack, which included leaked e-mails that embarrassed some of Hollywood’s leading actors, ultimately is confirmed to be a terrorist act and not the work of a disgruntled former employee as was also reported, then the entertainment conglomerate would have recourse against TRIA for significant damages. So says Les Boughner, deputy CEO of Willis Global Captive Practice and SIIA’s most recent past chairman. The incident highlights “the inherent uninsured business risks that corporations face,” according to Duke Niedringhaus, an insurance broker with J.W. Terrill Inc. who chairs SIIA’s Workers’ Comp Committee. “The data breach, reputational risk, litigation expense and loss of revenue could all be funded through an enterprise risk captive. Sony will certainly incur significant expenses that are not covered by traditional property or casualty insurance policies. These are the typical coverage gaps that should be funded through a captive.”

Harsh Reminders The irony of TRIA’s temporary lapse is that it coincided with two major terrorism events, both strangely enough involving satire, that reminded the nation about the importance of reauthorizing TRIA without hesitation. The first was a so-called hack attack at Sony, whose internal data was compromised and traced to cyber-terrorists in North Korea. Their apparent objection: the movie studio’s release of “The Interview,” a comedy

Pricing Risk There was some indication leading up to TRIA’s reauthorization lapse that insurance carriers were considering increasing the supply of captive programs, though Theriault didn’t think “the supply would follow the demand in a situation of TRIA non-renewal.” Another component was the nuclear, biological, chemical and Februar y 2015 | The Self-Insurer 5

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TRIA | FEATURE radiological part of the coverage for extreme types of terrorism events such as a dirty bomb. “While there is some availability for terrorism in the commercial market, there’s virtually none that I’m aware of for NBCR other than a small amount of coverage available through London,” he explains. “TRIA fills a void there, as well as helping with supply or availability and pricing – especially in major centers like New York City. “The TRIA renewal would see retention increase from 15% to 20%,” Theriault continues, “and the early indications provided by reinsurance brokers on quotes for the additional 5% for some of our clients in high-risk area such as NYC show a much higher pricing than what we saw last year for the coverage – with some carrier even stating that they do not have capacity for the additional percentage, which demonstrates the likely major imbalance we would have faced without TRIA. So, even with TRIA renewed, pricing for coverage is difficult and very sensitive to demand, and captives is one tool to try to manage availability and pricing.” It’s also worth noting that many first-party transactions between commercial reinsurance captives and middle-market companies were built around a flat pricing that didn’t reflect the organization’s location, according to Theriault. “A company in the Midwest should not pay the same amount of money to its captive for the same amount of terrorism coverage as something in New York City,” he says.

Larger Economic Impact The implications of TRIA’s temporary lapse went far beyond insurance, spotlighting the role of banking. Lawmakers failed to realize the connection between how a material drop in limits would cause a technical default of borrowing and lending agreements, Boughner observes. In short, he says any protracted congressional inaction on this issue would have potentially had “a very large impact on the economy.” A hard-line stance to block a Senate vote on TRIA was adopted by Sen. Tom Coburn (R-Okla.), who was concerned about an unrelated separate rider. And while Boughner says the retiring senator had expressed consternation about the issue of insurance agency licensing, he adds that the larger point to consider is that “insurance facilitates a lot of construction and infrastructure development.” Captive programs weren’t the only area of concern for self-insurance. When Congress failed to reauthorize TRIA, excess workers’ comp carriers continued


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TRIA | FEATURE to provide full statutory limits assuming the TRIA extension would be the first priority in 2015. “The excess markets did not overreact,” Niedringhaus reports. An extended non-renewal lapse beyond January “may have disrupted the marketplace with fewer carriers offering capacity and most likely higher premiums,” surmises Tom Hebson, VP of product development and government relations at Safety National Casualty Corporation, addressing the workers’ comp carrier side of the equation.

Do you aspire to be a published author? Do you have any stories or opinions on the self-insurance and alternative risk transfer industry that you would like to share with your peers? We would like to invite you to share your insight and submit an article to The Self-Insurer! SIIA’s o cial magazine is distributed in a digital and print format to reach over

Asked what it’s like to be a regulator in a state that’s not a terrorism target, Provost says there are still local businesses that use captives to access TRIA to safeguard “installations of various kinds across the country that they view as potential targets,” including Manhattan skyscrapers. Provost calls TRIA “a reasonable and necessary tool for companies to operate with,” noting that “acts of terrorism aren’t something we can predict, and in theory, they’re not insurable. But this is something that Congress has established, and it’s not a free ride. Companies have to pay the money back. It’s just a help to get over the shock of a major terrorism event again. It’s almost like flood insurance. At some point, if you have a disaster, the federal government is going to step in anyhow. This way, at least we have a way to pay them back, and it’s all done in writing about how it’s supposed to work if something like 9/11 happens again.” ■ Bruce Shutan is a Los Angeles freelance writer who has closely covered the employee benefits industry for more than 25 years.

10,000 readers around the world. The Self-Insurer has been delivering information to the self-insurance/alternative risk transfer community since 1984 to self-funded employers, TPAs, MGUs, reinsurers, stop-loss carriers, PBMs and other service providers.

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Articles or guideline inquiries can be submitted to Editor Gretchen Grote at ggrote@sipconline.net.

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ART C News Item aptive reinsurance has been branded a ‘risk to financial stability’ by the U.S. Treasury’s Office of Financial Research (OFR). The OFR has stated that regulators and market participants need better information about captive reinsurance in order to evaluate the financial solvency of captive reinsurers themselves, and become aware of the potential risks to holding companies. The report cited recent examples such as the National Association of Insurance Commissioners (NAIC) attempt to broaden the definition of a multistate insurer, which would subject captive reinsurers to the same oversight and transparency requirements as other insurance companies.” – Report by Captive Insurance Times.

Gallery Written by Dick Goff

Cleaning Out the News In-Basket National Insurance Department has taken its swipes at captives, for what purpose who truly knows? I’m reminded of the bromide that it’s not necessarily paranoia to believe people are out to get you – sometimes they really are!

My Take This report by an arm of the federal government could presage a huge negative effect on the captive insurance industry. And it is another indication of the feds being seduced by the negative bias of the NAIC toward captive insurance, based on little more than its ignorance of the ART industry’s mission and practices. That other Treasury Dept. appendage, the Internal Revenue Service (IRS), continues to probe for ART faults. Meanwhile, the newly established 10 The Self-Insurer | www.sipconline.net

News Item Congress failed to extend the Terrorism Risk Insurance Act (TRIA) in the waning days of the 2014 session.

Industry Reaction “The failure (of the Senate to vote) will likely reverberate quickly through the insurance industry and the entire U.S. economy: ‘There will be an immediate adverse effect on the U.S. economy,’ said Robert Hartwig, president of the New York-based Insurance Information Institute. The Senate’s inaction will cause tumult in the insurance marketplace as insurers scramble to adjust policies and policyholders rush to secure coverage.” – Matthew Lerner, Business Insurance. “Potential solutions... may include: Re-approaching insurers to see if they will not invoke sunset clauses or conditional terrorism exclusions and provide stop-gap coverage until either Congress renews coverage or the individual policy expires; looking to the global standalone terrorism insurance markets for stop-gap coverage

– but with limited capacity it would not be able to fill all requests.” – Duncan Ellis, Marsh Insurance Thought Leadership (ITL). “The program’s expiration will have many negative repercussions for commercial insurance consumers, the countless organizations they represent and the U.S. economy as a whole... We urge both the House and the Senate to act swiftly on this issue as soon as they convene. The longer this lapse in coverage is allowed to continue, the more the U.S. economy will suffer.” – Carolyn Snow, RIMS president, reported by Captive Insurance Times.

someone hadn’t tacked on a national insurance licensing requirement for agents and brokers. This was just another instance of a huge problem in our government: tacking unpopular legislation onto important bills.

There, Jeff Simpson of SIIA’s ART Committee objected that the NAIC proposal’s language was so broad that it would enmesh all captives reinsuring risks beyond their home domiciles. This current apparent backpedaling by the NAIC puts me at risk for applauding the organization for a glimmer of responsiveness to the industry it would regulate. Even while it holds course on developing draconian accreditation standards to be applied – or else! – by state insurance commissioners. ■

News Item “A committee of the National Association of Insurance Commissioners (NAIC) has deemed it necessary to prepare a new and completely revised preamble that will clarify the scope of the NAIC accreditation standards, including the applicability to XXX/AXXX, variable annuities and long term care reinsurance. The NAIC committee has stated that the revision has been undertaken ‘in order to provide both clarity and accuracy to the proposed revisions.’” – Report by Captive Insurance Times.

My Take By the time you read this, you should be able to breathe a sigh of relief if my prediction held true that the TRIA issue would be quickly resolved when Congress convened its new session. I believe that a TRIA extension would have been passed in the last session if

Readers who wish to comment on this column or write their own article are invited to contact Editor Gretchen Grote at ggrote@sipconline.net. Dick Goff is managing member of The Taft Companies LLC, a captive insurance management firm. Email dick@taftcos. com and visit www.taftcos.com/blog.

My Take For specifics on this issue see the October 2014 ART Gallery column in The Self-Insurer.

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Februar y 2015 | The Self-Insurer


Bench From the Unimerica Insurance Company v. GA Food Services, Inc., et al., No. 8:14-cv-2419-T-33TBM, In the United States District Court for the Middle District of Florida, Tampa Division, December 10, 2014 Written by Thomas A. Croft, Esq. 12 The Self-Insurer | www.sipconline.net

Florida Federal Court Keeps TPA as Third-Party Defendant in Suit Between Stop Loss Carrier and Group: A Walk Through the Procedural Thicket


his case is a federal civil procedure professor’s dream. One can easily imagine it as a part of a first-year law student’s final exam. I discuss it because the backdrop for all the procedural issues is a stop loss dispute between a carrier and a group and its TPA and it illustrates just how convoluted things can become in such controversies. I will do my best to keep things simple. Our story begins in Minnesota, where the carrier filed suit against the group (“GA Food”) to obtain a refund of a portion of claims paid respecting a Plan beneficiary with end stage renal disease in the amount of $248,887. After paying the claim, it was learned that the individual became eligible for Medicare and lost coverage under the Plan during the time the claims were incurred (according to the carrier), resulting in a refund due for

the amount the carrier had paid. After learning of the Medicare issue, the carrier applied an offset to another claim, leaving a net amount of refund alleged to be due of $129,655. The carrier, a Wisconsin corporation, sued in federal court in Minnesota, where it had its principal place of business. There was federal jurisdiction in Minnesota because of “diversity,” in that Ga Food was a Florida corporation with its principal place of business in St. Petersburg, Florida. [Note: for there to be subject matter jurisdiction in federal court for a case based on state law, the dispute must involve a certain minimum amount and be between citizens of different states. Corporations are deemed to be citizens of both their state of incorporation and the state where their principal place of business exists.] GA Food filed a motion to transfer the case to federal court in the Middle District of Florida. One federal court may transfer a case to another federal court under a federal statute, 28 U.S. C. §1404, to any other federal district “where it might have been brought” for “the convenience of parties and witnesses,” even over the objection of one the parties. The Minnesota Court found that a transfer to the Middle District of Florida would serve the interests of justice, noting that the case involved a coverage dispute involving a Florida corporation and a Florida employee under a stop loss policy issued under Florida law. The Court also noted that the TPA (not yet a party to the case in any way nor yet asked by either existing party to be added as a party to the case) was BCBSF – a Florida corporation based in Jacksonville, Florida and that non-party witnesses (presumably from BCBSF) were located there. Finally, the Court noted that the substantive law of Florida would likely apply to the dispute

(probably due to a Florida choice of law provision in the stop loss policy). Accordingly, the Minnesota Court sent the case to the Middle District of Florida, but did not specify to which division of that District it should go. [Many federal districts have “divisions” established by statute, which require that cases arising in specified counties be tried in the division encompassing that county]. This case landed in the Jacksonville division. On its own motion, the Jacksonville federal court noted in an order that “no relevant conduct between the two current parties [i.e., Unimerica and Ga Foods] is alleged to have occurred in the Jacksonville Division.” The Jacksonville Court noted that GA Food’s principal place of business was in St. Petersburg – a part of the Tampa Division – and that “the only reference made to the Jacksonville Division is in contracts between [GA Foods] and businesses not party to this case [i.e., BCBSF]. Ultimately, the case was transferred to the Tampa Division, but not before GA Foods filed a motion to add BCBSF as a third-party defendant. The motion was not decided before the transfer to the Tampa Division, however. The apparent theory of the motion to add BCBSF was that it was liable to Ga Foods in the event that GA Foods was ultimately found liable to Unimerica for the refund, allegedly because it either breached its Administrative Agreement with GA Foods in paying the claim in the first place, or negligently did so. The Tampa federal court granted permission for Ga Foods to file its third-party complaint and then BCBSF moved to dismiss it on several grounds. First, BCBSF contended that it was not properly added under Federal Rule of Civil Procedure 14(a), which governs third-party actions, arguing that this dispute was between a stop loss carrier

and an insured under a policy to which BCBSF was not a party and, accordingly, it could not be liable under that policy for any refunds and was improperly added to the case under Rule 14. Further, BCBSF argued that the Court should not exercise jurisdiction over Ga Foods’ claim due to “exceptional circumstances” and “compelling reasons” for declining jurisdiction under 28 U.S.C. § 1367(c)(4). The nuances of Rule 14(a) and Section 1367 are the subject of a great deal of case law and scholarly jurisprudence and are well beyond the scope of the instant article. However, in brief, the Tampa Court concluded that, because the stop loss policy and the Administrative Agreement between GA Foods and BCBSF both incorporated the Plan Document, the parties were sufficiently “inextricably intertwined” such that the requisites of Rule 14(a) were satisfied. Under Section 1367, a federal court can decline to exercise jurisdiction over a third-party claim for a “compelling reason,” as BCBSF argued it should in this case. Here, that reason was that there was a provision in the Administrative Agreement between GA Foods and BCBSF that stated that “all actions or proceedings instituted by [GA Foods] or [BCBSF] hereunder shall be brought in a court of competent jurisdiction in Duval County, Florida.” Ironically, Duval County is the county seat of Jacksonville, Florida, whence this case came. Here is where the analysis gets somewhat dicey. The Tampa Court concluded that the clause quoted above (“the forum selection clause”) did not apply for three reasons. First, the Court observed that the forum selection clause did not literally apply because neither GA Foods nor BCBSF “instituted the action” – Unimerica did. Second, the Court noted that Februar y 2015 | The Self-Insurer 13

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GA Foods had in fact filed its motion to add BCBSF while the case was still before the Jacksonville Division of the Court, such that the “third-party proceedings” were initiated there, notwithstanding that GA Foods motion to add BCBSF was not granted until after the case had been transferred to the Tampa Division. Third, the Tampa Court concluded that it was not clear that the forum selection clause applied to “third-party actions being brought supplementary to already initiated proceedings,” as here. Lastly, BCBSF challenged the thirdparty complaint on the grounds that it failed to state a claim upon which relief could be granted under Federal Rule of Civil Procedure 12(b)(6).

In other words, BCBSF argued that an exculpatory provision in the Administrative Agreement operated to relieve it of any possible liability to Ga Foods, even if all the other factual allegations in the third-party complaint were true. The Court determined that its interpretation of this exculpatory provision at this stage of the proceedings would be premature and denied the BCBSF’s Rule 12(b)(6) motion. So that, boys and girls, is how a Minnesota case ended up in Tampa. And the merits of the case have not yet even begun to be addressed. ■ From The Bench is a monthly column that features Tom Croft, a leading expert on medical stop loss insurance, offering his insights into recent court decisions and other matters impacting the legal environment in which reinsurers, carriers, MGUs, TPAs, brokers and self-insured groups operate.

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Independent Directors Can Help Captives INCREASE Profile T he captive insurance sector is one of the fastest growing segments of the insurance market, yet is one of the least understood. In the past year, all different sorts of captives have come under opposition from sources both inside and outside the insurance industry. Captives are often perceived as “shadowy” even when statistically a captive company is no more likely to fail than a traditionally regulated insurance company. Yet how can those in the industry work to improve the captive sector’s reputation? One of the most efficient ways to shore up the reputation of captives is for those entities to appoint an independent director to their Board. “I think in the industry we all recognize the value of independent contractors,” said John O’Brien, a consultant who sits on the Boards of five captives and risk retention groups. “The use of fit and proper independent directors has the potential to raise the level of captives and risk retention groups to very high levels and high reputations.”

Written by Karrie Hyatt 16 The Self-Insurer | www.sipconline.net

DIRECTORS | FEATURE At this time appointing an independent director is not obligatory in most domiciles and the idea of requiring it has been bandied about within the NAIC, yet many in the industry independently promote the idea as a good standard. Independent directors can add a lot of value to a Board team. The right person can bring a unique perspective and will have knowledge and experience in the insurance marketplace. Most often directors on captive Boards come from within the industry being insured and so will be familiar with the business of the company or group being insured, but they will not necessarily have any background or understanding of the insurance market. According to O’Brien, “The Board may consists totally of individuals who are involved in industry, such as hospitals or physicians, with no member having any background in insurance, Board governance, insurance regulation, or issues like reserves and reinsurance. A good active independent director who is fit and proper will bridge the gap from management to the Board.” While a captive manager or general counsel can help to educate the Board in the matters of insurance, having a Board member on the team that is knowledgeable about the industry helps to broaden the range of discussion and helps to increase the Board’s ability to make decisions. “Whether independent director or not, you need to have an independent mind,” said Gerald Yoshida, director for the law firm Char Hamilton Yoshida & Shimomoto. “Independent directors are good because they bring a different perspective, but there are caveats, with any director it depends on who you have, it depends on the qualities of the individual you have – independent or otherwise.” There are a number of reasons that companies, not just captives, avoid appointing independent directors. Arguments against them are that they are hard to find, are expensive, will interfere with management, don’t understand the core business, are outsiders, or are just plain unnecessary. According to O’Brien, these arguments don’t hold up. In his experience, a carefully vetted independent director is a valuable addition and important resource to a captive Board of Directors. “With a fit and proper independent director, the entire Board team will be a much better team, the work load will be distributed more properly, decisions will be reached after more discussion and consideration, goals will be better established and better resources in the way of service providers will be selected and dangers will be more readily recognized and avoided.” A “Fit and Proper” captive Board appointee is defined by O’Brien this way: Fit – a person who has some type of insurance background and insurance knowledge. At its most basic, “fit” in this case is someone who understands insurance; Proper – is someone who is ethical, who is of good character. According to Yoshida, when appointing the right independent director, or any Board director, it comes down to character. “Number one is the character of the person. There’s recognition of the fiduciary responsibility of being a director and that doesn’t vary. You really need to look at the individual you are considering.” One of the primary reasons that independent directors are not appointed more often is the excuse that there is a scarcity of knowledgeable candidates. O’Brien emphatically believes that it’s just not so. As retired insurance professional, he knows a number of others who, like himself, enjoy serving as an independent director.

“There are a number of people who want to serve as a director. Many times they are people who are retired [from the insurance industry] and they want to get involved, they want to do something, not necessarily with the intent to make money,” he said. “They want to be part of building something, they want to be part of something that matters. They want to make a contribution. They’re out there so you can find them.” Someone with a background in insurance who has retired or gone on to another business sector is the perfect match. They get to stay involved in the industry that they know so well and the captive gets a director who brings a different viewpoint and valued industry expertise. As more and more often Boards bear the burden of a mismanaged company, sitting on one can be a daunting prospect. Yet O’Brien is assured that it doesn’t keep good candidates away. “It used to be the Board could come forward and say ‘I didn’t know, no one told me, I was in the dark.’ But a director has to be fit and proper, has to be proactive. In other words you have to ask questions, you have to be involved, because ultimately you are going to be held responsible. That sounds scary, but it’s not going to be scary for someone who is fit and proper because they’re Februar y 2015 | The Self-Insurer 17

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DIRECTORS | FEATURE going to be involved anyway, they are going to know what’s going on.” “Sitting on a Board, that entails taking that responsibility seriously,” said Yoshida. That is more true than ever before. In Europe, Solvency II – the directive from the European Union that is meant to standardize insurance regulation across the Union – states that the Board has the ultimate responsibility for everything that goes on in a company. The movement within captive domiciles and the NAIC is to also place ultimate responsibility on the Board. If someone sues a company, most likely they will go after the Board of Directors as well. An experienced independent director can help the Board avoid potential problems by bringing their understanding of the insurance industry to the table. However, is it ultimately worth it to bring in an outsider to a closely held company’s Board? Anybody appointed to a Board of Directors should be vetted for their character and ethics, just like an independent director. According to Yoshida an independent director is not always necessary. “There are some situations when you have closely held companies where having a small Board made up of directors primarily from the parent company, who fully understand the parent company’s insureds and yet are still able to act independently, is fine. These “insiders” will bring some knowledge that an independent director will not have.” It comes down to what is most appropriate for the captive in question. While appointing an independent director can bring an assortment of benefits to a company’s Board, as well as improving their reputation, they may not always be the right choice. Independent directors do have a lot to offer to a captive Board. As O’Brien would have it, they are “Outstanding individuals with broad ranging insurance experiences that seek out opportunities to serve on captive... The captive industry is a close knit community that has been built over the past thirty years on the solid foundation of relationships.” ■ Karrie Hyatt is a freelance writer who has been involved in the captive industry for nearly ten years. More information about her work can be found at www.karriehyatt.com.


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PPACA, HIPAA and Federal Health Benefit Mandates:


Health Care Reform Litigation Update: SCOTUS Takes Another Look at the ACA; The House of Representatives Takes Aim at The President

ore provisions of the Affordable Care Act (ACA) remain under challenge in the courts. This article provides an update on the challenge to the payment of premium tax credits through Federal Exchanges in the case of King v. Burwell, which the Supreme Court has decided to review and also addresses a new case filed by the House of Representatives challenging the authority of the Obama Administration with respect to specific actions taken to implement the ACA. House of Representatives v. Burwell (referred to here as the “House Case”) challenges the Treasury Department’s delay of the employer pay or play penalties and guidance regarding


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the percentage of full-time employees that must be offered coverage in order to avoid penalties. The House Case also challenges payments by the Department of Health and Human Services (HHS) with respect to cost-sharing reductions. The pending litigation does not at this time impact ACA enforcement or the need for compliance. Thus, for example, premium tax credits are being paid to qualified individuals who enroll in health coverage through FFEs. Similarly, the Treasury Department’s regulations relating to the employer penalties remain in effect, including the delay in enforcement. This article discusses the issues involved in the pending cases and the potential impact in the event the Administration’s regulations are found to be invalid.

facilitated exchange established under section 1321 of the ACA could be said to have been established under section 1311, it rejected the idea that the statutory language would permit such an exchange to be “an Exchange established by the State.” The D.C. Circuit struck down the IRS Rule as contrary to the statute’s plain language. In doing so, the D.C. Circuit reasoned that: • Other provisions of the ACA state expressly that federal territories will “be treated as a State” for purposes of establishing an exchange.4 “Congress knew how to provide that a non-State entity should be treated as if it were a State when it sets up an Exchange.” Congress’s failure to use similar language in the ACA with respect to the federal exchanges confirms that Congress did not intend to extend tax credits to individuals purchasing health insurance through federally established exchanges. • The government’s concerns about absurd results under other provisions of the ACA upon application of a plain-language reading of § 36B(b)(2) are not controlling.5 Accepting, for the sake of argument, the government’s position that the results of a plain meaning construction of section 36B “are odd,” the Court’s “inquiry into the ACA’s legislative history is quite narrow”. – In the face of the statute’s plain meaning – a federal Exchange is not an “Exchange established by the State” – we ask only whether the legislative history provides evidence that this literal meaning is “demonstrably at odds with the intentions” of Februar y 2015 | The Self-Insurer 21

Premium Tax Credits in Federal Exchanges – King v. Burwell; Halbig v. Burwell Overview Within just a few hours of each other on Tuesday, July 22, 2014, two federal circuit courts of appeals made headline news with conflicting decisions on a core provision of the Affordable Care Act (ACA). In the first decision, Halbig v. Burwell, the U.S. Court of Appeals for the District of Columbia Circuit (the “D.C. Circuit”) struck a major blow against the ACA by holding that regulations allowing premium tax subsidies through Federal Exchanges are invalid and that subsidies may be provided only through Exchanges established by States. In the second decision, King v. Burwell, the U.S. Court of Appeals for the Fourth Circuit (the “Fourth Circuit”) took the opposite approach, holding that the regulations are valid. The Supreme Court has now decided to review the decision in King. If the Supreme Court strikes down the regulations, there will be major implications for core aspects of the ACA.

The IRS Rule At issue in both King and Halbig is an Internal Revenue Service (IRS) regulation (the “IRS Rule”) providing that qualified persons may receive a premium subsidy if the individual is enrolled in a qualified health plan through an “Exchange.”1 The IRS Rule defines “Exchange” for this purpose as “an Exchange serving the individual market for qualified individuals... , regardless of whether the Exchange is established and operated by a State (including a regional Exchange or subsidiary Exchange) or by [the U.S. Department of Health and Human Services].”2 The IRS Rule interprets section 36B(b)(2) of the Internal Revenue Code3 (“§ 36B(b)(2)”), as added by the ACA, which provides that the IRS is to calculate tax credits for premiums for qualified health plans “which were enrolled through an Exchange established by the State under [section] 1311 of the Patient Protection and Affordable Care Act.” The question in both cases is whether the IRS Rule is a valid interpretation of § 36B(b)(2).

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Halbig v. Burwell – the D.C. Circuit The D.C. Circuit concluded in Halbig v. Burwell, that the IRS Rule is invalid. While the Court was willing to accept the government’s argument that a federally


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the ACA’s drafters. Unless evidence in the legislative record establishes that it is, we must hew to the statute’s plain meaning, even if it compels an odd result.6 • Citing Chief Justice John Marshall that “‘it is incumbent on those who oppose’ a statute’s plain meaning ‘to shew an intent varying from that which the words import,’”7 the D.C. Circuit concludes that the ACA’s legislative history fails to show Congress’s “precise intent.”8 Legislative history has value only when it clearly identifies Congress’s intent. Here, the legislative history is silent on Section 36B(b)(2). The plain language thus prevails because, “in the absence of any contrary indications, that text is conclusive evidence of Congress’s intent.”9 The D.C. Circuit stated that it reached its conclusion “reluctantly” because it recognizes that, “[a]t least until States that wish to can set up Exchanges, our ruling will likely have significant consequences both for the millions of individuals receiving tax credits through federal Exchanges and for health insurance markets more broadly.”10 Halbig was originally heard by a three-judge panel of the D.C. Circuit. After the decision was issued, the Administration asked for and was granted, a re-hearing of the case en banc (i.e., a review involving all judges of the court). In accordance with usual procedure, in granting the re-hearing, the court vacated the earlier decision. The court set oral arguments in the re-hearing for December 17, 2014; however, as a result of the Supreme Court’s decision to consider King, the oral arguments have been cancelled and the case has been on hold pending the Supreme Court’s review.

King v. Burwell – the Fourth Circuit Several hours after the D.C. Circuit issued Halbig, the Fourth Circuit reached the exact opposite result in King v. Burwell. The Fourth Circuit upheld the IRS Rule by finding that § 36B(b)(2) is ambiguous and then deferring to the IRS’s reading of the statutory language as a permissible exercise of agency discretion.11 Specifically, the Fourth Circuit reasoned that: • Other provisions of the ACA support the government’s position that § 36B(b)(2) reaches federally established exchanges. Such provisions include the ACA’s definitions section, which broadly defines the word “exchange” to include non-State Exchanges. Those provisions favor the government’s interpretation of the ACA, though “only slightly.”12 The Court acknowledges the common sense appeal of the plaintiffs/appellants’ argument. As a result, “based solely on the language and context of the most relevant statutory provisions, the court cannot say that Congress’s intent is so clear and unambiguous that it ‘foreclose[s] any other interpretation.’ ” • Congress’s intent is not rendered clear from the other relevant provisions, which the government contends conflicts with the plain language interpretation advanced by plaintiffs. Statutes of ACA’s size naturally have conflicts and the mere existence of conflicts within a statute does not render the government’s view as dispositive of Congress’s intent.13 • Nothing in the legislative history provides compelling support for either party.14

• While the government has the better of the statutory construction argument(s), the Court concludes that “the statute is ambiguous and subject to at least two different interpretations.”15 • The IRS Rule is a reasonable exercise of agency judgment. Confronted with an ambiguous provision, the IRS “crafted a rule ensuring the credits’ broad availability and furthering the goals of the law.”16 The IRS’s exercise of discretion is entitled to deference under the second step of the Chevron standard. After the decision was issued, the plaintiffs petitioned the Supreme Court to review the decision.

SCOTUS Agrees to Hear King On November 7, 2014, the Supreme Court announced its decision to review the King case. The decision came as a surprise for many. Conflicting (“split”) decisions among Circuit Courts is the most common, but not the only, reason that the Supreme Court decides to hear cases. Once the D.C. Circuit vacated its decision, however, there was only one Circuit Court decision on this issue, that of the Fourth Circuit in King. The Supreme Court did not explain its reasons for taking the case in its one-sentence order. Other pending cases challenging the IRS Rule have been put on hold pending the decision by the Supreme Court. Premium subsidies continue to be paid in all Exchanges pending the outcome of the litigation.

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What exactly is a Federal Exchange? A Supreme Court decision striking down the IRS Rule could have a dramatic Februar y 2015 | The Self-Insurer 23

impact on the success of ACA. However, the impact may depend on the details of an issue that is not really addressed by either the Halbig or King court – what exactly is a Federal vs. a State Exchange or, more precisely, what does a State need to do to establish an Exchange? There is not agreement on just how many State and Federal Exchanges there are – the D.C. Circuit panel decision in Halbig counted 36 Federal Exchanges, while the Fourth Circuit in King counts 34. The difference appears to be Idaho and New Mexico, which have State Exchanges, but at the time of the decisions, used the healthcare.gov platform for enrollment. For 2015, Idaho is using its own platform. If the Supreme Court strikes down the IRS Rule, there may be a more thorough re-examination of just what a State needs to do in order to be considered to have established an Exchange. The Administration might issue new regulations or guidance on the issue. Some States that have not previously “established” an Exchange may consider what is needed to do so (e.g., action by the governor or action by the State legislature) in order to protect subsidies in the State. On the other hand, some States, such as those involved in challenging the IRS Rule, may choose to do nothing.

Implications for Individuals, Exchanges and the Delivery System Regardless of a State’s Exchange status, a final resolution of King that denies premium subsidies to even part of the population otherwise eligible for them would not only impact individual consumers, who may choose to forgo coverage in the absence of financial support, but also threatens the viability of the broader Exchange marketplace.17 A well-functioning Exchange marketplace requires a risk pool that reflects a full range of consumer demographics. If healthy or younger individuals opt out of the ACA’s coverage options, premium and participation costs may increase for others and Exchanges themselves may fail to function efficiently. Health care providers and hospitals in particular, may also be impacted by a Supreme Court decision striking down the IRS Rule. The ACA effects a reduction in federal financial support for uncompensated care (e.g., reductions in federal disproportionate share hospital (DSH) payments) because it anticipated an increase in the number of people covered by health insurance or Medicaid. Hospitals – especially in States electing not to expand their Medicaid programs and not to create Exchanges – may find that they are responsible for substantially more uninsured individuals than promised by the ACA, further weakening an already fragile safety net system in some communities.

Implications for Employers

Overview A Supreme Court decision striking down the IRS Rule would impact potential liability under the employer responsibility provisions of the ACA, also known as the “pay or play” penalties, imposed under Internal Revenue Code (the “Code”) section 4980H. The penalties are triggered if a fulltime employee receives a premium tax subsidy (“Premium Subsidy”).18 Because Premium Subsidies are accessed by individuals through Exchanges based on place of residence (rather than where they work), employers could face different exposure to penalties based on where their employees live and whether there is a Federal Exchange or a State Exchange in the employee’s State of residence if the Supreme Court reverses King. The employer penalties generally apply starting in 2015.19

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Summary of Employer Penalties The employer penalties apply to “applicable large employers” (ALEs), meaning employers with at least 50 full-time equivalent employees.20 In the case of employers that are members of a controlled group of entities, whether an employer is an ALE is determined by looking at the entire controlled group; however, liability for any penalties is determined separately for each applicable large employer member (ALEM), i.e., each separate employer that comprises the ALE.

one-twelfth of $2,000 ($167) multiplied by all of the ALEMs full-time employees (reduced by its allocable share of a de minimis amount). • The Tackhammer Penalty for any month is equal to the product of one-twelfth of $3,000 ($250) multiplied by the number of full-time employees who received a Premium Subsidy during that month, or if less, the maximum amount of the Sledgehammer Penalty.

What if subsidies are available only in State Exchanges? Because the employer penalties are triggered only if a full-time employee receives a Premium Subsidy, a Supreme Court decision with the effect of limiting the availability of such subsidies to States with their own exchanges would have a direct impact on potential employer liabilities. The impact will vary based on the residence of the employer’s employees. The following general examples illustrate the potential impact if the Supreme Court strikes down the IRS Rule. As one example, if all of an ALEM’s employees reside in States that have not established Exchanges, then that employer would not be subject to a penalty, even if the employer does not offer coverage to any full-time employee (and their dependent children). As another example, suppose an ALEM has employees who reside in Nevada (which has established an Exchange) and Texas (which has a federally facilitated exchange) and that the ALEM does not offer coverage to substantially all its full-time employees (and dependent children). Employees who reside in Texas cannot trigger the penalties under Halbig, because the Premium Subsidies are not available.

Generally, Code Section 4980H imposes penalties on ALEMs for any month during a calendar year in which one or more of the employer’s full-time employees are certified as having received a Premium Subsidy and if either of the following applies: • The ALEM failed to offer minimum essential coverage (MEC) during that month to substantially21 all of its full-time employees and their dependent children (including adult dependent children up to age 26).22 In this case, the employer would be liable for what we refer to as the Sledgehammer Penalty (sometimes called the “fail to offer” or “4980H(a)” penalty) if even one fulltime employee receives a Premium Subsidy; OR • The ALEM offered minimum essential coverage to substantially all its full-time employees (and their dependents) during that month but the coverage was not affordable or didn’t provide minimum value. In this case, the employer would be liable for what we refer to as the Tackhammer Penalty (sometimes referred to as the “nonqualified coverage” or “4980H(b)” penalty) with respect to full-time employees who receive a Premium Subsidy.23 As a practical matter, the Sledgehammer Penalty will typically be much greater than the Tackhammer Penalty, because, if triggered, it is based on the total number of the ALEM’s full-time employees, whereas the Tackhammer penalty is limited to the number of full-time employees who receive Premium Subsidies. As a result, many employers have focused planning on at least avoiding the Sledgehammer Penalty. The penalties are calculated as follows: • The Sledgehammer Penalty for any month is equal to the product of 26 The Self-Insurer | www.sipconline.net

However, if one of the full-time employees who resides in Nevada receives a Premium Subsidy, then the Sledgehammer Penalty would apply and would be calculated based on the total number of the ALEM’s full-time employees, including those who reside in Nevada and those that reside in Texas. Note that the Sledgehammer Penalty would apply even if only one full-time employee in Nevada receives a Premium Subsidy. On the other hand, the Tackhammer Penalty would only apply with respect to employees who reside in States that have established an Exchange. Thus, in general, a decision limiting the availability of premium subsidies would add a new element to the analysis of whether pay or play penalties may be triggered. The ultimate impact, however, will vary from employer to employer. An employer with even a few full-time

employees in States that established Exchanges could still be subject to significant penalties without appropriate planning.

House of Representatives v. Burwell The House Case focuses on two aspects of ACA implementation, the employer penalties and payments by HHS for cost-sharing reductions. With respect to the employer penalties, the House argues that the Treasury Department unconstitutionally exceeded its authority by: (1) delaying the penalties by one year, from 2014 to 2015 for all employers and until 2016 for certain employers with less than 100 full-time equivalent employees and (2) allowing employers to avoid the Sledgehammer Penalty by offering coverage to

“substantially all” full-time employees, where substantially all means 70% in 2015 and 95% thereafter. The House argues that the statute sets the effective date and requires employers to offer coverage to all their fulltime employees to avoid the penalty. The House Case argues that the Administration, in making these rules, has essentially usurped Congressional legislative authority as established by the Constitution and seeks a declaratory judgment that these actions violate the Constitution. Cost-sharing reductions (CSRs), like Premium Subsidies, are designed to help achieve the “affordable” goal of the ACA. For eligible individuals, CSRs reduce the out-of-pocket expenses that would otherwise apply, by reducing deductibles and co-payments. In order to be eligible for a CSR, an individual must also be eligible for a Premium Subsidy.24 In addition, the

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individual must be enrolled in a silver plan. The income eligibility limits for CSRs are lower than for Premium Subsidies. CSRs are implemented differently than the Premium Subsidy. Insurers are required to reduce cost-sharing (e.g., deductibles and co-payments) for eligible individuals and are then reimbursed by the Department of Health and Human Services.25 The House Case argues that funds HHS uses to reimburse insurers for CSRs have not been properly appropriated, thus violating certain statutory requirements as well as Constitutional provisions requiring that Federal funds must be appropriated. The House Cases seeks a declaratory judgment that the HHS CSR payments violate Constitutional and statutory law and an injunction prohibiting further payments by the Federal government relating to CSRs unless/ until a law appropriating funds for such payments is enacted. The House Case involves a variety of potential issues of law, including possible challenges to the lawsuit on a number of grounds. The time for the Administration to respond to the complaint has not yet passed. The full range of potential implications of the House Case will develop after the Administration responds to the complaint and the case proceeds. With respect to the employer penalties, employers may wonder whether, if the House prevails, they will become liable for additional penalties, including penalties retroactive to the beginning of this year. With respect to CSRs, insurers may wonder whether, if the House prevails, they will still be required to provide the CSRs even if they are not reimbursed and, whether, although the House has not requested such relief, they would be required to repay any CRS offset payments they have already received. For now, implementation is not affected.

Note that Congressional action on these issues is also possible in the new Congress. ■ 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 selfinsured 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, Johann Lee, Carolyn Smith and Dan Taylor provide the answers in this column. Mr. Hickman is partner in charge of the Health Benefits Practice with Alston & Bird, LLP, an Atlanta,


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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. This article was co-authored by Alston & Bird, LLP attorneys Carolyn E. Smith, Paula Stannard, Colin Roskey, Brian Stimson and Michael J. Barry.

References 26 CFR § 1.36B-2(a)(1). 45 CFR § 1.36B-1(k), incorporating by reference the definition in 45 CFR § 155.20. 4 26 USC § 36B(b)(2). 5 Halbig v. Burwell, No. 14-5018, slip op. at 17 (D.C. Cir. July 22, 2014) (slip opinion). 6 Id. at 22-30. 7 Id at 32 (emphasis in original). 8 Id. at 34, quoting United States v. Fisher, 6 U.S. (2 Cranch) 358, 386 (1805). 9 Id.at 34. 10 Id.at 41. 11 Id. (noting that its conclusion is dictated by Congress’s supremacy in matters of policy and that the court’s duty, “when interpreting a statute is to ascertain the meaning of the words of the statute duly enacted through the formal legislative process”). 12 King v. Burwell, No. 14-1158, slip op. at 5 (4th Cir. July 22, 2014). 13 ] Id. at 20. 14 Id. at 24-25. 15 Id. at 28. 16 Id. at 28. 17 Id. at 34. 18 The D.C. Circuit itself recognizes the potential impact of its decision on health insurance markets. See Supra note 10. 19 Note that the penalties are triggered if a full-time employee receives either a premium tax subsidy or a cost-sharing reduction (under ACA § 1402). As discussed above in the text, a condition to receiving a cost-sharing reduction is qualification for a premium subsidy. For convenience, the term “Premium Subsidy” in this section refers to both the premium tax credit under Code § 36B and cost-sharing reductions. 20 The statute provides that the penalties are effective starting in 2014; Treasury Regulations provide a one-year delay. 21 Under a transition rule, the 50 full-time equivalent employee threshold is increased to 100 full-time equivalent employees in 2015 for employers that satisfy certain requirements. 22 Under an administrative transition rule, “substantially all” means 70% for 2015 and 95% in 2016 and later years. 23 Under another administrative transition rule, certain plans that did not historically offer coverage to dependent children may have until 2016 to provide such coverage without incurring a penalty. 24 Even if the ALEM was not subject to the Sledgehammer Penalty because it offered MEC to substantially all full-time employees (and dependent children), the Tackhammer Penalty would still be assessed for any full-time employee who receives a Premium Subsidy because the ALEM did not offer that employee coverage. 25 Although neither King nor Halbig mentions CSRs, because an individual must be eligible for a Premium Subsidy in order to receive a CSR, the outcome of the King litigation would also appear to apply to eligibility for CSRs. 26 Individuals are required to reconcile the amount of any advance Premium Subsidies received with the amount to which they are in fact entitled on their individual income tax return. There is not a similar reconciliation for CSRs. 2 3

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© 2015 Meritain Health, Inc. For self-funded accounts, benefits coverage is offered by your employer, with administrative services only provided by Meritain Health, a subsidiary of Aetna Life Insurance Company (Aetna). 2014285

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SIIA Endeavors S New Opportunities to Network with Industry Colleagues and Peers in 2015 Health Plan Executive Forum, is open to all conference registrants and promises to be an excellent opportunity to network with executive-level industry colleagues and peers. The tournament will be a scramble format and you can either sign up as an individual or reserve a foursome. All skill levels are welcome! Educational sessions at the Self-Insured Health Plan Executive Forum include ACA Regulator Briefing, SIIA Political Advocacy Update, Tough Love for Self-Insurance Service Providers, Private Health Insurance Exchanges – The TPA Perspective, Minimum Value/Skinny Plans – The Good, The Bad & The Ugly, The Return of MEWAs?, Taming Specialty Drug Costs for Self-Insured Health Plans and ACO Trends and The Self-Insurance Marketplace. IIA has several important events coming up in the next 2 months. Our first event of the year is the Self-Insured Health Plan Executive Forum at the beautiful JW Marriott Camelback in Scottsdale, AZ March 4-6th. This event will deliver high quality educational content of interest to executives involved with the establishment, management and/or support of self-insured group health plans. Anticipated attendee profiles include: corporate benefit directors, third party administrators, brokers/ consultants, stop-loss insurance carriers/MGUs, captive managers and industry service providers. In addition to the educational program, the event will feature multiple unique networking opportunities. Make sure you arrive early so you can participate in the annual fundraising event to benefit the Self-Insurance Educational Foundation (SIEF). Don’t miss this exclusive opportunity to better your handicap, refine your putting skills and support the foundation dedicated to ensuring the development of tomorrow’s leaders in the selfinsurance/ART industry. The SIEF Golf Tournament Fundraiser, scheduled on opening day of SIIA’s Self-Insured 32 The Self-Insurer | www.sipconline.net

Our next event will take place April 13th-15th at the brand new upscale Hilton Panama. Many industry experts now see Latin America as a promising new frontier for self-insurance/captive insurance. Based on this perspective, SIIA is taking its International Conference to one of the leading economic hubs in Latin

America to explore and discuss emerging self-insurance business opportunities in this important region of the world. Consistent with this outlook, the educational sessions include evolving regulatory environment for self-insured health plans in Latin America, captive insurance opportunities in Latin America, multi-national pooling for group benefits programs in Latin America, evolving roles for TPAs, brokers and carriers in Latin America, an insurance carrier panel discussion, The Panama Canal – a risk management case study, self-insurance opportunities in the Caribbean and medical travel in Latin America. The event will also feature multiple networking opportunities for senior executives involved in the self-insurance marketplace, both from the United States and Latin America – making this a truly unique event. You will not make these connections anywhere else. Translation services will be provided. Special rates for Latin and South American Attendees, Government and Spouses! For companies interested in promoting their corporate brands and capabilities in connection with this event, please contact Justin Miller at jmiller@siia.org for sponsorship opportunity information. Watch for more information on these events and the 1st Annual Self-Insured Taft-Hartley Plan Executive Forum April 29-30th at the Marriott Metro Center in Washington, DC and SIIA Workers’ Compensation Executive Forum May 12th-13th at the Windsor Court Hotel in New Orleans, LA. ■ Complete details for all events, including registration forms, can be accessed online at www.siia.org, or by calling 800-851-7789.

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Opportunities in Self-Funding in Response to the ACA Fueling your business growth in the emerging self-funded market


ecessity has driven every employer providing employee health beneďŹ ts to become a student of the Patient Protection and Affordable Care Act (ACA), anticipating its potential impact on their employees and on their bottom line. The questions are many and the absolutes are few. One thing is certain: The impact of the ACA is one of the biggest unknowns for employers today. Increasingly, employers are addressing the uncertainty by choosing private self-funded employee health plan options. Many of those who have not been traditional candidates for self-funded plans are now considering them as an option. Additionally, many employers that are already self-funding are concerned about how the ACA will impact their risk profiles. They’re also uneasy about their ability to manage large claims. Many such employers are, for the first time, considering the purchase of specific and/or aggregate stop-loss coverage. Together, these two groups create a tremendous and immediate oppor tunity for insurers to expand their book of business. It also significantly increases their exposure.

Written by Tony Plampton, President RE-SOLUTIONS INTERMEDIARIES, LLC 34 The Self-Insurer | www.sipconline.net

This article outlines the emerging self-funded and specific and aggregate stop-loss opportunity, the risk of unlimited claims and how to mitigate that risk with reinsurance.

The Emerging Self-funded Opportunity Insurers have always balanced risk and opportunity, but with healthcare reform, there are new, largely unknown factors helping to tip the scales. All the uncertainty presents a tremendous opportunity to grow a book of business as more employers show interest in self-funded insurance options and in the purchase of both specific and aggregate stop-loss medical coverage. The new healthcare environment opens the door for employer groups traditionally not interested in or qualified for self-funding employee health solutions. For example: • Small employers – Increasingly, employers with as few as 25 employees are investigating self-funded options. • Midsized employers – New healthcare market conditions are driving a better fit between mid- sized employers and self-funding. • Larger employers – Already self-funding employee benefits, many are worried about the unlimited nature of their exposure and are looking to purchase protection for their bottom line. More and more employers are looking at self-funding today because: ACA = Great Uncertainty Guaranteed Issue Changes Risk Pool Without pre-existing conditions limitations, unhealthy people have a larger effect on community-rated insurance pools. What will that do to premium cost? Coverage Mandates = Higher Cost The ten essential benefits and other coverage mandates drive up the cost of group health plans.

• So a plan with stable membership that would have expected to see a single $1 million claim in 2005 should expect to see five or more claims today. It’s no longer uncommon for there to be $2 million claims. Is that what we’re coming to expect? Are multimillion dollar claims becoming commonplace? Another reinsurer, PartnerRe, states that the frequency of catastrophic medical claims in excess of $1 million is trending at a rate of 25-30 percent, stating “a million-dollar claim is not a big claim anymore; the $1 million xs $1 million layer is now just another working layer.” Following is a look at the factors contributing to the problem.

Self-funding = Fewer Unknowns A Specific Population is Easier to Predict Group pricing faces an unknown future versus an employer’s ability to predict its own workforce. No Premium Tax No premium means no premium tax. Flexible Plan Design Self-funded plans can be designed around the specific needs of the workforce.

Price Increases Drive Higher Cost Claims In November 2013, a U.S. News and World Report article stated: Contrary to popular belief, the biggest reason for the rise in U.S. health care spending is not an aging population or patient demand, but rather the increasing costs of drugs, procedures and hospital care, a new study finds. Researchers found that since 2000, those yearly price increases have accounted for 91 percent of the rise in national health care spending, which totaled $2.7 trillion in 2011. The article’s information stemmed from a Journal of the American Medical Association (JAMA) study. JAMA is not alone in reporting accelerating charges by the medical community. Stories of soaring medical prices hit the front page of nearly every professional journal on a regular basis. The massive regulatory change of the ACA is causing enormous volatility. Since the legislation did very little to contain actual medical costs, the sure outcome is continued medical cost inflation. Februar y 2015 | The Self-Insurer 35

The Risk of Unlimited Claims The shift toward self-funded employee health benefits creates both opportunity and risk for insurers. The opportunity for more business comes by way of additional stop-loss insurance sales. The risks of self-funded solutions include: • Changing risk profile • An increase in the frequency and severity of specific claims • Jumbo specific claims • Unlimited claims exposure This section outlines those risks. © Self-Insurers’ Publishing Corp. All rights reserved.

What’s Causing the Angst with Payers? Claims Throughout the nation, Re-Solutions’ business partners report troubling trends with claims. Some reflect the frequency of claims. More often, the trends reflect significant increases in the size (or severity) of claims – across all medical lines. Not long ago, a $1 million claim was rare. According to reinsurer RGA, the frequency of claims that reach $1 million has increased significantly. In fact, they have found: • Since 2005, the frequency of million-dollar claims has increased fivefold.

An inpatient day in a U.S. hospital costs, on average, five times as much as in many other developed countries. There’s no simple answer. Just like diagnoses and the resulting claims are compounded by co-morbidities, medical inflation has co-morbidities of its own.

errors, according to a study released by Harvard Law School and Harvard Medical School. Overcharges make up an estimated 66 percent of these errors, as reported in Money Magazine.”

Out-of-network claims – This phenomenon particularly affects regional carriers that are not part of a national network.

PPO agreement is based on percentage discounts, it is likely being outpaced by the rate of medical inflation. Plus, with billed charges varying so much for the same medical procedures, the value of PPOs is becoming more questionable. In the post-ACA environment, rising prices will be further complicated by:

Contributors to High Cost Claims Prior to the ACA, rising prices were complicated by:

Coverage mandates – With the inclusion of the 10 essential benefits and widespread acceptance of experimental treatments, experts are certain the industry will see increased utilization.

New technologies and treatments – The U.S. population expects medical miracles and new, sophisticated technologies make it possible – but at a cost.

Billing errors – Assent Medical Cost Management, a Re-Solutions Resources partner in claims negotiation, shared with us a staggering statistic: “Ninety percent of the roughly 31 million hospital bills processed in the U.S. contain

Increase in chronic illness – The National Health Council reports that ongoing, chronic disease affects approximately 133 million Americans, representing 45 percent of the total population of this country. By 2020, that number is projected to grow to an estimated 157 million, with 81 million (52 percent) having multiple conditions. And it’s not just the elderly driving this statistic. More than 50 million Americans under 65 years old have some type of pre-existing condition.

Removal of pre-existing conditions – The concern is this mandate puts a less healthy population into the exchanges. Experts anticipate that as this drives premium prices up, healthy people could be pushed out of the market entirely, leaving the exchanges as the new high-risk pools.

Removal of coverage limits – In the past, insurers saw provider billing

Diminishing return of PPOs – If a

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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 hmig.com/InSights



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patterns that matched the limit of available health insurance. What will happen when there’s no limit? Insurers will be on the hook. One or two jumbo claims could significantly impact a health insurer’s overall results.

Cost shifting from the public to the private sector – This phenomenon happens whenever government funding or oversight changes. At this time it’s still unclear what the effect will be.

Specialty Drugs Also a Factor in High-dollar Claims While increased medical costs are the primary cause for the increased claim severity, in second place is the increased utilization of expensive specialty drugs that continue to rise in cost. A specialty drug can be defined as one that: • Costs more than $600/mo. • Requires ongoing clinical assessment • Treats a rare condition and/or requires special handling • May be in limited distribution • Has no generic substitute The American Journal of Managed Care reports that in 1990 there were 10 of these drugs on the market. In 2012, there were nearly 300. Astonishingly, 40 percent of drugs in the pharmaceutical pipeline will be specialty drugs once they hit the market. According to Excelsior Solutions, a Re-Solutions Resources partner in pharmacy management, the pipeline is filled with: • New types of therapies for more-common conditions, such as oral drugs to replace those that were previously injected to treat cancer, autoimmune and other familiar diseases • Costly therapies for less-common conditions like hemophilia, growth hormone deficiencies and others Some industry analysts have predicted that by 2017, 45 percent of total drug spend will be on specialty drugs. Excelsior Solutions suggests that half the costs of specialty pharmacy are embedded within the medical portion of most plans, resulting in the pharmacy costs being buried in the medical billings, which can subject the plan to even higher costs. For pharmacy costs that can be separated out, some insurers have responded to the mounting cost pressures by increasing patient cost sharing. This is being handled by formulary exclusions, four-tier pharmacy benefit design, value-based benefits design, pricing and utilization and care management. For pharmacy costs being billed as a part of a medical bill and not as part of the drug benefit, insurers will see more multimillion-dollar claims as the number of specialty drugs continues to increase and their costs continue to climb. © Self-Insurers’ Publishing Corp. All rights reserved.

Keeping claim costs down not only improves an insurer’s bottom line but also reduces the cost of their reinsurance program. An insurer can make the biggest impact to their reinsurance premium and therefore their bottom line, by having a master plan that includes pre- and post-claim management.

How to Buy Reinsurance at the Best Cost The following claims management strategies are “best practice” in helping position an insurer for the best possible reinsurance pricing.

1. A medical management program that works with self-funded plans The earlier the outcome of a claim can be influenced, the better off the insurer will be. Medical management programs help get a handle on at risk populations and those with chronic diseases. With self-funded plans, it’s not uncommon for chronic disease populations to go unnoticed until escalated claims reveal that a patient or a group of patients is past the point of manageability. Medical management programs can simultaneously help an insurer contain cost and help employees get the care they need. Although they vary widely, medical management programs typically have the same goal of getting the most medically effective, cost efficient care by using the: • Correct diagnosis • Appropriate care for the condition • Right protocols • Right timing for the care • Correct step-down levels • Appropriate provider for the condition and stage of care • Appropriate coordination of care Februar y 2015 | The Self-Insurer 39

Reinsurance Limits Exposure in the Emerging Self-funded/Stop Loss Market To take advantage of the emerging self-funded/stop loss market, insurers need to know they’re not alone in taking on the potential risk. Reinsurance allows insurers to mitigate the risk. The challenge is getting that reinsurance on the best possible terms and at the right price. Reasonably priced reinsurance costs are the result of well managed claims.

2. Strong utilization review and underwriting procedures and protocols Medically unnecessary procedures can put a tremendous drain on insurance companies and drive up medical costs. Take, for example, the increasingly common off-label use of inhaled nitric oxide (iNO). According to the FDA, iNO has only been approved for term and near-term neonates >34 weeks, but based on a Drug Use Review from Nov 2010 to May 2012, the majority of iNO use (57 percent) was among patients 17 years and older. Nitric oxide is just one such example of an ongoing source of loss for insurers. Stop loss insurers need to be updating staff on medical necessity, diagnosis codes and emerging medical practices on a regular basis.

a major role in influencing healthful decisions. By helping employers shape health and wellness incentives for their employees, the insurer shapes an environment that can benefit all parties.

4. Get a handle on out-of-network claims Out-of-network claims burden insurers of all sizes, but regional insurers without large network coverage benefit most from controlling out-of-network claims costs.

transplants so that transplant episode costs are fixed and outlier costs are contained • Negotiating costs up-front, rather than trying to renegotiate an invoice that has already been billed • Using carve-out programs for certain diseases, such as organ transplants or dialysis

6. Encourage employers to keep plan language up to date While the underlying plan language is usually controlled by the TPA, broker or consultant contracted by the employer, insurers can encourage those advisors to adopt up-to-date plan language that aims to control costs. An example would be including usual and customary reimbursement language for dialysis claims.

5. Look for ways to turn variable claim costs into fixed costs Claim costs escalate when hospitals and providers are free to increase charges without limit. As well, PPO’s arguably don’t do enough to keep costs down, so it is smart to look for ways to contain costs through fixed or preagreed pricing, such as by: • Contracting with centers of excellence networks for

3. Focus on the health and wellness of self-funded members Since employees average 50 hours per week at work, employers can play

7. Create systems to spot overcharges Along with utilization review procedures, insurers need to build


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systems and protocols that increase the likelihood of spotting overcharges. Examples include: • Passing all charges through a claim negotiator to identify potential over charging and duplicate billing before paying the charges • Having all pharmaceutical charges in excess of a dollar threshold reviewed by a pharmaceutical cost-containment company • After payment, having all charges reviewed for subrogation recoveries By following the above claimsmanagement strategies, many insurers have been able to significantly cut the cost of individual claims.

be written, while limiting your portfolio retention to a level that you are comfortable with and providing a greater spread of risk. These reinsurance solutions can be employed separately or coordinated together.

Different Types of Reinsurance and Their Uses If you are active in the self-funded specific and aggregate insurance space, you will recognize many of the issues discussed above and in part 1 published last month. If you are contemplating entry into the stop-loss market, you need to know about them. Reinsurance and its various structures are familiar to many in the industry, but for those who may not be well versed, reinsurance can assist you in many ways, such as: 1. Unlimited specific excess of loss reinsurance – This protects your portfolio on a specific per person basis. You decide your risk tolerance on a per person, per claim basis (with our help as needed) and the reinsurance caps your risk above that retained deductible. 2. Quota share reinsurance – This provides capital relief by engaging a reinsurer that is conversant with the line of business and brings additional value added benefits as a risk taker sitting side by side with you. It can allow a greater overall volume of premium to Februar y 2015 | The Self-Insurer 41

Summary To remain relevant in the post-ACA world as the frequency and severity of claims increases, insurers need to offer value added stop-loss insurance that is relevant to employers of all sizes. Insurers need to protect their own bottom lines with reinsurance and adopt claims management strategies to contain costs. ■ Tony Plampton is President of Re-Solutions Intermediaries, LLC (www.re-solutions.net), an independent specialist A&H reinsurance intermediary headquartered in Minneapolis, MN. Tony first began working on U.S. self-funded medical stop loss business in 1986 when working for a small Lloyd’s broker in London and he has maintained a market involvement either on the underwriting side or mostly on the broking side ever since. Tony has been a frequent speaker at SIIA and SOA conferences over the years and moderated the MGU/direct writer forum at the 2012 SIIA annual conference in Indianapolis. He has worked with MGU’s and direct writers of stop loss during his career placing both quota share and excess programs for these clients.

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

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

SIIA New Members Regular Members Company Name/ Voting Representative

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 PRESIDENT* Mike Ferguson SIIA Simpsonville, SC TREASURER & CORPORATE SECRETARY* Ronald K. Dewsnup President & General Manager Allegiance Benefit Plan Management, Inc. Missoula, MT

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

Gordon Larson BridgeHealth Medical Inc. Denver, CO Aurora Cayetano CEO/President Greymatter Risk Management LLC Byron Center, MI

Committee Chairs ART COMMITTEE Jeffrey K. Simpson Attorney Gordon, Fournaris & Mammarella, PA Wilmington, DE GOVERNMENT RELATIONS COMMITTEE Jerry Castelloe Castelloe Partners, LLC Charlotte, NC HEALTH CARE COMMITTEE Robert J. Melillo 2nd VP & Head of Stop Loss Guardian Life Insurance Company Meriden, CT 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

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


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