Self-Insurer July 2016 by SIPC

July 2016

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An Emerging War on Drug Costs

Rx Program

Efficiencies May Lie BEYOND U.S. Borders

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An Emerging War on Drug Costs

Rx Program

Efficiencies May Lie BEYOND U.S. Borders

Volume 93

A Dose of Reality

INside the Beltway SIIA Members Working to Clarify New Law Governing Small Captives

OUTside the Beltway Government Relations Committee Prepares Rebuttal to Washington State Stop-Loss Rules

Self-Insurance Innovation Self-Insured Health Plans Leading the Way on Innovation

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SIIA Endeavors The Self-Insurance Industry’s Experience of the Year... SIIA’s 36th Annual National Conference & Expo in Austin, Texas

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July 2016 | The Self-Insurer

An Emerging War on Drug Costs

Rx Program

Efficiencies May Lie BEYOND U.S. Borders

fter years of aggressively cost-shifting employees to a point of inadvertently rationing their Rx supply and/or not adhering to drug regimens, some forward-thinking employers have gone full throttle â&#x20AC;&#x201C; in reverse. Theyâ&#x20AC;&#x2122;re designing prescription drug plans without any co-pay to ensure that chronically ill populations on expensive meds will be in adherence. The upshot is better outcomes, say industry observers, which also result in substantial savings to the employer. One promising path to these achievements is through a carefully crafted international prescription program, which can save anywhere from 30% to 70% on name-brand medicines and beat pharmacy benefit manager (PBM) pricing. Escalating drug prices for both generic and name-brand prescriptions certainly necessitate the need for self-insured employers to consider this option to mitigate Rx costs without reducing benefits.

Written by Bruce Shutan

BEYOND U.S. BORDERS | FEATURE The key to success is a reliance on experts in the field who not only secure deep discounts from the right countries, but also ensure that the efficacy of these drugs is equal or superior to what’s available in the U.S. Mail-order supplies of up to 90 days involving drugs for personal use that that aren’t sensitive to heat or cold are shipped from various countries. The arrangement, left to the discretion of the Food and Drug Administration (FDA), offers patients a huge convenience considering a growing number of medical tourists traipsing around the globe in search of more affordable medical treatments that don’t skimp on quality. Rx shipments from other countries are limited to Canada, England, Australia and New Zealand, which the FDA classifies as so-called tierone nations whose quality control standards mirror those in the U.S.

In an increasingly dangerous world economy featuring politically unstable regions, avoidance also plays a significant role. For example, experts say countries such as Mexico or Iraq that don’t have the same standards as the U.S. are bypassed, as are narcotics or so-called lifestyle drugs such as Viagra and Cialis that are in high demand yet prone to abuse or fraud. Similarly, there are guarantees regarding the pedigree of every script. A huge concern is online or overseas pharmacies that may not even have a pharmacist and allow customers to buy meds online without a prescription. “You don’t know whether you’re getting the real med or not the real med,” explains Gary C. Becker, CEO of ScriptSourcing, which helps self-funded employers mitigate prescription drug claims. He says the FDA is constantly on the lookout for rogue pharmacies.

Life Imitating Art Finding cheaper drugs has long been a permissible option for Americans living in border states, according to Bill Hepscher, director of sales and marketing for the Canadian Medstore. “If they lived in Detroit, they could drive over to Windsor and fill a prescription for half of what the cost was here in the United States,” he says. Since 2003, the Canadian Medstore has helped facilitate orders from licensed international pharmacies that are shipped directly to U.S. citizens. Most of them are seniors on Medicare looking to avoid the socalled doughnut hole, those without prescription drug insurance or participants in high deductible health plans (HDHPs). As the arrangement advanced and Medicare Part D was introduced, he recalls how big pharma worried about eroding margins backed legislation that would outlaw international pharmacy orders. That’s when the FDA responded with regulatory guidance known as its “personal importation policy.” U.S. residents can order “maintenance medication” from an international pharmacy as long as it doesn’t exceed a three-month supply, Hepscher notes. But there are also other conditions. For example, it must come from a licensed pharmacy in a tier-one country and be prescribed by a U.S. doctor whose patient is under his or her care. To his knowledge, he’s not aware of any prosecution under this policy by the FDA, whose intent is to ensure that medications are coming

from reliable sources as opposed to penalizing individuals for ordering safe and affordable drugs. Hepscher likens the arrangement to The Dallas Buyers Club starring Matthew McConaughey. The film’s premise involved procuring much cheaper medicine from Canada, England and European countries that hadn’t been approved in the U.S. to treat a then-growing AIDS epidemic. “That’s kind of how the industry was created,” he says. Casey Macpherson, a pharmacist and COO of New Zealand-based Rx Manage, believes it’s “a no-brainer” to consider an international prescription program as a means of strengthening the intent of self-insurance. Her firm doesn’t charge monthly or admin costs to self-insured employer groups or co-pays and shipping fees to plan members, instead building its fee into the company’s transparent pricing structure. Costs are incurred only when employees place an order. The cost benefits associated with an international prescription program have wide appeal. Becker says customers include many large private employers, as well as state governments and municipalities looking for more austere solutions that please taxpayers. Fully insured employers would incur additional expenses because the prescription cost burden falls to carriers, who he says would charge more for that service. “We’re able to source name brandmeds, maintenance name brand meds for a zero co-pay and on average, we’re saving 60 cents on the dollar,” Becker reports. One example is Nexium, July 2016 | The Self-Insurer

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BEYOND U.S. BORDERS | FEATURE which costs about $2 per pill overseas versus the $7-plus range domestically.

Partnering with PBMs While there’s no doubting the power of an international prescription program, it’s not a panacea and, in fact, is usually offered in conjunction with traditional efforts. Hepscher says all of the employers he works with must offer a traditional domestic PBM. Employees are offered a “voluntary” option to order certain name-brand medications that do not have a generic alternative in the US. Crestor, a popular cholesterol-lowering drug, is a good example of a medication that provides a savings when ordered from the Rx Manage international program. Other cholesterol-lower drugs such as Lipitor and Zocor do have lower cost generic alternatives and are less expensive in the US.

“That drug is still available to the employee through their traditional PBM model,” Hepscher explains. “They’re simply offering this as a second voluntary option to them where the employee could choose to order that medication through an international pharmacy. And the reason that’s a benefit to the employee is it’s a zero co-payment. “So instead of them paying us a $50 or $75 co-payment through their traditional PBM,” he continues, “the employee gets that medication for a zero copayment. The cost to the employer is about half of what they’re paying through the traditional PBM and the real benefit to the employee is obviously they can lower their costs and stay compliant on that medication. They’re not skipping doses.” Hepscher says drug manufacturers can charge whatever they want for name-brand drugs in the U.S. because there are no price controls

and a patent protects from competition unlike the generic market that usually encourages competition. Whereas multiple drug manufacturers will drive down the price of drugs that become available in generic form in the U.S., he says price controls help keep brand prices down in countries like Canada and New Zealand. However, they do just the opposite for generic medication costs due to a lack of competition. Another reason an international prescription program cannot be the sole pipeline is the sense of urgency for some meds such as drops for an earache that need to be used right away. Hepscher says two-week shipping from an international pharmacy would render that option pointless. So there may be instances when it makes much more sense to go with a $4 prescription at a patient’s local Walmart. “Our mindset is truly consumerism; let’s bring that cost down,” he says. Noting his business model can help substantially lower prices on about 300 medications, Hepscher says the onus is on PBMs to manage generics. “Our prices would be more expensive if we tried to source every single medication and what the U.S. based PBM can offer,” he adds. “In most cases, there isn’t a need for international fulfillment for generics. However, when it comes to name-brand drugs, the PBMs just like individual consumers are at the mercy of the manufacturers.” Until recently, the Canadian Medstore largely served the individual-insurance market. In discussions with brokers and HR executives, Hepscher says they were surprised that there’s no per member per month charge. Rather, they learn ahead of time what each medication will cost without such fees. Employers pay only their medication’s international cost and avoid a co-pay.

“If an employer decides to do business with us and the employee orders a drug, they see an immediate ROI,” he explains, unlike wellness programs whose payoff may not show up for years.

“If they don’t engage their employees and the employees don’t participate, it doesn’t cost the employer anything other than the lost opportunity to have them participate in the program.” Within the self-funded arena, Hepscher sees a meaningful opportunity to bend the cost curve relative to fully insured plans that don’t have the same flexibility on plan design. “The employer sees a massive savings of 50% on what they’re paying for the prescription and the employee goes from a co-payment to paying zero,” he observes. While Rx Manage can help employees on HDHPs manage their cost, there’s no immediate savings to the employer since they are fully insured and already paying a premium for Rx coverage. Here’s why that’s so significant: Becker notes that 20% hospitalizations are traced to medication non-adherence, while the average three-day hospital stay is $30,000. July 2016 | The Self-Insurer

BEYOND U.S. BORDERS | FEATURE

Staunch Opposition Not surprisingly, the notion of importing cheaper drugs from other countries hasn’t caught fire in the U.S. self-insured group market. The reason: a powerful drug lobby that funds the campaigns of politicians who eschew the issue in exchange for their support. “It’s in the PBM’s best interest and it’s in the pharmaceutical companies’ best interest, for employers not to do this,” observes an unnamed industry insider, noting a potential for huge profits. “The PBM is making money on spread pricing and rebates,” the source explains. “The manufacturers would rather you pay $65,000 for Gilenya, a multiple sclerosis med, than $25,000 through Canada.” Another questionable practice in the U.S. that one could argue led in part to the creation of international prescription programs involves “co-pay assistance.” Manufactures will offer coupon cards that zero out the cost of an expensive prescription to employees, but jack up the price on employers, the source says. Whatever direction a self-insured employer pursues in managing its prescription drug costs, Hepscher believes it’s critical to embrace an innovative mindset or face continued uncertainty. “More and more, we’re seeing groups that are just saying we just can’t afford to offer these services anymore,” he reports. “And it’s not just the cost of the actual inhaler. It’s the cost of the employee and the cost of non-compliance.” For example, $50 co-pays for the Advair inhaler may seem like a bargain when the out-of-pocket cost usually runs $300, but it still may be unaffordable to minimumwage workers. What’s unfortunate is when these individuals have a late-night asthma or COPD attack and end up in the ER. “The employer didn’t see any value in that employee not filling the prescription,” he says. “They’d rather them be compliant.”

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When viewed in strategic terms, having an international prescription program can lift morale, loyalty, recruitment and retention of top talent who no longer need to worry about rationing their pill supply. “It seems like every year they’re going back to their employees with bad news,” observes Hepscher, quipping about the potential for “pitchforks and the torches” being wielded at open enrollment meetings to explain higher monthly premiums and annual deductibles. Adding this layer onto any Rx management effort certainly can help employers better explain the cost of prescriptions, he says and enable employee populations to “understand that there’s a way that they can help keep those premiums down across the board.” ■ Bruce Shutan is a Los Angeles freelance writer who has closely covered the employee beneﬁts industry for 28 years.

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A Dose of Reality This article represents “commentary” and represents views of the authors. We welcome other opinions on the subject

tilization review. Precertiﬁcation. Medical case management. It seems as if health plans have been, for lack of a better word, micromanaging how medical care is sought and obtained by plan participants, for decades upon decades. It makes sense. Whether I’m a fully insured carrier or a self-insured plan sponsor, I know that a complicated pregnancy, chronic illness, cancer diagnosis, or any other number of conditions will seriously hurt – if not sink – my plan. So, it makes sense. It makes sense that I ask patients, providers and everyone else to check in. Give me a heads up. Let me know what’s going on and put an independent team in place to identify the most effective, yet cost-conscious course of care. Everyone wins.

Written by Ron E. Peck, Esq. Sr. VP & General Counsel The Phia Group, LLC 10

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Meanwhile, we rail against hospitals whose charges multiply exponentially every year. World renowned periodicals take the “time” to publish magazines dedicated entirely to the “bitter” truth... that costs are out of control. In response, savvy self-insured benefit plans begin questioning everything about their medical program. They question their preferred provider organization (PPO) model; (“Does the discount matter, when it’s applied to an arbitrary and excessive

amount?” “Is it worth the peace of mind [and prohibition on balance billing] to stick with a network model, when I’m being contractually bound to pay more than [some interpret] my plan document allows?” “Should I consider putting my participants in the ‘balance billing cross-hairs,’ dump the network and just pay – out of network – rates I think are fair, based on external parameters [such as Medicare rates]?”) Yes indeed – from how, where and what care is obtained, to re-pricing and cost containment warfare – medical care (and costs) dominate the conversation these days.

Yet, as I examine plan spending, one thing becomes clear. The attention we pay to medical care, PPOs and hospital pricing, grabs almost all of the air-time, allowing what many would deem to be an outdated pharmaceutical “drug” acquisition process to plod along, unfettered and unchecked. As specialty drugs, implants and other devices – like the aforementioned medical care – usher in an age of skyrocketing costs, not enough attention is being paid to this area in dire need of improvement. Industry experts have uniformly agreed that pharmacy costs are rising; increasing nearly ten percent (10%) each year, with a fairly certain projected “cost-trend-rate-increase” in 2016, already matching that prediction of 10% growth over the year prior. A 10% multiplier, applied year after year, may not scare you – until you learn that these drug costs already make up 25% of all healthcare expenses. Indeed, a recent study revealed that large employers spent – on average – almost a thousand dollars per covered life, on pharmacy costs in 2014.1 More than one industry ally has advised me that, driving significant

portions of this trend are the oft mentioned “Specialty Drugs,” “Compounds” and “Brand-Name Drug Price Inflation.” Specialty and Compound drugs in particular, another expert tells me, accounts for between 25% and 35% of total drug spending. Further, the costs associated with specialty drugs is increasing at nearly double the 10% rate attributed to other drugs; meaning a 20% jump per year. Even more startling, more than 50% of drugs in the later stages of FDA approval are specialty drugs. When these meds hit the shelves, you can anticipate that the aforementioned trends will actually fall short of the reality. It’s not all about new drugs, however; another industry expert shared data with me, evidencing the fact that prices of some existing medication have increased substantially, with some increases exceeding 47%. All of this adds up to a total pharmacy spend projected to double by 2020. Ouch. So... I’ll ask again. What are plan administrators doing about this? Need I remind you that, as fiduciaries of the plan, administrators have a duty to prudently manage plan assets; a fiduciary duty to protect the plan and its members from abuses, waste and fraud? One might argue that a fiduciary who fails to address this obvious problem of drug costs is drifting awfully close to breaching their duty; or – at least – making themselves a target for such accusations. As we look at these apparently out-of-control costs, one must therefore assume that we’re up in arms, scrambling to identify and implement solutions; right? Wrong! The same report referenced above also reports that eighty percent (80%) of employers agree or somewhat agree that their Pharmacy Benefit Manager (PBM) is sufficiently managing drug costs. I’m sure – if asked about

medical expenses in general – the same respondents would be full of complaints. Yet, when we focus on drug costs which – as described above – are one of the (if not the) fastest growing drivers of plan expense, 80%+ of plan sponsors are satisfied. Someone isn’t getting the memo! PBMs are not necessarily the problem. The issue is that we – as an industry – don’t recognize their role, limits and mission. People assume PBMs exist to contain drug costs. This is simply not the case (with a few exceptions). Over the span of a couple decades, the role of PBMs has changed. Gone are the days where PBMs simply handled prescription billing. Today, plan sponsors contract with PBMs directly or through their third party claims administrator, to decide what drugs are covered, what the costs shall be and, as it relates to payment to pharmacies, the where, when and how much. Further, plans rely upon their PBM to set the participant cost-share and establish pharmacy networks. PBMs therefore serve many important roles; none of which are – first and foremost – dedicated to identifying cost containment opportunities. Understanding the role of a traditional PBM, what they do to create revenue for themselves and recognizing the pros and cons of said arrangement, is the key to devising independent cost controls. Some plan sponsors think that they simply pay the PBM for the cost of any drugs actually dispensed and usually an administrative fee for managing the prescription drug program. Little do they know, but many other costs – and conflicts – impact the bottom line when it comes to prescription drug purchasing and distribution, above and beyond the problem of rising drug costs. As we examine such arrangements July 2016 | The Self-Insurer

The pharmacy supply chain, however, is especially complex; so that plan sponsors are at a disadvantage when attempting to manage it on their own. As such, PBMs are in a unique position to leverage their knowledge; providing many valuable services to these plans.Yet, with a lack of transparency, control over plan assets and incentives not aligned with containing plan costs, these organizations may not be driven to make reducing spending their top priority.

and relationships, we begin to notice that there are many different stakeholders involved and their interests often conflict. Whenever a plan administrator “turns over the reins” to a third party, so that spending is determined in large part by a stakeholder unrelated to the plan sponsor, we must ask what drives that stakeholder. What action (or lack of action) most benefits that entity? For this (and other) reason(s), most plan sponsors today prefer to maintain control of their plan and its spending.

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The costs of the drugs purchased are – as already referenced – exploding. Plans, however, are not only contending with the rising cost of the drugs themselves. They must also worry about lost refunds, PBMs pocketing spreads (the difference between what the plan pays and the pharmacy receives) and other revenue bolstering tactics, such as up-charging and therapeutic shifting. PBMs are contractually tasked to complete a particular set of jobs. Rarely does that include reducing costs for the plan, no matter what. PBMs enter into contractual arrangements with other entities, to achieve their duties, even when those other entities may not share the same goals as the plan. For instance, PBMs may enter into contracts with retailers, where – in exchange for steerage – said retailers provide discounts to PBMs. Is that retailer the best option for the plan? Who knows?!?! Can we confidently say that said steerage is being driven with plan cost savings as the chief impetus? Not with any confidence; no. A significant source of revenue for PBMs comes from drug manufacturers in the form of rebates. Brand-name drug manufacturers have the ability to financially incentivize PBMs to stimulate demand for their drugs; using discounts and rebates as a form

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of compensation to PBMs. Meanwhile, few people know that there are at least two types of rebates: performance and access. Generally speaking, PBMs are only obligated to share performance rebates with the plan, meaning that drug purchasing, usage and other plan spending may not be producing the most costeffective path for the plan, despite putting the greatest number of rebate dollars into the pocket of the PBM. These and other contractual relationships may represent a conflict of interest for the PBM, because the PBM stands to gain additional revenue from parties with interests competing with those of the plan. One last concern I have, whereby the status quo runs headfirst into (and against) efforts to contain the rising drug costs, relates to PBMs that own their own specialty pharmacy – and more importantly – handle the prior

authorizations. Indeed, these particular organizations authorize themselves to buy drugs from their own pharmacy. Huh? Could you imagine if a hospital were in charge of pre-certifying procedures they will be performing? Yet, most agree that PBMs still offer valuable services. If that is the case and we all agree that the cost of prescription drugs is skyrocketing, plans are obligated to: (1) implement programs either themselves, with third parties, or with their PBMs to make cost containment priority #1 and (2) recognize the limits and needs PBMs deal with – noting that if the plan wants to use a PBM, they may need to be flexible in their demands and expectations. So, with these potential issues in mind, we next need to consider some actions we can take to avoid such conflicts, while still benefitting from many of the valuable services PBMs provide. If PBMs cannot be relied upon (and, in many instances, ought not to be relied upon) to reduce costs to the plan and manage drug utilization, the duty falls upon the plan fiduciary to do it themselves, or find someone who can do it for them. First and foremost, the PBM (or someone else, providing oversight) should constantly evaluate medical necessity as it relates to the drugs being purchased. In other words, eliminate the “set it and forget it” attitude that tends to apply to medication purchasing. This is especially true with some of the most common conditions we see today. An industry expert and friend explained to me the outrageous waste he sees related to back injuries and conditions. According to him, 67% of all back surgeries are not medically necessary and too often the TPA just approves them. Worst of all? Most of them don’t solve the problem!

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Another ally in the battle against rising drug costs assured me that, to deal with this problem and ones like it, a savvy benefit plan must implement a program that involves evidence-based clinical care management – meaning they perform detailed analysis and identification of opportunities based on historical data, perform clinical review for appropriateness and cost effectiveness and continuously monitor diagnoses, treatment options and new therapy options, to ensure that the option that was best for both the patient and plan yesterday, is still the most impactful for the client as well as most likely to produce the best clinical outcomes today.

Ron E. Peck, Esq. is The Phia Group’s Senior Vice President and General Counsel. Ron has been a member of The Phia Group’s team since 2006. In that time he has been an innovative force in the drafting of improved beneﬁt plan provisions, handled complex subrogation and third party recovery disputes and spearheaded efforts to combat the steadily increasing costs of healthcare. Ron’s theories and innovative ideas regarding all industry issues are well regarded and he is routinely asked to speak at industry events on these and other topics. Ron obtained his Juris Doctorate from Rutgers University School of Law and earned his Bachelor of Sciences Degree from Cornell University. Ron is also a dedicated member of SIIA’s Government Relations Committee. References 1 “The Prescription Drug Supply Chain ‘Black Box’ - How it Works and Why You Should Care For the American Health Policy Institute,” By Henry C. Eickelberg Managing Director - The Terry Group; 2015 American Health Policy Institute

An exasperated professional said it best when he remarked that people are not even remotely up to speed on the cost of new drugs and therapies. There is, he said, a new therapy on its way that will cost benefit plans more than $1 million per year; (insert Dr. Evil laughter here). One of the hottest topics in our industry today is “price transparency for hospitals.” How about transparency here? If a benefit plan’s current arrangement would allow them to get slapped with a $1 million claim for the purchase of a drug or medical supply and they didn’t have measures in place to provide early warning, stop payment pre-purchase and analyze the situation to identify any and all alternatives, they deserve what they get! With price inflation on current medication and a storm of high cost drugs brewing on the horizon, pipeline monitoring that allows for real-time actionable recommendations is a must. Whether these measures are implemented by PBMs seeking to self-police themselves and counterbalance incentives to ignore cost containment, or, are provided by third party cost containment partners, the time to take drug costs seriously hasn’t come... it’s already been here for years. Act now or no amount of sugar will help this medicine go down. ■

July 2016 | The Self-Insurer

INSIDE

the Beltway Written by Dave Kirby

SIIA Members Working to Clarify New Law Governing Small Captives

hese months’ lazy, hazy days of leisure are only a myth to SIIA members and staff who are working hard through the hot and humid Washington, D.C. summer to solve federal tax questions that could impede the operation of many small business captive insurance companies beginning in 2017. Comprised of members of the Enterprise Risk Captive (ERC) Working Group along with DC-based staff, SIIA continues to meet at every opportunity with Congress, including the Joint Committee on Taxation (JCT), as well as key Internal Revenue Service (IRS) officials. JCT is comprised of members of the House and Senate with equal Republican and Democratic representation. It monitors federal legislation and assesses the impact of Congressional bills. SIIA’s goal is to solve some problems that arose along with significant improvements when Congress included new rules affecting enterprise risk captives (ERC) in the end-of-2015 “tax extender” bill last December. ERCs are those small and medium-sized captives that businesses set up to protect against unusual but possibly devastating risks for which traditional insurance is not available 16

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or inordinately expensive. Many ERCs make an election under the Internal Revenue Service code section 831(b), which was amended by December’s bill. The good news in that bill is that ERCs operating under 831(b) will be allowed to receive annual premiums of up to $2.2 million in 2017, an increase from $1.2 million which is tied to inflation moving forward. More problematic and the subject of SIIA’s current interest, is legislative language that negatively impacts legitimate captive formation and operation with limitations on familial ownership,

asset valuation reporting and other definitional changes that SIIA insists require clarification. “Much of the captive industry is flying blind right now on implementation of this new legislation,” said Ryan Work, SIIA Vice President of Government Relations. “There remain a number of points in the new law that require clarification in order for captives to be certain of complying. Captive policies are being written now to go into effect in 2017, but the industry can’t be sure how to proceed without needed guidance.”

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Simpson noted, “SIIA has proven that it can be heard in Congress and it can do as well as anyone can.”

Jeff Simpson, chairman of SIIA’s Alternative Risk Transfer Committee and of the ERC Working Group, offered capsule examples of the new law’s needed clarifications. “The law speaks to calculated percentages of interest in specified assets, but we don’t know if that means interest on stocks, loans, fair market value, adjusted basis or something else,” he said. “Another passage talks about ‘policy holders’ but we don’t know if that would include reinsurers. Relating to family businesses, if the husband owns the business a wife or family group couldn’t share ownership of the captive. We don’t know if that’s really the intent of the law.

“ The best way to eliminate uncertainties would be for Congress to make the technical corrections to provide guidance to the IRS,” Simpson said. “ Taxpayers want to comply with the law, but they don’t know how to do that at this point.” SIIA members and staff realize that the smoke and turmoil of an election year is not the ideal time to ask for technical corrections from Congress and federal agencies. “Perhaps either Congress or the IRS could agree that the law is not clear and suggest its implementation be delayed for a year,” Simpson said.

ERC Working Group member Dana Sheridan, general counsel and chief compliance officer of Active Captive Management of Laguna Hills, California, notes that “It’s also important to remember that Section 831(b) was not just created to provide tax benefit to farm mutuals, history tells us otherwise. The future can be very bright if we all remember why captives were – and still are – so necessary in the first place and we all do our part to ensure that small captives follow insurance industry best practices. Clearly, tax strategy with regard to small captives is in the media spotlight, but I hope that we don’t lose sight of the fact that an insurer should be judged by the quality of its insurance business, not its ability to make a tax election.” SIIA’s pursuit of tax law clarity on behalf of the small captive industry is likely to continue through the current session of Congress. ■ SIIA members who wish to join the campaign to advocate for self-insurance on the federal level are welcome to contact Ryan Work in the Washington ofﬁce at rwork@siia.org or (202) 595-0642.

He indicated that SIIA’s advocacy has not been met with monolithic resistance: “There is a sense from the House and Senate of acceptance of small captives as a valid benefit to businesses. And the IRS seems to acknowledge that properly managed captives have an important role. Hopefully, further effort will give us the guidance we need to proceed.” July 2016 | The Self-Insurer

OUTSIDE

the Beltway Written by Dave Kirby

Government Relations Committee Prepares Rebuttal to Washington State Stop-Loss Rules WASHINGTON

Washington state white paper from the Ofﬁce of the Insurance Commissioner (OIC) outlining new objections to stop-loss policies covering sponsors of self-insured employee beneﬁt plans arrived silently but with possibly deadly effect. As this issue goes to press, SIIA’s Government Relations Committee is preparing a response to defend the state’s self-insurers and the thousands of employees and dependents they cover. “All of a sudden these new directives by the OIC just appeared without the opportunity for input or response by the industry” reports SIIA Director of State Government Relations Adam Brackemyre. The most egregious – from self-insurers’ perspectives – is a rule that only one stop-loss attachment point can be set for the specific claims of any policy. The frightening implication is that a second, higher, attachment point may not be set for cases of known high risks. This eliminates an employer’s ability to protect against high-risk, high-cost claims at a reasonable premium. The traditional method to assure coverage for high-risk employees has long been known as lasering. In addition to prohibiting that practice, Washington’s new rules demand uniform rate-setting manuals that allow for no flexibility or variable factors. In addition, the OIC may apply its new rules to all policies now in effect with the potential to void every stop-loss contract in the state.

“It’s not overstating the fact to say these rules, if left standing, would cripple self-insurance among Washington employers,” Brackemyre said. “The state’s self-insured market is very large, comprised of a robust business community with a high proportion of technology companies, plus government entities and Taft Hartley plans.” As soon as the new Washington rules became known, SIIA’s Government Relations Committee authorized a remediation campaign. Committee Chairman 20

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Jerry Castelloe described the SIIA delegation to Olympia that is being formed and will include major self-insuring employers who, he said, “Are the most powerful constituents we can bring to bear in these situations.” Castelloe, principal of Castelloe Partners of Charlotte, North Carolina, is a veteran of state advocacy campaigns to protect self-insurance. Having been involved in successfully opposing harmful regulations in several states, he is generally optimistic about SIIA’s chances. “In Connecticut last year we took a delegation of SIIA members to a meeting with the insurance commissioner and they did a great job of presenting how well self-insurance and stop-loss policies work for the self-insured employers in the state,” Castelloe said. The state subsequently revised its approach to a position that was acceptable to the industry. Washington, he believes, is the latest in a lengthy line of states that have attempted to encroach on

self-insurance in this manner. “States continually look for ways to regulate self-insurance, even reduce its presence to support state healthcare exchanges under the ACA or to otherwise balance their budgets,” Castelloe says. In earlier decades, SIIA’s primary government relations activities centered on federal issues in Washington. But now most challenges come from a growing number of states. “These are very complex and expensive issues for SIIA to defend against,” Castelloe said. “They can’t make outright attacks on self-insurance because it is protected by the Federal ERISA law,” he noted. “So they attack stop-loss insurance instead and often seize on the issue of lasering to weaken selfinsured plans.

“It’s up to us to be educators on that point,”Castelloe said. “We have helped state insurance regulators understand that lasering doesn’t mean denying coverage, it’s actually the opposite. We hope we can successfully make this point in Washington.”

grassroots efforts are always the most important part of government relations campaigns.” ■ SIIA members who wish to join the state government relations advocacy team are invited to contact Adam Brackemyre at the Washington, DC, ofﬁce, (202) 4638161 or abrackemyre@siia.org.

Castelloe noted that SIIA members who are located or do business in Washington were instrumental in alerting the organization about the challenging new regulations. “We have to rely on our members to maintain those communications and pursue advocacy opportunities. Our

“Many regulators seem to think

that lasering is a bad thing, as if we would cut out the potential for highrisk claims from plans, but actually it’s beneficial to employers to help them cover employee health risks in managing their overall benefits program. Lasering is a financing tool, not a risk transfer tool,” he said.

July 2016 | The Self-Insurer

Innovation Self-Insurance

Self-Insured Health Plans Leading the Way on Innovation

EDITORâ&#x20AC;&#x2122;S NOTE: This is the ďŹ rst of a series of periodic articles highlighting innovation that is taking place within the self-insured health plan marketplace.

or an increasing number of businesses, self-insurance is a great way to move money spent to money invested, or money in the bank. And if that was not impressive enough, many selfinsurers across the country are now role models for health care delivery innovation through wellness programs, education and rewards systems.

Written by Wrenne Bartlett 22

The Self-Insurer | www.sipconline.net

Several companies have been highlighted as implementing innovative strategies for their company. While

most have a cost saving component, the overall agreement is that spending money on employee health creates a happier, more productive workplace.

Hilltop

based in Grand Junction, Colorado, which has experienced huge savings by switching to self-insurance, pointing to a 0% increase in premiums last year. They used the insurance broker IMA, Inc. to make the change and implement their successful wellness program. They are changing the culture of their company by emphasizing healthy meals and exercise. Further, they are required to have blood tests which alerts them to any major illnesses that may have gone unnoticed otherwise. Hilltop has implemented a points system to encourage healthy living. Employees may earn points by doing blood screenings, going to educational programs, or exercising. Once an employee reaches 10,000 points, they benefit from a significant drop in their premiums... in addition to being healthier. By having more control of their health care claims data, Hilltop is better able to promote wellness as well. For example, they noticed that the men in their company had higher BMI’s than the women, so they targeted the men with programs to help get that number into a healthier range. Finally, Hilltop has encouraged “shared decision-making.” This means that if one doctor suggests a surgery or treatment, the employee is encouraged to ask more questions and to get a second opinion to make sure that it is the best approach to treat the ailment.

Telligen

is another such company doing more than just saving money with self-insurance. Their wellness program is named “Rev It Up” and employees are encouraged to live a healthier lifestyle with incentives and benefits such as an indoor walking track.

Doug Ventling, the company’s Vice President of Human Resources and Benefits, explains, “For the several years leading up to 2014, Telligen’s employee health plan was fully insured and experiencing double-digit premium increases annually. We made significant plan design changes, terminated high loss-ratio options, changed carriers, changed brokers, cost-shifted to employees, implemented wellness and yet nothing seemed to the stem wild trajectory of costs. Then in 2014, Telligen made the shift to self-funding, broadened our efforts around a culture of health and well-being and experienced only a 2% increase (even accounting for the immature claims year).”

“In 2015,” Mr. Ventling continues, “We deployed our own Telligen Health Management Solutions’ DM program, implemented our partner Total Well-Being’s platform and saw costs decrease 3.2%. In 2016, we are experiencing a 1.8% increase YTD through February. We project our costs to be flat to decreasing slightly in 2017 based on implementing these programs.”

Yampa Valley Bank

located in Steamboat Springs and Craig, Colorado, has focused on educating their employees. In mountain communities, there is typically only one hospital available. Yampa Valley Bank has started helping their employees find the best, most costeffective providers for their health care even though that may be outside of the community. PJ (John) Wharton, president and CEO of Yampa Valley Bank, said, “I am proud to say that as a result of our self-insured plan and the education provided, we have become pro-active in our medical decisions. We have implemented electronic resources such as Healthcare Bluebook as an aid for our employees to locate high quality physicians and facilities at competitive rates. This and other available tools have uncovered cost savings for both our employees and the Bank while maintaining high quality medical outcomes for our employees and their families.” Deana Von Almen, Assistant Vice President and Human Resource Officer for the bank added “Our success with this plan is largely due to our strong relationship with our Benefits Consultant, Neil-Garing and our third party administrator, Cypress Benefit Administrators. Over the past three years, they educated us on self- insurance and cost containment and guided us through implementation and renewals. We were then able to educate our employees so they could make informed healthcare choices for themselves and their families.”

evans Roofing

located in New York, puts importance on safety of its workers and use of education and technology to keep costs down. They July 2016 | The Self-Insurer

they can work on. In some cases, the screenings have made employees aware of serious medical issues that they were unaware of until they had the screening.”

used Berkley Accident and Health to make the switch to self-insurance in 2010, and have seen exceptional benefits to the employees and the business. Owner Mike Spinosa explains how influential their blood screening process is: “Through our

annual wellness blood screenings we are giving our participants a glimpse into their current health risk areas. In other words, by putting their numbers in front of them on an annual basis, our participants can start to see trends and/or problem areas that

“Our wellness program is more than just generic ‘do this/don’t do that’ posters hung on the wall, although we do have those,” continues Mr. Spinosa. “Each participating associate receives a personalized report on their individual blood health and they are given recommendations specific to them on how they can improve in those areas. They are also directed to see their primary care physician at least once a year to go over those results. We feel that kind of ‘education’ is worth its weight in gold.”

The Phia Group

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preach and switched to self-insurance many years ago, despite having less than 100 employees at the time. Implementing programs within their own plan, that they offer to others as well, some of their innovative ideas include their unusual payments structure. For example, there is no co-payment for employees who seek treatment at urgent care facilities as opposed to going to an emergency rooms, which is more expensive for both the employee and the company. Employees are also encouraged to save money by choosing generic prescriptions.

to us, address areas of need, nimbly adjusting our program whenever and however needed, is by self-funding our health plan. We customize our plan document, react to trends revealed by our claims data, select our partners based on our values and needs and ensure that our plan is truly OUR plan. That’s huge. By taking control, working with passionate advocates and implementing cutting edge programs, we’ve not only halted the upward cost-trend; we’ve reversed it – freezing premium growth and reducing plan spending.” ■ Ms. Bartlett is a SIIA professional staff member specializing in communications, media relations and political advocacy.

The group challenges its employees to pay attention to their medical bills and share any mistaken charges identified. In one such instance, a woman went to the ER and stayed overnight in a public room but was charged for a private room. She noticed the incorrect statement and was able to save around $3,000 in her medical bills. In return, the Phia Group gave her a $500 Visa gift card.

Ron E. Peck, Sr. Vice President and General Counsel of The Phia Group, says,

“Working with benefit plans, The Phia Group develops tactics to achieve employers’ goals. As an employer ourselves, we also understand the goals themselves and more importantly, we share them. We want to attract, retain and reward talented staff. We want to support and promote wellbeing; after all, healthy employees are happy and productive employees. Offering robust benefits is therefore not only a wise move; it’s the right move.” Mr. Peck continued, “these days the only way an employer like us can offer maximum benefits where they are needed, avoid costly items that are useless July 2016 | The Self-Insurer

So, You Want to

Start Captive? A

aptives are a useful tool in managing risk, but there is a lot of time, group effort and money that goes into starting a captive. Here are some tips and considerations from experts involved in the launching of new captive insurance companies.

First Considerations Starting a captive is a complicated undertaking. It requires effort and input from a number of parties from both within a company and from outside. As you think about starting a captive, make sure that organizing your companyâ&#x20AC;&#x2122;s risks under a subsidiary fits in with the philosophy and long-term goals of the company. Jarid S. Beck, a director with Risk Management Advisors, Inc., suggests that companies considering forming a captive should conduct an internal evaluation or audit to make sure that company goals will be best served by a captive and that the company has the resources â&#x20AC;&#x201C; both financial and staff â&#x20AC;&#x201C; to effectively run their captive. Written by Karrie Hyatt 28

The Self-Insurer | www.sipconline.net

START A CAPTIVE? | FEATURE A captive insurance company brings a company’s risk in-house and can help reduce costs while providing better and more stable coverage for those risks. Captives are not a tax shelter or wealth transfer mechanism. Any service provider that is trying to sell them as such are likely not legitimate managers. As the Internal Revenue Service and other regulatory bodies continue to examine the legitimacy of captives, using a captive in a way that it is not intended could have serious consequences.

Financials and Risk, Organizing Your Ducks The first thing that most people think of for start-up captives is capital requirements. Minimum requirements are required by all domiciles. Jarid Beck pointed out that, “People new to captives often focus on the minimum amount of capital required by the domicile. However, minimum shouldn’t be confused with proper amount. Depending on the types of risk being written, capital requirements are often more than the domicile’s minimum.”

Sandra A. Bigglestone, director of Captive Insurance at the Vermont Department of Financial Regulation, agrees, “The amount of minimum capital required by a domicile’s law is merely a floor. Actual capital should be commensurate with the risk in the captive’s program. Premium and loss estimates should drive capital requirements, as should the variability and timing of the expected loss payments.” Beck related an example of captive his company has worked with. It was formed for a Southern California-based company that owned several multifamily real estate properties which was seeking Earthquake coverage. “The buildings were older and highly appreciated so it was nearly impossible to get sufficient coverage. Earthquake [insurance] as a risk is low frequency,

but has a big payout. The minimum capital requirement in many domiciles is $250,000. If a substantial earthquake were to occur in early years of the program $250,000 wouldn’t provide any sort of meaningful support.” Using actuarial recommendations, the company wound up putting several million into their captive to fund it. Beck continued, “For a captive covering a different exposure, a lower capital amount may be just fine. It depends on the client’s risks.” According to Anne Marie Towle, senior vice president and senior consultant with Willis Towers Watson, “It may not necessarily be a requirement, but it’s important to look to the parent company to see how healthy its balance sheet is. Particularly with pure captives since they are insuring the risks of the parent company.” The financial health of the captive owners is a key indicator of how healthy the captive will be and is often considered by domiciles when assessing a new captive. “The financial strength of the captive owner(s) should be considered,” said Biggleston, “To support a strategy for recovering capital in a stressed environment and to support any loan back obligations to the captive under a plan to maximize investment returns.” Most companies that are considering captives are wellestablished, with a history of historical data and a more developed risk management program. Beck said that, “This isn’t a hard and fast rule, but we often find captives to be more feasible for established companies with proven track records... . Also, new companies that are still reinvesting every dollar into growing their business may not have the excess funds to capitalize a captive. Or, they may not be willing to part with the funds as they’ll see a larger ROI by growing their business over

establishing an insurance subsidiary.” A company-wide risk management program is essential to getting the most out of a captive and many domiciles will look into the parent/ owners’ to see how it is managed internally. Additionally, according to Biggleston, domiciles consider other information, such as loss prevention programs and initiatives. Also, she said, “A start-up captive should articulate how the insureds intend to prevent losses from happening and to mitigate those that do occur, thus providing surplus protection.” For Towle all financial elements have to be considered. “Looking at a captive’s potential solvency it’s important to consider all the financial information combined. Domiciles will really want to understand the parent company, even going so far as to look at the financial health of individual owners. They also want to understand growth strategies, mergers/acquisitions and the leverage on their balance sheet.”

A Captive Domicile, Not Just a Destination “When the domicile discussion comes up, prospective captive owners often joke about choosing based on the best tropical locale to hold a winter meeting,” said Beck. “In truth, we work with several domiciles and what it really comes down to for us is accessibility to the staff and the domicile’s commitment to the program. We need to have a good response time from the domiciles we work with.” Regulators for a domicile need to be available to provide answers and guidance with a short turnaround, so a well-trained staff is important. So too, are domiciles that have experience with the types of risk the prospective captive is covering. “We look for the domicile that best understands what our client wants to do and has July 2016 | The Self-Insurer

START A CAPTIVE? | FEATURE experience regulating the type of risk or type of captive our client is setting up,” continued Beck. “Once our client’s captive is up and running, we want to know that the domicile will be accessible and responsive to our clients’ needs.”

time are, “whether or not their examiners are in-house, the process for evaluation, invasiveness of those evaluations and operations from a day to day perspective.” The operations part also assesses whether a domicile requires the captive to operate remotely or in state. The financial part delves into questions regarding taxes and accounting, whether or not the domicile taxes premium (onshore domiciles) or excise tax (offshore domiciles) and fees charged (if any).

Anne Marie Towle uses a unique approach when working with clients to select a domicile. “I like to break it down into three parts – strategic, operational and financial. With these three parts there are different components and criteria that can help answer questions about the domiciles under consideration.”

From the regulator perspective, Bigglestone suggests that when prospective captives are in the process of selecting a domicile that their “captive manager or consultants should be neutral to the choice.” She also suggests looking at the politics of the state or country of the domicile. “The political environment of a prospective domicile should be stable, with adequate history and support from state leaders and lawmakers.”

She describes strategic as “domicile location, length of time they’ve been a domicile, looking at its growth, whether or not they have expertise in the lines of coverage, captive lobby groups to support the domicile, etc.” Operational considerations are for when a captive is up and running, but important questions to know ahead of

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An active domicile-centric captive industry association is an important aspect to consider when selecting a domicile. As Biggleston said, “Captive industry associations are an important element to a successful domicile’s infrastructure, serving as an advocate for captives at the state and national level and offering education and networking opportunities unique to the industry.” A captive domicile is more than its captive law requirements. Prospective captive owners need to thoroughly research both the regulators and regulations, as well as the political mind-set and associations supporting captives in the domicile.

Team Building So you’re starting a captive, which service provider should you start with? Accounting, legal, management? It’s a chicken and egg scenario. According to Beck,

START A CAPTIVE? | FEATURE

“When initially considering a captive, a business can start with any service provider as the lead consultant. This could be a captive attorney, accountant, actuary, manager or broker. Often though, the captive manager is the logical choice. They tend to function like a quarterback and can help marshal together the accountants, attorneys, brokers and other providers.” He continued, “Choosing the captive manager first will help smooth out the process since they will be able to coordinate the feasibility study to determine if starting a captive is viable. They’ll also be able to help you find the other service providers you’ll need and facilitate implementation if you elect to move forward.” “When the right professionals are hired, their role will help drive the success of the captive,” said Bigglestone. “Domicile regulation typically requires captives to contract with a captive manager. Captive manager listings can be found on most domicile’s website and managers can be found in person at various industry conferences throughout the year.” She recommends that the owners of a start-up captive should interview a number of captive managers and meet with the staff that will be involved in the day-to-day operation of managing the captive. A captive owner should understand what kind of experience the captive manager has managing similar captives or in similar industries. Along the same lines, Towle said that “When [captive owners] are vetting captive managers the most important thing is not that they manage multiple captives around the world, it’s that their industry experience is similar to the parent company and the proposed captive business plan. That they understand what the needs of the parent company are. It doesn’t matter if they have 1,000 captives if they don’t have the experience.”

According to Beck, “A good manager should also help you see the bigger picture for your captive. Your primary focus might be identifying a Workers Comp solution, but your manager should also be able to look at your whole program and offer other suggestions. For example, it might make sense to integrate group medical stop loss into the captive as well.” Whatever order you put together the team for your start-up captive each component needs to be ready to help to get the captive going. “It’s important early in the feasibility study to bring everyone to the table,” said Towle. “The accountant or lawyer who suggested a captive, the in-house risk management team, captive consultants/managers, brokers and individual owners, everyone needs to be involved in getting the captive off the ground.” ■ Karrie Hyatt is a freelance writer who has been involved in the captive industry for more than ten years. More information about her work can be found at www.karriehyatt.com.

Do you aspire to be a published author? Do you have any stories or opinions on the self-insurance and alternative risk transfer industry that you would like to share with your peers?

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

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

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

July 2016 | The Self-Insurer

PPACA, HIPAA and Federal Health Beneﬁt Mandates:

Practical

Q&A

So-Called Tax-Free “Wellness Plan” Reimbursements – Not So Good for Employers’ or Employees’ Financial Health

f you’re at an ice cream store, a double dip is tasty and refreshing. In the employer health beneﬁts arena, the “double dip” may sound good, but it isn’t. “Double dip” is the name for a health beneﬁts tax scheme that initially made the rounds some years back. Now, some 15 years later, we are seeing double dip arrangements with a new “wellness plan” twist. [Note: The vast majority of employer wellness arrangements provide meaningful incentives to employees to incent healthy behavior. We do not take issue with such programs. Rather, the “fatal defect” arises with respect to the incorrect tax treatment of certain programs as described in more detail herein]. The classic double dip involved two steps. First, employees would make a salary reduction election to pay for their portion of the cost of an excludable

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employer health plan. Next, employees were reimbursed for a portion of their salary reduction contribution purportedly on a tax free basis. These arrangements were touted as a winwin: employers and employees get to pocket tax savings generated by the salary reduction, while employees have no reduction in take-home pay due to the purported tax free reimbursement. If it seems too good to be true, it probably is. While the salary reduction for the employee health coverage was permissible, the so-called tax-free “reimbursement” to employees for the premiums used to pay for the health coverage was not!! There simply is no basis in the tax code for tax free reimbursements of premiums paid by the employee with pre-tax salary reductions and the IRS made that clear in Revenue Ruling 2002-3. Fast forward to some fifteen years later where there has been a resurgence of similar health benefit schemes, this time characterized as “wellness plans.” The core elements of the current arrangements are remarkably similar to the classic double dip (although some details may differ). First, employees make a salary reduction election to pay for cost of a wellness plan (and an additional amount for administration). Next, employees who participate in certain wellness program activities (e.g. they open an email that contains health educational information) receive a tax free payment. This payment to employees is characterized as a “wellness payment” or “wellness reward” for participation in the wellness plan and it does not correspond to any expenses incurred by the employee. Regardless of how it is characterized, it is effectively a repayment of the employee’s pre-tax salary reduction for the wellness program. Finally, under some

arrangements, employees may elect additional benefits, paid for by the purported tax savings. Again it’s sold as win-win: employers pocket payroll tax savings and they are able to provide the wellness payment without having to expend any additional funds from its general assets. Moreover, employees can use their tax savings to purchase additional benefits with no reduction in take-home pay. Promoters receive a fee for administering the arrangement, again paid for with tax savings so that neither the employer nor the employee is out of pocket for the fee. What’s the problem? Once again, there simply is no basis in the tax laws for excluding the wellness payment from employees’ income. The IRS issued guidance on May 27, 2016, to address the issues raised with these programs (the “May 27 IRS Guidance”).1 According to the IRS, these wellness plan arrangements really are no different than the classic double dip that the IRS said more than 10 years ago just doesn’t work. Employers and employees who find themselves in these “Wellness Plan” arrangements can face significant adverse tax consequences. Further, in a postAffordable Care Act (ACA) world, a number of other compliance issues also arise. This article provides a high-level overview of the issues associated with “Double Dip II”.

What Makes These So-Called Wellness Plans Appear So Attractive? A simple example illustrates the draw of these Wellness Plans. We’ll look at Sue, who has current weekly pay of $900. For simplicity we will assume tax withholding for Sue, including income and the employee share of payroll taxes, of 20%. Here’s what Sue’s current take-home pay looks like: Current Weekly Gross Pay

$900 ($180)

Taxes Current Take-Home Pay

$720

Now let’s see what’s supposed to happen when Sue’s employer adopts a “Wellness Plan” compared to her current situation. We’ll assume a $200 per week pre-tax salary reduction contribution for the “cost” of the Wellness Plan, a reimbursement of 95% of the salary reduction (reflecting a 5% administrative fee), and the same 20% tax withholding on the rest of her pay. Current Pay

Sue’s Paycheck Weekly Gross Pay

with Wellness Plan

Salary Reduction for Wellness Plan Contribution

($200)

$900

Taxable Income

$700

($180)

Taxes

($140)

$720

Post-Tax Income

$560

N/A

Wellness Plan Reimbursement (95% of salary reduction)

$190

N/A

Tax on Reimbursement

Subtotal

$900

Amount Available for Add’l Benefits

$750 ($30)

$720

Take-Home Pay

$720 July 2016 | The Self-Insurer

Employer payroll tax savings on salary reduction amount: 7.65% X $200 = $15.3/wk ($795.5/yr) This arrangement, if the tax benefits are realized, looks attractive to employers because they have FICA tax savings. Employees also have tax savings, which they can use for additional benefits. On the other hand, if the tax benefits are not realized, then the arrangement fails economically. [Note: some of the arrangements we have seen (and evaluated by the IRS) purported to provide tax savings on employee contributions of up to 5 times as much as is outlined here.]

Are the Wellness Payments Tax-Free? No, Wellness Payments of this type are not tax free. Like the classic

double dip, there is simply no basis on which to exclude such payments from income. The May 27 IRS Guidance makes it clear that such payments are not only taxable, but are wages subject to income and employment tax withholding.

The Applicable Law The federal tax laws start from the premise (in Code Section 61) that all income is taxable unless a specific exception applies. If the Wellness Payments are excludable from gross income, they would be excludable under either Code Section 105 or 106; however, Code Sections 105 and 106 do not support the conclusion that the Wellness Payment is excluded. Section 105 and 106 work together to provide an exclusion from income for both the value of employer provided health coverage (regardless of amounts received) and the benefits received by

the employee through such coverage but only to the extent such benefits reimburse otherwise unreimbursed medical expenses. For example, with regard to the value of coverage, if an insurance carrier charges the employer $300 per month to provide self-only coverage, the value of that coverage is $300. If the employer chooses to pay $200 for that coverage, then the $200 is excluded from income under Code Section 106. Amounts that the employee elects to reduce from his or her compensation on a pre-tax basis through a Code Section 125 cafeteria plan to pay for health coverage are also considered “employer” contributions. See Prop. Treas. Reg. 1.125-1(r)(2). Thus, the value of the coverage paid for with pre-tax salary reductions is also considered provided by the employer and excluded from income by virtue of Code Section

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106. In the example above, if the employee pays for the remainder of the $300 premium not paid by the employer through salary reduction, that $100 would also be excluded from income under Code Section 106.2 Section 105 determines the extent to which benefits received through employer-provided accident or health coverage are excluded from income. If the coverage was paid for on a pre-tax basis, then the general rule in Code Section 105(a) is that benefit payments received under the coverage are taxable. However, Code Section 105(b) provides an important exception to this general rule. Under Section 105(b), benefit payment amounts received under such coverage are excludable from income if such amounts represent direct or indirect reimbursements for expenses actually incurred for medical care (as defined in Code Section 213(d)) that if paid directly by the employee would give rise to a deduction under Section 213. Amounts that are excludable from gross income under Sections 105 and 106 are also excludable from wages for purposes of income tax withholding under Section 3401 and FICA and FUTA payroll taxes (Section 3121(a)(5)(G) and 3306(b)(5)(G)). Similarly, salary reduction contributions made by employees through a Section 125 cafeteria plan are excludable from wages for withholding and payroll tax purposes.

Discussion

It is possible that there is a cost to the employee to participate in the Wellness Plan (similar to a health plan premium).3 If that is true, then the employee could make a pre-tax salary reduction under the cafeteria plan equal to the cost to participate in the Wellness Plan; however, there is no circumstance in which those pre-tax salary reductions could be returned to the employee as a tax free benefit absent corresponding medical expenses. In the wellness program described above, the receipt of the wellness payment is not conditioned on the employee actually incurring an expense. Consequently, the Wellness Plan payments of the type discussed here are not reimbursement for medical expenses and, thus, do not fall within the exclusion from income provided under Section 105. We have

seen some programs that operate under the assumption that Wellness Payments are made because the employee will or is likely to incur medical expenses. The IRS has made it clear that such advance payment in anticipation of medical expenses are taxable income in Revenue Ruling 2002-80. The cafeteria plan rules also clearly prohibit such an approach. The IRS has recently confirmed this analysis in the May 27 Guidance. The IRS concluded that: • Cash rewards or other benefits that do not qualify as reimbursement for medical expenses are not excludable from employees’ income or for payroll tax purposes.4 • Reimbursements of all or a portion of premiums for participating in a wellness program are not excludable from income or payroll taxes if the premiums were originally made on a pre-tax salary reduction basis. So, now let’s look at Sue’s situation when the Wellness Payment is properly treated as taxable.

Current Pay

Sue’s Paycheck

with Wellness Plan (Reimbursement Treated as Non-Taxable)

$900

Weekly Gross Pay

$900

Salary Reduction for Wellness Plan Contribution

($200)

$900

Taxable Income

$700

($180)

Taxes

($140)

$720

Post-Tax Income

$560

N/A

Wellness Plan Reimbursement (95% of salary reduction)

$190

N/A

Tax on Reimbursement

($38)

$720

Subtotal

$750

$712

Amount Used for Additional Benefits

($30)

$720

Take-Home Pay

$720

$682

with Wellness Reimbursement Properly Treated as Taxable

July 2016 | The Self-Insurer

• When the Wellness Payment is properly treated as taxable, the purported tax savings disappear, so that there is no “free money” from which to purchase benefits or pay fees associated with the Wellness Program. While the employee may choose to purchase additional benefits, there will be a net reduction in take-home pay. Moreover, the employer is subject to FICA taxes on that amount.

What are the Potential Adverse Consequences to Employers and Employees that Participate in a Defective Wellness Plan? Employers who participate in Wellness Plans of the type discussed in this memo will have under paid employment taxes. Thus, they will likely have liability for additional employment taxes, including interest on late payments and potentially significant penalties. The IRS may impose a “trust fund” penalty equal to 100% of the amount of employment taxes that should have been withheld and paid over to the federal government. This penalty is in addition to the amount of tax liability and may be imposed even if the employee pays the tax. Employees who participate in these defective Wellness Plans will have under paid their income and payroll taxes. Thus, they will likely have liability for additional income and payroll taxes, including interest on late payments and potentially significant penalties. Arrangements similar to the defective Wellness Plans have been found to be prohibited tax shelters. Promotors of tax shelters can be liable for significant penalties, including potentially criminal sanctions. We also note that arrangements that charge the employee more than 38

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the fair market value of the wellness plan and/or allow employees to use salary reductions to purchase benefits such as whole or universal life could result in disqualification of the cafeteria plan.

Do the Defective Wellness Plans Raise Other Legal Issues? Yes, a variety of other laws are implicated, including the following: • Nondiscrimination Rules Final EEOC regulations under the Americans with Disabilities Act (ADA) published on May 17, 2016 extend the 30% limitation on the amount of wellness plan incentives awarded under participatory plans that utilize health information. Prior regulations issued by Treasury/IRS, DOL and HHS only applied the limit to health contingent plans. » In general, the 30% limit is based on the total cost of self-only coverage offered by the employer. » If the employer does not have another group health plan, then cost is based on the second lowest-cost Silver plan offered in the ACA Exchange in which the employer has its principal place of business for a 40-year old non-smoker. While this cost varies by geography, premiums in the $200$350 per month range are common. This would leave room for only $60105 in wellness benefits – far less than the amounts purportedly available under some arrangements. • ACA Requirements Wellness Plan arrangements of the sort described here do not by themselves satisfy the ACA minimum requirements (e.g., required preventive services, no annual dollar limit on benefits). Thus, unless the employer has another group health plan that is ACA compliant, the Wellness Plan arrangement may subject the employer to penalties of $100 per day for violation (for employers with more than 50 employees). Further, regardless of employer size, participants and the DOL may bring actions to force compliance with ACA requirements.

• Employer Penalties For employers with 50 or more full-time equivalent employees, Wellness Plan arrangements are not designed to shield employers from ACA penalty exposure under Code Section 4980H. • Cafeteria Plan Rules Code Section 125 limits the benefits that may be offered through a cafeteria plan to listed qualified benefits. Some Wellness Plan arrangements purport to allow benefits to be paid on a salary reduction basis through a cafeteria plan even though they are not qualified benefits. For example, whole life insurance is not a qualified benefit and may not be offered through a cafeteria plan. Offering benefits that are not qualified may disqualify the entire cafeteria plan. • Other issues may also arise, including other nondiscrimination issues, issues under GINA and possible Cadillac plan tax issues (effective in 2020).

Conclusion The defective Wellness Plans described here attempt to use a cafeteria plan and a wellness program to provide greater tax savings to employees and employers than is otherwise permitted by the Code. While the details and descriptions of these programs may vary and change, the underlying core element is an attempt to convert what is clearly taxable income into purportedly nontaxable income without an underlying medical expense reimbursement. It is these purported tax savings that make the programs appear attractive, despite the fees charged for participation. In reality, there is no basis in the Code for excluding Wellness Payments or similar payments from income or applicable employment taxes. When the arrangements are taxed properly, the attraction of the arrangements disappears. Employers and employees who participate in these arrangements are likely liable for additional taxes, interest and penalties, which can be significant. Similar arrangements to those described here have been found to be prohibited tax shelters; promotors of tax shelters can be subject to significant penalties, including criminal sanctions.

References The May 27 IRS Guidance may be found at www.irs.gov/ pub/irs-wd/201622031.pdf (last visited on May 31, 2016).

2 What if the value of the coverage was $300 but the salary reduction for that benefit was $1000? Would the cost of the coverage still be excluded from income? The IRS did not specifically address this issue but we note that it the cost of coverage may not qualify for exclusion under 106 in that instance. If not, the benefit would not constitute a qualified benefit that can be offered under the cafeteria plan – thereby jeopardizing the tax status of the cafeteria plan. 3 It is unclear why there would be a charge for wellness plan incentives or why an employee would pay for such incentives. The essence of wellness plans is that the employee receives the incentives by taking certain actions specified in the program. The incentive can be taxable (e.g., cash or a gift card) or non-taxable (e.g., a contribution to the employee’s HSA or a reduction in health plan premiums). In some cases, the Wellness Plan may offer limited health benefits, such as health screenings or a limited number of doctor’s visits that qualify the plan as an accident or health plan. 4 In very limited circumstances, the May 27 IRS Guidance indicates that certain wellness rewards may be excludable as a de minimis fringe benefit under Code Section 132. A tee-shirt is given as an example of such a benefit. However, cash (other than overtime meal money and local transportation fare) is never excludable as a de minimis fringe benefit. Note, also, that such benefits are not qualified benefits under the cafeteria plan rules.

Employers who have adopted these arrangements may wish to consult legal counsel to determine the best way to unwind the arrangements. ■

The Affordable Care Act (ACA), the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and other federal health benefit mandates (e.g., the Mental Health Parity Act, the Newborns and Mothers Health Protection Act and the Women’s Health and Cancer Rights Act) dramatically impact the administration of self-insured health plans. This monthly column provides practical answers to administration questions and current guidance on ACA, HIPAA and other federal benefit mandates. Attorneys John R. Hickman, Ashley Gillihan, Carolyn Smith and Dan Taylor provide the answers in this column. Mr. Hickman is partner in charge of the Health Benefits Practice with Alston & Bird, LLP, an Atlanta, New York, Los Angeles, Charlotte and Washington, D.C. law firm. Ashley Gillihan, Carolyn Smith and Dan Taylor are members of the Health Benefits Practice. Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner’s situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation. Readers are encouraged to send questions by email to Mr. Hickman at john.hickman@alston.com. July 2016 | The Self-Insurer

SIIAEndeavors The Self-Insurance Industry’s Experience of the Year... SIIA’s 36th Annual National Conference & Expo in Austin, Texas

elf-Insurance Institute of America’s (SIIA) upcoming National Conference & Expo is scheduled for September 25th-27th at the JW Marriott Austin in Austin, TX. This is the world’s largest event focused exclusively on the self-insurance/alternative risk transfer marketplace and typically attracts more than 1,700 attendees from around the United States, and from a growing number of countries around the world.

Channel with an Election Day preview on Monday, September 26th at 8:30am. The always popular end of conference party returns this year, and will be held on the evening of September 27th, and will feature live music at a fun venue close to the hotel. The SIIA Speakeasy will be a great way to cap off your conference experience and fit in one last round of networking, so you are encouraged to make your travel plans accordingly! Many senior industry executives representing TPAs, employers, stop-loss carriers, captive managers, brokers and other key players in the self-insurance marketplace have already registered, making this a truly must-attend event.

The National Conference & Expo will feature more than 40 educational sessions focusing on self-insured group health plans, captive insurance, self-insured workers’ compensation programs and international selfinsurance/ART trends, a huge exhibit hall, and numerous networking opportunities to help you connect with senior executives and other key players in our industry. If you arrive early, on Saturday evening, September 24th, there will be an invitation only event for the SelfInsurance Political Action Committee (SIPAC) contributors. Please contact Wrenne Bartlett at wbartlett@siia.org for details. This year’s sessions will kick off with keynote speaker Chris Stirewalt, Digital Politics Editor, Fox News 40

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The expansive exhibit hall is almost sold out and sponsorship opportunities have become more limited, so if you want to promote your company’s corporate brand at this event, it is suggested that you reserve exhibit space/sponsorships now. For immediate assistance, contact Justin Miller at jmiller@siia.org. Detailed conference information, including registration forms, can be accessed online at www.siia.org/national, or by calling (800) 851-7789. We look forward to seeing you in Austin this September! ■

“The “The Craft Craft Brewer Brewer of of Benefits” Benefits” In theCraft words of the Brewers “The Brewer ofAssociation: Benefits” In the words of the Brewers Association: In the words of the Brewers Association:

Small

Annual production ofSmall 6 million barrels of beer or less...” Annual production of 6Small million barrels of beer or less...”

of 6 million barrels ofmost beerdiscerning or less...” tastes. BIC stays Annual small to production provide the utmost attention to the BIC stays small to provide the utmost attention to the most discerning tastes. BIC stays small to provide the utmost attention to the most discerning tastes.

Independent Independent Less than 25% of the craft brewery...controlled by an...industry member... Independent Less than 25% of the craft brewery...controlled by an...industry member... Less than 25% of the craft brewery...controlled by an...industry member... BIC stays independent...beholden only to our customers BICBIC stays independent...beholden only to our customers stays independent...beholden only to our customers

Traditional Traditional

A brewer that...derivesTraditional from traditional or innovative brewing ingredients... A brewer that...derives fromtraditional traditional orinnovative innovative brewing ingredients... A brewer that...derives from brewing Flavored malt beverages areornot considered beers.ingredients... Flavored malt beverages are not considered beers. Flavored malt beverages are not considered beers. BIC brews benefits with innovation and to our our missiontotodeliver deliver value. BIC brews benefits with innovation andtradition traditionalways always true true to value. BIC brews benefits with innovation and tradition always true to ourmission mission to deliver value.

• Towson, 303 MDMD 21204 • Towson, 303 West WestAllegheny AlleghenyAvenue Avenue 21204 • • Phone: 443-275-7400 Fax: 443-378-8567 303 West Allegheny Avenue Towson, MD Phone: 443-275-7400 • Fax: 443-378-856721204 info@benefitindemnity.co www.benefitindemnity.co Phone: 443-275-7400 • •Fax: 443-378-8567 • www.benefitindemnity.co info@benefitindemnity.co

info@benefitindemnity.co • www.benefitindemnity.co July 2016 | The Self-Insurer

SIIA would like to Recognize our Leadership and Welcome New Members Full SIIA Committee listings can be found at www.siia.org

2016 Board of Directors CHAIRMAN * Steven J. Link Executive Vice President, Midwest Employers Casualty Co. Chesterﬁeld, MO CHAIRMAN-ELECT Jay Ritchie Senior Vice President, HCC Life Insurance Company Kennesaw, GA PRESIDENT & CEO Mike Ferguson SIIA, Simpsonville, SC TREASURER & CORPORATE SECRETARY* Duke Niedringhaus Senior Vice President, J.W. Terrill, Inc. Chesterﬁeld, MO

Directors

Committee Chairs

Joseph Antonell Chief Executive Ofﬁcer/Principal A&M International Health Plans Miami, FL

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

Adam Russo Chief Executive Officer The Phia Group, LLC Braintree, MA Andrew Cavenagh President Pareto Captive Services, LLC Philadelphia, PA Mark L. Stadler Chief Marketing Officer HealthSmart Irving, TX Robert A. Clemente Chief Executive Officer Specialty Care Management LLC Lahaska, PA David Wilson President Windsor Strategy Partners, LLC Junction, NJ

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GOVERNMENT RELATIONS COMMITTEE Jerry Castelloe Principal Castelloe Partners, LLC Charlotte, NC HEALTH CARE COMMITTEE Leo Garneau Chief Marketing Ofﬁcer, SVP Premier Healthcare Exchange, Inc. Bedminster, NJ INTERNATIONAL COMMITTEE Robert Repke President Global Medical Conexions, Inc. Novato, CA WORKERS’ COMP COMMITTEE Stu Thompson CEO The Builders Group Eagan, MN *Also serves as Director

SIIA New Members Regular Members Company Name/ Voting Representative

Steven Miller National Director of Tax alliantgroup Houston, TX Mine Ozbek Operations Avande, Inc. San Francisco, CA Holli Titus TPA Employee Benefit Logistics Brighton, MI Joel Pina CFO and Managing Member Keystone Risk Partners, LLC Media, PA Paula Beersdorf President Sun Risk Management, Inc. St. Petersburg, FL

Employer Members Doug Hamilton Administrator Kansas Builders Insurance Group Topeka, KS Jonathan Hickman Director Munninghoff, Lange & Co. Covington, KY Timothy LaMotte President Northern Tree Service, Inc. Palmer, MA

2016 Raffle

Your participation makes it possible for us to sponsor educational initiatives and projects that have included briefings on self-insurance for congressional staff members on Capitol Hill and many other endeavors. Until Tuesday, Sept. 27, all contributions to the SIEF raffle will enter you a chance to win one of several fabulous prizes!

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The Self-Insurance Educational Foundation (SIEF) is a 501 C 3 non-profit educational | The Self-Insurer July 2016 foundation affiliated with the Self-Insurance Institute of America, Inc. (SIIA).43