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May 2014

www.sipconline.net

Collateral

GAME CHANGER Program in California called

Frees up credit for small SIGs, improve workers’ comp efficiency


2

May 2014 | The Self-Insurer

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www.sipconline.net

MAY 2014 | Volume 67

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

FEATURES

ARTICLES 12 From the Bench: What’s the Plan, Stan?

Editorial Staff

18 ART Gallery: Another Thing to Worry

PUBLISHING DIRECTOR Erica Massey

About, but Better to Prepare for

SENIOR EDITOR Gretchen Grote

20 Group Captive Insurance Programs:

DIRECTOR OF OPERATIONS Justin Miller DIRECTOR OF ADVERTISING Shane Byars

6

Collateral Program

in California called Game Changer by Bruce Shutan

Generating Family Wealth from Your Insurance Captive by Duke Niedringhaus

32 Cell Captives Explained: Benefits, Structures and Popularity

EDITORIAL ADVISORS Bruce Shutan Karrie Hyatt

by Karrie Hyatt

36 In Reference to Reference Based Pricing by Ron E. Peck, Esq.

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

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

26

Exploring Integrated Health Management Opportunities by Brian Devlin

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INDUSTRY LEADERSHIP 4 SIIA Chairman’s Message

The Self-Insurer | May 2014 3


SIIA CHAIRMAN’S MESSAGE SIIA’s International Conference returns to hot spot Miami and the iconic Eden Roc Hotel, June 9-11th!

T

he globalization of the self-insurance/alternative risk transfer industry is increasing in momentum as effective solutions for the selfinsurance needs of companies are adapted to local markets.

The International Conference features top industry experts (including myself) sharing their knowledge to help companies with international risk management needs understand the self-insurance solutions available to them. There will be networking opportunities for companies interested in establishing strategic partnerships with global reach within the self-insured/ alternative risk transfer industry, along with the superior educational program. This year’s keynote address will be given by Steven G. Ullmann, PhD, Professor and Director, Programs in and Center for Health Sector Management and Policy, Management School of Business Administration at the University of Miami, who will present the session “Affordable Care Act: Effects on US and International Health Policy and Economics.” Other educational sessions include: The Changing Ways Benefits Are Offered To Brazilians -- Both Corporate and Retail Markets Given the sustained growth of Brazil’s economy, the target market for Supplemental Benefits continues to expand. The audience is coveted for its sheer size and appetite to purchase both Corporate and mass-marketed products. Michael Feighan, SVP and Worldwide A&H Underwriting Manager of Chubb Accident & Health and Walter Zucca of Aon Hewitt will cover how corporations and financial institutions are changing such marketing in the workplace and through direct marketing distribution channels, respectively. Business Opportunities in Colombia A combination of political stability, economic growth and demand for insurance products show a positive market trend in Colombia. Our panelists Maria Carolina Quijano, US Representative of ProExport and Andres Campos Cochener, President, Protekti Insurance will discuss the drivers and potential market opportunities they see. Leveraging the Power of Health to Drive Business Outcomes Dana Citron, MPH, Director, Global Health and Wellness Programs of MetLife, Global Employee Benefits will provide an update on health and wellness issues and solutions. In addition to claims cost impacts, she will explore the links between employee health and business-relevant outcomes. Topics covered include the impact of chronic diseases, calculating the total cost of health and best practices in launching a global health strategy. The Use of Data Analytics for Predictive Modeling To gain (or maintain) a competitive advantage, businesses have been heavily investing in technology infrastructure for data warehousing and comprehensive business intelligence

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May 2014 | The Self-Insurer

Les Boughner

reporting and analysis capabilities. These investments are an effort to improve decision-making – that is, to make better and timelier decisions to improve business performance. During this session Patrick Malloy, Senior Vice President of Aon Benfield and Kimiko Jarrett, Director, Aon Benfield will explore the sources of data available to companies and how this historical information can be used to predict future trends. Status of Self-Insurance and Employee Benefits in Central America and Caribbean: Update and Opportunities Robert DiCianni, Senior Vice President, Pan-American Life Insurance Group will explore the current state of employee benefits and self-insurance in the Central American and Caribbean region as well as emerging trends and market opportunities. The session will include emerging regulatory and risk management elements. He will also discuss service levels in the region as

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


well as local VS out of country medical treatment trends. Mexico: National Health System and the Impact of Self-Insured Programs This presentation will give you an understanding of how Mexico’s healthcare is structured. Apolinar Ortiz Hernández, Workers’ Compensation and Benefits Manager, Cooperativa La Cruz Azul, S.C.L. will explore the most important health government programs, government initiatives and the new fiscal reform that is affecting workers’ compensation. He will also show how a leading Mexican company operates it’s self-funded programs. Facing the Economic and Regulatory Challenges to Provide Health Insurance/Reinsurance in Venezuela Pedro Maneiro, CAH, Zone Underwriting Officer, Chubb de Mexico and Paula Ferrara, Aon Benfield will describe the current situation of the health system in Venezuela. They will include a description of how the health system operated and their current challenges. They will describe the role of the insurance companies and reinsurers and their strategies to overcome the challenges to still serve the insured population. Universal Healthcare: A Handson Assessment of the Cuban Health Care System Fact or Fiction: Not much is truly known about how universal health care works in Cuba. Sid Stolz, President, Chip Rewards will give a personal glimpse of the Cuban health care system, separately fact from fiction. What can the rest of the world learn from Cuba? Insurance Law Developments in Latin America John Rooney, Attorney at Law of John H. Rooney, Jr., P.A. will discuss recent developments in insurance law in the Americas and regulation, with emphasis on the regulation of non-admitted products, on health insurance, and on trade

agreements that the United States has entered into with countries in the region. The survey will include general treatment of the international aspects of the Affordable Care Act. Captive Insurance Solutions in/for Latin America I am honored to speak at this year’s International Conference! Latin America is an emerging market for Captive insurers. Domiciles such as Puerto Rico, Panama, Barbados and Bermuda are busy positioning themselves as the domicile of choice for this emerging market. I will explore the challenges and benefits for Latin American companies as well as the relative benefits of these domiciles. Emergency Medical and Travel Assistance Ever been called at 2AM on Saturday morning by a client who has a traveling employee in Buenos Aires who just fell and broke her leg? What do you do, who do you call and, oh, do you speak Spanish? Anthony Froelich, Regional General Manager, Travel Guard, a Member of AIG, will provide an in-depth look at the value of adding a robust, comprehensive assistance program to your current service platform. He will highlight how a global 24/7 emergency medical and travel assistance program not only enhances your value proposition and differentiates your offering but also brings a level of expertise and support to your team freeing them up to concentrate on your core business.

Paul Kohlenbrener of ComPsych will discuss the impact of how successfully globalizing an EAP will maximize workforce productivity, increase product and service quality, reduce operational costs, mitigate risk, enhance workforce branding and optimize international assignments worldwide. The pitfalls of poorly globalizing an EAP can prove equally disastrous to the enterprise and will also be addressed. n

For more information on SIIA’s International Conference, including registration and sponsorship opportunities, please visit www.siia.org or call (800)851-7789.

Key Success Factors for Globalizing a Multinational Employer’s EAP Value for the dollar, the employee assistance program (EAP) is one of the most powerful benefits an employer can provide to their workforce. Problems related to depression, marital conflict, substance abuse, legal matter and other life complications are not contained within specific international borders, so it is important for multinational employers to take a global view.

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

The Self-Insurer | May 2014

5


Collateral

GAME CHANGER Program in California called

Marsh helps free up credit for small SIGs, improve workers’ comp efficiency by Bruce Shutan

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May 2014 | The Self-Insurer

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


A

n innovative new program in California is being heralded for dramatically easing the business challenges associated with managing workers’ comp for self-insured groups of small employers. “What’s revolutionary is that we’re accessing a different source of

groups might be talking $10 million to $50 million of collateral.” What’s particularly noteworthy about this program is that it offers

capital, which has created a significantly improved solution that was previously just

a financial product that doesn’t

not available to the groups in any form,” explains Quentin Hills, managing director

assume “every single member is

at Marsh Risk & Insurance Services and creator of a new collateral program for

going to become financially insolvent,”

California SIGs.

Niedringhaus explains, “and when you

Although pioneered last year for five small groups of self-insured employers in

can spread out that risk financially, it

California, which he declined to identify, the program is equally applicable anywhere

makes it a little bit more palatable for

SIGs are required to meet higher collateral requirements. Hills also is in talks with a

an insurance company to look at that in

group in New York, as well as a self-insured company, about pursuing this same solution.

a different light.”

California SIGs are required to post collateral to state regulators within any

He says the program can benefit

given 12-month period in the form of a letter of credit, surety bond or cash on an

certain classes of business more than

individual basis. That process has become increasingly cumbersome in the face of

others, such as agriculture, which can

new capital charges in the banking market and higher charges on the surety side

use “every option available to them to

under the Dodd-Frank Act. Hills says groups are often having to post anywhere from 60% to 100% of additional security or cash behind that action, which seriously restricts or drains liquidity. However, Marsh’s program allows them to post just 25% collateral to create this facility and pay an annual fee to cover the cost of that structure. “They’re going to free up 75% of that cash collateral they’ve got sitting behind their L/C or surety bond, which can be used for working capital within the group,” he explains, including helping manage workers’ comp. “Banks and sureties don’t want to take on the credit risk of the SIG.” Marsh, in effect, has removed that risk from bank balance sheets and instead taken it into the insurance or reinsurance markets, while providing security or collateral that is acceptable to the state regulator. The effort took shape about a month or two after the start of California’s annual posting cycle for self-insurance, which runs from July 1 to June 30. “We were able to get a six-month transaction done in December,” Hills reports, “and now over the last couple of months, we’ve been talking about deepening that structure across many more groups.” The facility’s size is expected to more than double this year.

California’s Collateral Crackdown The Marsh program is “a game saver” for SIGs that now have “another option to

try to control those workers comp’ costs.” Size also matters. Many small and midsize employers that tap the program will have an ability to continue the option of self-insuring workers’ comp in a group setting, he adds.

A Better Mousetrap Jeff Pettegrew, executive director of the California Self-Insurers’ Security Fund (SISF), describes Marsh’s collateral program as “an exciting direction” for security funds with self-insureds. “I think it’s kind of an ingenious model that they’ve come up with,” he says, “because the payment stream is way down the road. There’s a retention, if you will, like a lot of insurance policies, and the protection comes down the road, so they can price this pretty

allow them to navigate the very challenging California marketplace, whose collateral

competitively, and they know when the

demands are probably the largest in the country,” notes Duke Niedringhaus, an

losses occur and don’t have to fund

insurance broker with JW Terrill Inc. who chairs SIIA’s Workers’ Comp Committee.

them for years to come.”

Citing New York and Minnesota as states where small SIGs can use a helping

SISF uses the program for

hand accessing capital beyond traditional sources, he hopes Marsh’s program

protection in certain categories

migrates to states with low-end collateral requirements.

of alternative security program

California regulators have always taken a conservative stance on how much

participants. Pettegrew says “it’s the

collateral they want from SIGs, according to Niedringhaus. “Despite having

first time that we’ve been able to find

enormous liabilities,” he explains, “there are a couple states that might require

an alternative insurance market versus

$250,000 or $500,000 of collateral, whereas a lot of these California self-insured

credit default swaps that really don’t

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

The Self-Insurer | May 2014

7


fit out model.” The former solution is designed as an instrument for bond holders or investors in the event of a bankruptcy filing. “In our case,” he explains, “a default is not the same as bankruptcy. So the instrument that we have now is really tailored to not so much bankruptcy, it really has to do with default, and it has to do with workers’ comp losses and so forth.” There’s an understanding about the coverage and how it’s applied, without any guessing associated with the credit default swap mechanism. Hills has a long-standing association with SISF, whose innovative Alternative Security Program is the first of its kind for any of the nation’s state self-insurance security/guarantee funds. When that program began on July 1, 2003, about 350 companies were required to individually post about $4.8 billion worth of letters of credit, surety and cash – an

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May 2014 | The Self-Insurer

amount that’s now $7.4 billion.

looking at new creative solutions that

“That was chewing up their credit capacity,” recalls Hills, whose firm has worked closely with specialist insurance markets over the past decade to restructure how security or collateral is posted for individual companies in California. “It was inefficient from quite a number of different reasons.”

are prudent and meet their objectives.”

So rather than pay annual fees to banks and surety companies, each of the 350 employers pays the SISF, which arranges and guarantees collateral deposit requirements on their behalf based on credit standards. Those that do not meet these standards must directly post their collateral security deposits with the Office of Self Insurance Plans.

It’s also worth noting that the collateral program is more efficient for state regulators who receive a single letter of credit that addresses all security requirements for a group rather than having to post various forms of security, according to Tom Hebson, VP of product development and government relations for Safety National, the excess workers’ comp market leader. Knowing California SIGs face an uphill battle in trying to secure credit or capital, Marsh is able to bundle up their collateral requirements and access wholesale financial markets that

Embracing Creative Solutions

previously weren’t available to them.

Hills says regulators and fund trustees alike are “very comfortable

banking markets, pension funds and

The hope is that some capital from the other alternative capital providers will

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The Self-Insurer | May 2014

9


consider the collateral program a sound return for the risk that’s being taken, which in turn, will create more capacity. “At this stage,” Hills says, “our main goal this year is just to broaden and deepen participation from those five groups to around 10-12, get that version 2.0 in place, and then we’ll look to version 3.0. And a lot of this depends on what’s possible within the legislative framework as to what we can legally provide that the regulator will accept.” Once a SIG conducts an annual actuarial study to determine the extent of its workers’ comp liabilities, it will then know the amount of collateral that has to be posted. Under the collateral program, a letter of credit is then drafted based on that number. Hills says that while this solution has no direct impact per se on claims management, it enables SIGs to be much more effective by freeing up cash. Since workers’ comp represents “a significant portion” of exposure in California, Pettegrew says any tool that can SIGs squeeze more out of dollars devoted to addressing work-related injuries makes good business sense. “And to that degree,” he adds, “it strengthens the workers’ comp program because it offers for the first time an alternative, which no one’s really thought of or designed prior to this.”

Having access to a collateral alternative enables SIGs to “pay a premium or combination of premium and some collateral into a program that is less cost intensive than it would be if they had to do the whole collateral piece,” according to Hebson. Perhaps the most important point of all about the program is that it supports self-insurance, which he says “is probably the most efficient way to cover your exposures if you have all the other pieces in place.” n Bruce Shutan is a Los Angeles freelance writer who has closely covered the employee benefits industry for 26 years.

34th Annual National

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The Self-Insurer | May 2014

11


Bench From the

by Thomas A. Croft, Esq.

What’s the Plan, Stan?

E

ligibility issues, in my anecdotal experience, are replacing disclosure issues as the number one stop loss claims problem. I offer some thoughts this month. First, the basics. Most every stop loss form in current use adopts something resembling the following schema: 1) specific benefits are stated in terms of reimbursement for “eligible expenses,” “eligible claims payments” or some similar defined term; 2) “eligible expenses” are defined as being incurred with respect to “covered persons” or “covered units”; 3) “covered persons” are defined as those individuals “covered under the employee benefit plan”; and 4) “the Plan” is usually defined as “the master plan document” of the insured

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May 2014 | The Self-Insurer

group, though, in practice, it is the Summary Plan Description (“SPD”) that is provided to the MGU/carrier at underwriting time. One important intended effect of this stop loss policy structure is to confine stop loss reimbursements to expenses incurred by individuals covered under the Plan. Most typically, the Plan is specifically incorporated into the terms of the stop loss contract and explicitly made a part of the bargain between the carrier and the group via the “entire contract” clause in the stop loss policy form. Thus, the written terms of the Plan govern who is or isn’t a “covered person” for stop loss reimbursement purposes – a time-honored tradition of “mirroring” established well before the

recent “mirroring” fad regarding stop loss policy exclusions. In order to determine who is eligible under the terms of the Plan, one consults the “eligibility” section of the Plan Document. This usually describes the requirements for eligibility in terms of being an employee in a defined class of persons, e.g., those working some minimum number of hours per week, and perhaps other requirements. The eligibility section will also describe eligibility criteria for dependents of covered employees. One must also consult the “termination” section of the Plan Document, which describes when and how formerly eligible persons can lose coverage under the Plan. Often, the termination section circularly describes

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a loss of coverage as being an event which causes one to lose his or her status as a member of an eligible class, like a reduction in hours. Upon an event of termination, one must next determine what options the Plan Document offers for continuation of coverage. At minimum, these will include a section describing FMLA continuation coverage and COBRA. The Plan Document may also include, however, provisions addressing continuation of coverage during approved leaves of absence, periods of disability, and the like. Once FMLA and other options for continuation of coverage have been exhausted, then the issue of continuation of coverage comes down to whether COBRA was offered and accepted or not. All of the above is relatively straightforward in theory, and sometimes impossibly messy in practice. Let me count the ways. Practice Makes Imperfect. For reasons that elude me, Plan Documents very often do not reflect what employer groups actually do when it comes to continuing medical coverage. Outside the four corners of the Plan Document, employers often have policies or procedures which extend leave beyond that described in the Plan. These may appear in employee handbooks, internal memoranda distributed to employees, be posted on a company website, or sometimes simply reside in the minds of the HR folks who implement them. On occasion, they are just ad hoc, made up on the fly to fit a compelling need to continue coverage for a key employee without any basis in a formal company policy. Of course, it is no business of the stop loss carrier if an employer wishes to provide coverage for someone outside the language of the Plan Document. (It theoretically could be a concern to other contributing Plan participants, but that is an issue of proper administration of the Plan itself – something that the stop loss carrier has nothing to do with). The problem arises when the group wants a stop loss reimbursement for someone not covered by the terms of the Plan. I’ve seen many disputes that turn on one or more variations of the following themes: • “It’s right there in the employee handbook on page 7. We give leaves of absence for up to six months and medical coverage continues during such absences.” That may be so, but unless the terms of the employee handbook are expressly incorporated in the Plan Document by some specific language in the Plan, its provisions are not part of the deal made between the group and the stop loss carrier. The stop loss policy incorporates the Plan Document, only. Underwriting for the risk involved was done in the context of the SPD submitted to the MGU/carrier, and unless the SPD put the underwriter on notice that the terms of a handbook were somehow relevant to the eligibility provisions appearing in the Plan, those terms simply don’t count. [But see discussion of “side agreements,” below]. • “The Plan says that we have full discretion to interpret Plan terms, make decisions regarding eligibility, and resolve factual questions. We’ve decided this person was eligible, and you can’t question that.” Such provisions are common, and give the Plan Administrator wide latitude in determining coverage questions under the Plan. But they do not permit a Plan Administrator to ignore clear and controlling Plan language, or to add benefits to the Plan Document that are not there and thereby bind the stop loss carrier. Many current stop loss policy forms contain express “anti-discretion” clauses, which, in effect, state that any “discretionary authority” given in the Plan Document is not binding on the carrier, which remains free to make its own independent

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judgment about Plan coverage based on the written terms of the Plan for purposes of adjudicating its liability under the stop loss contract. Even without such a clause, virtually every stop loss policy prohibits the group from amending the Plan terms mid-stream without written consent of the carrier. Adding a continuation of coverage provision under the rubric of the exercise of “discretion” violates the letter and spirit of the antiamendment clause in the stop loss policy. • “We offer long-term disability coverage for our employees through another insurer, and we always continue medical benefits for employees out on LTD.” Again, unless the continuation of coverage for persons out on LTD is spelled out in the Plan Document, or the LTD benefit and the extension of coverage is somehow referenced in the Plan Document itself, it isn’t part of the deal between the group and the carrier. As stated in The Majestic Star Casino v. Trustmark Ins. Co., http://stoplosslaw.com/ wp-content/uploads/2009/11/ majestic-star.pdf, at pp. 11-12: “[I]t is the terms of the plan that control here, not Majestic’s interpretation or implementation of the plan. Majestic and Trustmark entered into the stop loss agreement based on the language of Majestic’s health plan. Majestic cannot avoid [the terms of the stop loss policy] by not following its health plan’s express terms.” Muddier Waters. The above examples are relatively clear-cut. But leave it to market forces to muddy the legal waters (don’t they always?). Here’s mud in your eye: Some The Self-Insurer | May 2014

13


brokers/TPAs, perhaps recognizing the oft-extant disconnect between what the Plan says and what the group really wants, have cut side agreements with some MGU/carriers whereby the continuation of coverage provisions found outside the Plan Document (say, in employee manuals, LTD policies, etc.) “count” for eligibility purposes. Laying aside the wisdom or market necessity of such side deals, there is the technical problem that such agreements contradict the express terms of the stop loss policy forms, which clearly describe what the “entire contract” between the parties consists of. The side agreement, of course, is not listed. Nevertheless, the MGU/ carrier would certainly be hard-pressed to defend a claim on the grounds that the side agreement didn’t bind them because it was just an unenforceable extra-contractual promise. But in order to protect themselves, the broker/TPA should insist on a formal endorsement to the stop loss policy to include the

14

May 2014 | The Self-Insurer

coverage provisions not found in the Plan Document itself. The more acute problem is that sometimes these side agreements are not even reduced to writing, or if they are, they are poorly drafted or ambiguous. Unless carefully drawn and reviewed by counsel, such market-driven deals can complicate more than they solve with regard to eligibility issues. Again, using the vehicle of a formal endorsement would require a level of specificity not often found in a side letter agreement, or worse, in some vague oral agreement. Both MGUs/carriers and insured groups (as well as their brokers/TPAs) would benefit by this approach. Clarity in contractual arrangements behooves everyone. Another potentially muddying situation deserves mention. Sometimes, an individual who is being continued on the Plan outside the coverage provisions of the Plan itself has been disclosed in connection with the standard disclosure process during underwriting, perhaps due to disability, hospitalization, or similar condition. Such disclosures often lead to a documented back-and-forth between the stop loss underwriter and the broker/TPA concerning the particulars of such an individual’s condition, and then either a decision to laser – or not to laser – the person in question. The decision to laser or not to laser is likely documented as well. In short, the disclosure process shines a bright light on a given individual. Once a large stop loss claim comes in for such a person, there is an argument to be made by the group that the MGU/carrier consciously assumed stop loss coverage in respect of the individual involved, and priced the stop loss coverage accordingly. To be sure, stop loss underwriters do not undertake eligibility reviews at the time of underwriting; it is the claims department that performs that function, after the fact of a claim. And the MGU/carrier has the argument that underwriting risk is always undertaken with the underlying eligibility provisions of the Plan Document

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HELP YOUR CLIENTS

TO THE BENEFITS OF STOP-LOSS. He has a new heart. His employer has peace of mind. With stop-loss coverage from Sun Life, your clients are protected against catastrophic claims. And they get the benefit of an independent point of view from one of America’s leading stop-loss providers. In the past three years alone, we processed 68,000 claims—over $1.3 billion in payouts. Why not put our expertise to work for you? Ask your Sun Life rep how.

Life’s brighter under the sun

sunlife.com/wakeup Stop-loss insurance policies are underwritten by Sun Life Assurance Company of Canada (Wellesley Hills, MA) in all states, except New York, under Policy Form Series 07-SL. In New York, stop-loss insurance policies are underwritten by Sun Life and Health Insurance Company (U.S.) (Windsor, CT) under Policy Form Series 07-NYSL REV 7-12. Product offerings may be subject to state variations. © 2014 Sun Life Assurance Company of Canada, Wellesley Hills, MA 02481. All rights reserved. Sun Life Financial and the globe symbol are registered trademarks of Sun Life Assurance Company of Canada. PRODUCER USE ONLY.

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The Self-Insurer | May 2014

15


SOLUTIONS. SERVICE. INSIGHTS.

WITH AmWINS GROUP BENEFITS, YOUR CLIENTS GET THE TOTAL PACKAGE. When you partner with AmWINS, you can help your clients select from an extensive range of products and administrative solutions, including medical stop loss, small group self-funding, audit services, care management, dialysis management solutions and healthcare benefits administration. We provide them with seamless customer service through our proprietary administrative systems, and you keep them in the know with timely insights from our practice experts — ensuring you’re the first place they turn for new program information. To learn more about offering your clients the most comprehensive self-funded healthcare solutions, visit amwins.com.

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May 2014 | The Self-Insurer

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in mind, so that mere inclusion of an individual’s name on an employee census, for example, submitted during underwriting hardly waives the carrier’s right to dispute eligibility when a claim comes in. But the question is somewhat harder with respect to a disclosed claimant – particularly one who was the subject of inquiry and discussion between the underwriter and the broker/TPA/group – a person who was “lit up” in the bargaining process. One can imagine some good deposition questions to the underwriter involved: “When you quoted this group, you were assuming, were you not, that his claims would be in the pool of risk your company was reinsuring?... So, when you priced this coverage (or established the laser) your assumption was that he would be an eligible person under the Plan?... So you charged my client premium consistent with this person being eligible, right?... So when your company denied this claim on eligibility grounds, that was profit you weren’t expecting, correct? Of course, a properly prepared underwriter witness could give some strong responses to these kinds of questions, but the trap is there for the unwary. From the MGU/carrier’s perspective, the addition of some language to the disclosure statement disavowing any intent to waive eligibility issues as to any disclosed claimant would eliminate this type of issue. Eligibility issues come up all the time in my experience. Proper policy language, the use of endorsements to expand coverage beyond the four corners of the Plan Document where desired, and the use of a disclaimer in the disclosure process all seem wise policies, i.e., “best practices” in the current vernacular. In these ways, “What’s the Plan, Stan?” eligibility disputes might be minimized. n

Known for his extensive writing on medical stop loss insurance issues, both in The Self-Insurer and on his comprehensive website, www.stoplosslaw.com, Tom has been practicing law for 34 years. Currently he practices through his own firm, CROFT LAW LLC, in Atlanta, GA. He regularly advises and represents stop loss carriers, MGUs, and occasionally TPAs, brokers, and self-insured groups, in connection with matters relating to stop loss insurance and the disputes that may arise among these entities regarding it. He currently serves on SIIA’s Healthcare Committee. He has been honored as a Georgia “Super-Lawyer” for the past six years running, and is listed as “Tier 1” in insurance by Best Lawyers. He is an honors graduate of Duke University and Duke University School of Law, where he formerly served as Senior Lecturer and Associate Dean.

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The Self-Insurer | May 2014

17


ART GALLERY by Dick Goff

Another Thing to Worry About, but Better to Prepare for

W

hoever first said, “It’s always something!” gave us a way to address many of life’s mysteries. The “something” of concern today is the innocuous sounding subject of Medicare compliance. Many insurers wouldn’t think that’s something they should worry about. But they would be wrong. Newly aggressive measures by Medicare to recover costs for treatment it says other insurers should have covered could cost billions of dollars under the Medicare Secondary Payers (MSP) Act. Here’s an example: massive treatment over decades for the effects of toxic PCB exposure in and around Anniston, Alabama – including people who aged into Medicare coverage – resulted in very expensive judgments against PCB producers. The parties settled for $300 million in payments to defendants. But none of the plaintiffs, defendants or insurers took any steps to reimburse Medicare for any of the monies it had spent on treatment related to PCBs. Of the thousands of people who filed claims, 907 were Medicare beneficiaries. Medicare’s subsequent lawsuit against the PCB manufacturers and their insurers 18

May 2014 | The Self-Insurer

totaled $180 million including the double damages allowed by the federal statute. Rafael Gonzalez, Director of Medicare and Medicaid Compliance of Gould & Lamb, a firm that provides Medicare compliance services, comments: “Although not all cases are this large or all expenditures this great, the Center for Medicare and Medicaid Services (CMS) indicated that total savings due to MSP recovery were $8 billion in 2013.” Medicare recovery under the MSP is certainly not limited to large organizations. The ART community including risk retention groups (RRG), captives and selfinsured entities is especially vulnerable because it relies on service providers such as TPAs or captive managers to assure compliance with the whole range of federal and state regulations. “The ability of Medicare to come back for monies it feels it shouldn’t have spent is not well understood by those who manage risks through alternative means,” Gonzalez says. “Many parties first learn that they have a problem when Medicare demands payment or files a suit.” Recovery of monies Medicare feels it shouldn’t have spent is one of several compliance issues faced by insurers, according to Gonzalez. He recommends that all insurers, but especially RRGs, captives and self-insured organizations learn how to get in front of compliance issues through several methods: • A Mandatory Insurer Reporting process monitors whether claimants may be Medicare beneficiaries and, if so, identifies specific cases that will need detailed attention.

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• A Conditional Payment Resolution process keeps track of how much money Medicare has paid, how much of it may be related to your claim, and how much Medicare will accept to resolve a lien. Medicare, like most creditors, is open to negotiation. • A Medicare Set-Aside process allows an RRG, captive or self-insured organization to do its own analysis of future medical costs related to a claim and set aside funds for such future use. Such information is an important element of any settlement process. The good news in managing such issues is that it will likely protect an insurer or organization from scary surprises in the future while also strengthening the organization’s management capability. “These Medicare compliance processes will further improve ongoing performance of the organization by assuring reporting of Medicare claims, reimbursement of conditional payments and allocating future monies for medical care related to the claim,” Gonzalez says. Gonzalez compares such preparation and protection with the sad case of insurers and manufacturers in the above-cited PCB settlement who, after they thought all the dust had settled, learned they were still on the hook for Medicare’s claims of $180 million. n Readers who wish to comment on this column or write their own article may contact Editor Gretchen Grote at ggrote@sipconline.net. Dick Goff is managing member of The Taft Companies LLC, a captive insurance management firm at dick@taftcos.com. Rafael Gonzalezr of Gould & Lamb, may be reached at rafael.gonzalez@gouldandlamb.com

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The Self-Insurer | May 2014

19


Group Captive Insurance Programs: Generating Family Wealth from Your Insurance Captive by Duke Niedringhaus

G

roup captive insurance programs can be an attractive alternative to traditional insurance. Regardless of the insurance market cycle, captives offer a new level of control, asset accumulation and financial independence. 2013 had record growth for group captives and this segment has approximately $1.5 billion in market premium. What is a group captive? It’s an insurance company that provides insurance to and is controlled by its owners. In short, you (and several other preferred risk businesses) own the company that provides your commercial insurance. Which means

20

May 2014 | The Self-Insurer

that you have greater control and your family estate – not an insurance company – benefits when the captive is profitable. In addition, you have minimal administrative obligations.The program is administered by a captive management company that provides the necessary structure, claims management, legal, accounting and other functions necessary to operate.

Benefits of a Captive • Greater control over your insurance program • Accrue tax deferred underwriting profit and Investment Income

• Premium calculation is based on your prior five-year loss history, not industry averages • 65-75% of premiums will be available to fund losses and generate investment income • Greater control over claims management • Networking with other high net worth shareholders to enhance Risk Management • Captive profits can be distributed directly to a family trust

Consider a Captive if Your Business Has: • A favorable prior loss history • Financial stability

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• Casualty premiums that exceed $200,000 (Auto, Workers’ Compensation and General Liability) • An entrepreneurial attitude

Types of Captives Captives provide coverage for a number of industries and are available in several configurations. We will focus on The Group Captive market to insure Workers’ Compensation, Auto and General Liability. Group Captives are utilized by mid-sized companies that have casualty premiums of $200,000 - $3,000,000. Group captives enable similar or diverse businesses to band together to form a cooperative to share the risk, cost and benefits of providing commercial insurance to their members.

C. Risk Sharing D. Collateral E. Engaging the captive shareholder F. Creating Family Wealth Using an example of a window manufacturer, we will review these components. In our scenario, we will assume Window Company has the following guaranteed cost insurance premiums: Workers’ Compensation General Liability Auto Total Window Company Premium

A. Reinsurance The captive will purchase both Specific and Aggregate reinsurance.The fronting carrier issues admitted insurance policies on behalf of the captive. The fronter is reinsured by the captive for losses up to $300,000. The captive’s reinsurer would then indemnify the fronting carrier for losses in excess of $300,000. Specific Reinsurance $1,000,000 Umbrella

Umbrella Fronting Insurance Company POLICIES

Reinsurance

Captive Fixed Costs Fixed Costs of a Typical Captive Program Captive Management Fee 5% Fronting Fee + Taxes 11% Reinsurance 8% Broker Commission 4% Claims Management 4% Loss Control 1% Total 33%

$350,000 $50,000 $50,000 $450,000

General Liability Auto Workers’ Compensation $300,000 Captive Retention

Frequency Funds

Aggregate Reinsurance Fund for All Members Severity Funds

Reinsurance

B. Premium Development for Window Company The captive will develop a casualty premium based on 5 years of incurred losses and exposures. Large losses will be limited to $100,000.

(Higher Reinsurance costs would apply to high Hazard Groups)

The basic similarities of Group Captives are in the following components that we will review: A. Reinsurance B. Premium Development

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Workers’ Compensation

Auto

# of Autos Losses

Total Casualty Losses

Losses Sales

Losses

1

0

$45MM

$10,000

40

$200,000 $9MM

$210,000

2

0

$40MM

$75,000

40

$200,000 $8MM

$275,000

3

$50,000 $35MM

$10,000

40

$200,000 $7MM

$260,000

4

0

$30MM

$10,000

30

$200,000 $6MM

$210,000

5

0

$25MM

$10,000

30

$500,000 $5MM

$510,000

Group Captive Model Although Group Captives can have a variety of structure and administration; we will focus on the most common model. Since the 1980’s, the most successful Group Captive managers have utilized one format of Risk Sharing.

General Liability

Yr.

Payroll

Based on these historical losses and exposure growth, the actuary develops a loss fund of $300,000 which generates the following Premium: $250,000 Frequency Loss Fund $ 50,000 Severity Loss Fund $150,000 Fixed Costs $450,000 Total Annual Captive Premium Paid by Window Company The Self-Insurer | May 2014

21


Window Company’s final captive costs determined in 3-5 years:

Fixed Costs

Incurred Captive Losses

Less: Investment Income

Total Captive Costs

Difference Compared to $450,000 Insured Premium

$150,000

0 Minimum

($20,000)

$130,000

($320,000)

$150,000

$250,000 (Projected)

($20,000)

$380,000

($70,000)

$150,000

$550,000 (Maximum)* ($20,000)

$680,000

+$230,000

*Maximum Losses: Frequency Fund + Severity Fund + Additional Frequency Fund C. Risk Sharing • Each member can be assessed one additional frequency fund. Window Company could be assessed an additional $250,000 for losses within the first $100,000 frequency layer. • Any large losses over $100,000 that exceed Window Company’s severity fund of $50,000 will be shared with other members on a prorated basis up to the $300,000 captive retention. D. Collateral • Captive Members will be required to post collateral roughly equal to the Annual Premium E. Engaging the Captive Shareholder The primary reason for the consistent success of group captives is the engagement of the members:

• Shareholder meetings (semi-annual two day events) • Risk control seminars • Committee participation by all members • Quarterly claim reviews F. Entrepreneurial Vision to create Family Wealth Entrepreneurs will enjoy the asset accumulation aspect of Group Captives. By turning the insurance expense into an asset, owners create an additional

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Your Yourrisk riskisisa aunique unique combination combination of Your risk is aofunique factors. factors.Shouldn’t Shouldn’t your combination of your factors. Shouldn’t solution solutionbe betoo? too? your solution be too?

YourYour riskrisk is as is unique as unique as your as your business. business. After After all, medical all, medical riskrisk is constantly is constantly in flux. in flux. Markets Markets change change andand so do so opportunities. do opportunities. Your risk is as unique as your business. After all, medical risk is constantly in flux. Markets change and so do Over Over the the past past twenty twenty years, years, weopportunities. we have have grown grown andand evolved evolved across across multiple multiple lines lines of business of business and and geographies. geographies. This This means means that that while while we we possess possess the the expertise, expertise, Over the past twenty years, we have grown and evolved across multiple lines scope scope andand scale scale to geographies. protect to protect against against a wide a wide array array of risks, of risks, we continue continue focus to focus on on of business and This means that while wewe possess theto expertise, onlyscope only one.one. Yours. andYours. scale to protect against a wide array of risks, we continue to focus on only one. Yours. To see To see how how our our experience experience andand insight insight cancan work work for for you,you, visit:visit: www.partnerre.com/risk-solutions/health www.partnerre.com/risk-solutions/health To see how our experience and insight can work for you, visit: www.partnerre.com/risk-solutions/health Underwritten Underwritten by PartnerRe by PartnerRe America America Insurance Insurance Company Company Executive Executive Office:Office: 199 Fremont 199 Fremont St., San St.,Francisco, San Francisco, CA 94105 CA 94105 Form H0214 Form H0214 by PartnerRe 03/2014 03/2014 Underwritten America Insurance Company Executive Office: 199 Fremont St., San Francisco, CA 94105 Form H0214 03/2014

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Corp. All rights reserved.

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24

May 2014 | The Self-Insurer

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source of income. If your objective is to accumulate a variety of business assets to generate family wealth, then a Group Captive is an alternative that should be evaluated. Some captive owners in low margin industries like trucking could generate more profit from their insurance captive than their trucking operation. Other captive owners can become fanatical in every aspect of risk management once they are engaged from captive participation. Let’s consider a long term outlook on insurance risk financing. Using our Window Company example, the company is paying $450,000 in annual casualty premiums. Over the next ten years that would be about $5,000,000 of pure expense when you include investment income.

Creating Family Wealth So now let’s look at how the family estate can benefit from a captive. Over a 10 year period, we can assume there will be very profitable years, average years and 1-2 catastrophic loss years. The catastrophic losses have limited impact because the captive only retains $300,000. Captive Profit or Deficit

Traditional Premium

Year 1

$100,000

$500,000

Year 2

$25,000

$500,000

Year 3

$250,000

$500,000

Year 4

$10,000

$500,000

Year 5

($200,000 Assessment)

$500,000

Year 6

$250,000

$500,000

Year 7

($200,000 Assessment)

$500,000

Year 8

$50,000

$500,000

Year 9

$25,000

$500,000

Year 10

$100,000

$500,000

Total

$810,000 Captive Profits

$400,000 Window Co. Assessments

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Most importantly, the family estate only participates in the captive profits. The operating entity Window Company will incur any loss assessments, (Years 5&7 in our 10 year scenario) with no impact to the family estate. This is the primary reason why companies rarely leave the captives.

Summary • Captive Work Comp Reinsurance is more efficient than self-insured or deductible programs • Premiums are developed only from the 5 year loss history • Turn an expense into a Family asset. • Run the numbers • Consider other captive opportunities for health insurance, property and uninsured business risks. • Take a 10 year outlook on paying expense vs. asset accumulation n Duke Niedringhaus, ARM is Vice President JW Terrill, Inc. – St. Louis and SIIA Workers’ Compensation Committee Chairman. He can be reached at dniedringhaus@jwterrill.com

$5,000,000 Expense

The Self-Insurer | May 2014

25


EXPLORING

Integrated Health Management Opportunities by Brian Devlin

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May 2014 | The Self-Insurer

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W

hat exactly is integrated benefits program and what is the opportunity for employers looking to improve their sophistication in employee absence management and the associated cost controls?

identification of overlap and waste in the traditional delivery of workers compensation and employee benefit coverage; where active management can contribute to lower budget loads from employee insurance costs.

New technologies provide employers the tools to exploit the overlap and inefficiencies in employee health plans and workers compensation insurance costs. Employers and selffunded operators have considerable financial investment in employee health and safety coverage’s where expense overlap is frequent and excessive.

Integrated benefit models deliver high touch multi disciplinary controls with the intent to barrage very high-risk employee health and safety exposures. These high-risk employees aren’t a high number set; however, an imminent mega health event requires early identification, resource coordination and employee engagement with continuous case management monitoring. Every employer has high-risk employees and many attempt to finance or fund reactive insurance programs without investing intervention resources and controls before a mega event attaches to a policy. Inflationary medical indexes make this a costly funding model. Integrated benefit models allow for enhanced tools that give clarity and importance to case managers. This creates efficiency in delivering coverage appropriate controls. One emerging strategy is delivering field clinicians to engage employees that have real health issues that are silent, emerging or an event complicating comorbidity. This resource targeting strategy is engaging onsite education and resource with employees in poor health. This model is most effective in delivering assets to keep these employees working and invested in lifestyle support and productive employment.

What is It? For a couple of decades “24hr coverage” was heavily discussed but only partially explored and considered. Employers are “married” to their employee’s health and safety practices for better and for worse. These “marriages” are key contributors to inflationary pressures on operational budgets via insurance costs and can lead to erosion of benefits and ultimately profit unless a method of evaluation is implemented. Employee integrated health, in the most distilled description, combines several resources to gain the greatest outcome. The components include delivering an outcome driven employee health management and safety program using data driven case management systems that include onsite engagement activity. Poor individual health choices have been proven to increase the cost of workers compensation programs. On the other end, employee safety practices and workers compensation costs may impact traditional health plan costs by adding to the number of employees needed to fill in for those off work due to injury. Integrated health management allows for the

What Does It Do?

How Does It Work? Integrated benefit models give case managers enhanced tools and improved timing for resource selection and delivery. The other part of this equation is letting technology identify

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benefit activity flags. An example would be an employee sustains an injury to their back on a Saturday working in the yard requiring urgent services; subsequently reporting to work on Monday claiming the injury occurred at work. Integrated benefit programs will catch the double billing and dates of service for a similar injury. This will trigger an investigation of the employee injury and dual claims where workers compensation fraud is occurring. This integrated benefit model is much more flexible and service accurate because they capture both sides of the employee medical cost rather than the traditional silo’s that exist in standard programs. The traditional corridors are breached and opened to case management versus coverage management. This produces an improved outcome with much lower expense by improving data efficiencies.

What Does It Target? Insurance as commodity models might provide short-term budget relief in the traditional market place but over time these short-term savings are replaced by increases in insurance expense. Integrated Health Management models utilize a combined multidiscipline approach of coordinated services to improve highrisk employee health markers that have consequential loads on insurance, lost productivity and loss funding activity. Some employers can expect to have an initial policy year increase in medical expense as high-risk employees engage in diagnostic and preventive medical services. This early intervention targets large health events with imminent mega expense for individuals that self identify or are identified through casualty coverage trending. It is a new model of investing resources in employee health and safety instead of traditional reactive insurance programs. Twenty thousand The Self-Insurer | May 2014

27


dollars in identification and intervention resources will prevent a mega event where costs can spiral in excess of half a million dollars on a per claim basis. Integrated benefits models rely on very specific targeting of impending high expense events.

What are Other Areas to Consider? Besides employee health plans and worker’s compensation expense inefficiencies; third party administrators should consider developing expense models for pension costs, retirement plans, and disability benefits. These are all components of consideration with an integrated model approach. Historically, industry data shows that adverse individual health markers impact expense and costs for employee health and workers’ compensation coverage’s. Individual comorbidities traditionally produce longer-term

28

May 2014 | The Self-Insurer

medical engagement and activity driving costs for return to work and limiting the maximum medical improvement. Historically, loss exposures for both employee health and workers’ compensation often overlap. Health comorbidities have consequences for employee safety and absentee management programs. For a quick review of this phenomena consider a recent case study by an Illinois based insurance program manger group: An employee is hired at 22 years of age. At the time of hire he/she is by all indications healthy and physically fit. Over time and decades, poor individual health choices manifest into the common trifecta of obesity, musculoskeletal degeneration disorders, and diabetes. Any of these three separately pose significant cost loads for traditional plans and policies, combined these comorbidities can overwhelm loss expense forecasting and complicate reserve and loss funding. These three exposures will have corresponding coverage activity on the individual health plan and workers compensation considerations if injured while working. This also places upward pressure on insurance costs year over year. These three common health exposures put extraordinary loads on group health coverage and bleeds into employee safety and workers’ compensation coverage; leveraging operating budgets and insurance costs. Medical costs for unfit employees are up to 3x the cost for services for fit employees. Unfit persons heal slower, require longer term medical engagement and extended physician monitoring for associated comorbidities.

How Does it All Come Together? With an integrated benefit model, case management systems deliver the appropriate coverage benefit and resources across a wide list of disciplines not always provided by traditional standard markets. These markers are identified

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Providing Excess Workers’ Compensation Since 1990 For Single Entities, Groups & Public Entities Provided by an A.M. Best “A” (Excellent) IX Rated Carrier Highlights

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• Aggregate Coverage Available

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29


from individual voluntary biometric panels, traditional Health Risk Assessments, casualty industry data, and employer historical trending. The impact opportunity is extraordinary compared to execution and operational expense for clinical intervention and engagement activities. These case management specialists are clinicians that also engage the appropriate safety systems and employment practice controls for human resource considerations. Technology partnering: Increasingly, more sophisticated employers are employing cost containment strategies by partnering with advanced TPA’s that are pioneering new technology, risk management controls, and advanced case management systems. Integrated benefit models deliver results by trending more loss driven data, delivering precise localized services and controls that target the most at risk employees. The large part of this data lies in many alternative market workers’ compensation databases. Additionally, partnering with strong medical networks for employee health and workers compensation produces data transparency with better outcome possibilities and program familiarity and reduced workers compensation medical costs. Technology advances have improved the immediacy of information delivery and access, allowing for trending predictability for looming expense. Employers with strong market partners and advanced third party administrators increasingly have access to more flexible technologies; taking advantage of customization and industry data familiarity to identify areas of inefficiency and waste. This level of detail provides for an opportunity to engage early intervention options and combined services to improve adverse employee health markers and barriers for return to work and absentee management programs. An example of these critical markers would be an employee who experiences a workplace injury. Systems logic identifies key comorbidities that will adversely impact medical expense, return to work/absentee management, and positive outcome barriers. Case management programs can then engage the employee with the appropriate resources and controls from the correct individual or casualty coverage also utilizing employee safety systems and training options. This is a coordinated effort targeting high-risk employees. Employers and self-funded operators should experience: 1. Decreasing the expense overlap comorbidities drive for traditional coverage’s in group health and worker’s compensation. 2. Certain sources of inefficiency may be eliminated through integrated benefit management systems. For example, advanced third party administrators with an integrated health management model could evaluate a preexisting medical history that could clarify issues in workers’ compensation coverage. 3. Traditional insurance when competing with integrated benefit management models may find it cost prohibitive or impossible to access information normally available with alterative markets with an integrated benefit model. 4. Double billings reduction and billing accuracy are impacted with integrated benefit models. Some health care providers bill both the workers’ compensation insurer and the group health insurer for the same health care services. 5. Improved predictability for loss funding and insurance underwriting. In closing, new and emerging technologies and regulatory intervention options are opening up new ways for progressive case management strategies. These new technologies and systems are identifying expense probabilities and alternative markets are delivering very specific resources and controls in advance of these events. These case management systems coordinate and deliver controls from the most

30

May 2014 | The Self-Insurer

appropriate benefit coverage in advance of a mega expense event. This combined with traditional employee health management and safety systems have long-range budget relief potential in the areas of insurance cost management. These models also require manager training for improved sophistication in employment practice tools for effective employee management and communication skills. n Author Brian Devlin is Vice President of Risk Management Services at Insurance Program Managers Group. In 1997, Brian was recruited to help build a risk management program for a new market mono line workers’ compensation carrier specializing in healthcare and LTC. He was the third employee hired and formed a risk management service platform that expanded into a multi-state operation covering seven states. During this time, clinical-based risk management was expanded for operational healthcare exposures. Brian served as the branch manager and supervisor for the risk management & loss control team. He was responsible for risk management consultant operations, program/service development, TPA services and agency development. IPMG’s rapid growth as an industryleading program manager brought Brian to IPMG in 2004. He was hired in Risk Management Services, responsible for program development, local agent development, and risk management service delivery to the healthcare industry, long-term care operations, distribution companies, equipment manufacturing, and local governmental taxing bodies. Brian soon embedded himself in public entity risk management at IPMG, increasing the scope of service delivery and available resources to clients and program members.

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The Self-Insurer | May 2014

31


Cell Captives Explained: Benefits, Structures and Popularity by Karrie Hyatt

I

32

n the last twenty years, the concept and use of cell captives has become widespread. There are dozens of domiciles worldwide that allow for this structure for captives and that number is growing every year. The popularity of these types of alternative risk transfer vehicles is based on their flexibility – they are more easily launched, they generally require less capital, they can separate risk by lines of business, they can be easily expanded and they can be quickly shut down – as compared to a pure captive.

structure is the original type – the Protected Cell Captive – also known as a segregated portfolio company, a separate accounts company or a private act company, depending on the domicile. However, there are also Incorporated Cell Captives and, most recently, Series LLC Captives.

There are three different types of cell captive structures, with new uses and concepts always in development. The most well-known cell captive

According to Kirk Mooneyham, managing director, Captive Management Services, Wilmington Trust, cell captives are popular because of the flexibility they can offer to owners, “The ability to separate risks by lines of business, geographic region or risk/responsibility centers can be an attractive tool for some prospective

May 2014 | The Self-Insurer

The idea of a cell captive is a relatively new one which grew out of the renta-captives concept utilized by Bermuda and other offshore domiciles from the late 1980s on. The concept amounts to an insurance company allowing outside organizations to access its captive operations for a fee without the financial commitments by those outside companies that would be required to set up their own captive. Based on this idea, in the late 1990s the domicile of Guernsey passed the first official law legalizing cell captives. This law took the rent-a-captive idea and legally segregated the assets of each section of the company from that of the other, creating individual cells. Many other captive domiciles quickly passed similar law, with the first U.S. domiciles, South Carolina and Kentucky, joining the rush in 2000.

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captive owners. A cell structure also gives the ability to easily expand the captive operations to include new types of risks or new insured entities.”

Cell Captives Defined So what exactly are cell captives? A Protected Cell Captive is a legal, corporate entity in which the assets and liabilities are segregated and protected within one or many “cells” within the company, also called the “core.” Each cell is legally independent from the other cells and often from the main core itself. Therefore, each protected cell’s finances must be separately accounted for on the books of the core company. With this structure, the assets of one cell cannot be affected by the liabilities of another. Another type of cell captive structure is the Incorporated Cell Captive. This entity is very similar to the Protected Cell Captive except that each individual cell is incorporated and is considered its own separate legal entity. The core company and the incorporated cells must file separate premium tax returns and are each required to meet the minimum and maximum premium tax limits as legislated by their domicile. The cells segregated by this structure are considered to have “higher and thicker” walls separating them from one another. The third type of cell captive structure is the most recently developed, the Series LLC Captive. A Series LLC is made up of a number of cells, in this case called a Special Business Unit (SBU), where each is treated, for all intents and purposes, as a pure captive. The core company has a minimum capital requirement (that is often quite lower than for regular captives) and when those requirements are met, the SBUs can generally begin operation. Each SBU can obtain its own tax number and will file its own tax returns. One

limitation is that an existing SBU will often only allow a limited range of permitted lines of coverage.

Cell Captive Advantages The segregation of the assets and liabilities of each individual cell of a company is what makes cell captives advantageous. Like pure captives, cell captives enjoy such benefits as lower premiums, more control of risks covered, potential dividends for owners, as well as tax benefits and other tax saving opportunities. The cell captive structure also offers other advantages. • The structure of cell captives appeals to potential captive owners who want the cost benefits associated with captives but who are concerned about

the sharing of risks and financial assets with owners not in their own geographic area or line of business, or only indirectly related to their business. • Once the core company of the cell captive is established, it is relatively quick for new cells to begin operations. • Another appealing aspect is that cell captives can cleave away from the main company and readily transition into a regular or pure captive. This is especially true of Incorporated Cell Captives that will already have separate finances and their own board of directors. • The cell captive structure is very flexible in nature allowing for a

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captive that best meets the needs of its owners. According to Mooneyham, “The biggest advantage cell captives bring to the table is the flexibility they allow for with the design of an overall captive structure. Assets and liabilities can be walled off in number of different ways to make an overall structure much more appealing than a pure captive arrangement.” • Because the capital resides in the core company, cell captives are easier and quicker to close down than a regular captive.

Why So Popular? The advantages listed above explain why cell captives have been taking off over the last decade. Secured assets, lower capital requirements and flexible structure all have their appeals, but another reason may also be driving the growth of this sector of captives. Fewer large companies are forming pure captives, leaving an opening for smaller companies utilizing different types of captive structures to fill in the gaps. “Looking at the captive market in its entirety, larger companies that have formed traditional captives... there are less and less of those companies out there without captives, so we’re going to get to a point where [pure] captive formations and growth of large captives will plateau,” said Ellen Charnley, managing director, Marsh Captive Solutions. “I think companies will always form captives, but we’ll see the real [growth] in the small captive space.” Part of this growth in the smaller captives sector, including cell captives, is that many of the emerging risks tend to be categorized as “high severity, low frequency” risks. Examples of these types of risks are employment practices liability insurance, product recall, errors and omissions, catastrophic, cyber and reputational risk. While many of these risks may never occur, when they do the losses tend to be very high. The cell captive structure is perfectly suited to those types of risks. According to

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Charnley, “There are many risks that an organization could be exposed to but typically wouldn’t want to go out and buy traditional coverage for because it would be cost prohibitive to do so.” Mooneyham agrees that cell captives have to potential to meet the needs of some of the emerging risks in the insurance market. “I see activity with enterprise risks that are difficult to current place in the general insurance market. Risks such as cyber liability, reputational exposures and supply chain elements.” As the cell captive structure heads towards its twentieth anniversary, there seems to be no end to their growth potential. Given their flexibility and ease of set-up, there is plenty of opportunities for cell captives to grow. As this sector of the industry matures, cell captives will no doubt evolve even further. n 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.

As a Stop Loss expert, Berkley Accident and Health can put you on the right path. Our innovative approach to risk management can lead to greater stability, transparency, and control with your self-funded plan. When it comes to risk, let Berkley be your guide.

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ECHO, A Trusted Partner with A Trusted Solution ECHO Health, Inc. is the leading provider of electronic healthcare payment solutions, serving over 45,000 ERISA health plans and fully insured groups through a single secure ERISA, HIPAA and CORE compliant system.

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In Reference to Reference Based Pricing by Ron E. Peck, Esq., Sr. Vice President & General Counsel, The Phia Group, LLC

I

f you’ve been listening to webinars, attending meetings or pretty much been doing anything other than living under a rock, you know that many self-funded plans and their claims administrators are contemplating utilization of a fixed “fee schedule” for pricing purposes, in lieu of the currently predominant network-discount-off-ofbilled-charges approach. More often than not, this fixed “fee schedule” approach utilizes references such as Medicare rates, MSRP, AWP and the like. Everyone agrees that this approach – utilization of a fair market price for services rendered – makes sense from a common sense perspective. Indeed, almost all other consumer goods are bought and sold utilizing this method; we set a fair price for a good or service, adjust the price to take “special considerations” into account, reduce the price to draw attention and lock in the sale, and make the exchange. Comparison shopping and the competition it inspires is as American as apple pie and baseball! Thus, it’s worrisome for many that our health plans currently pay whatever the provider of medical services charges, without any fixed “fair market value” to compare the price to. Further, this results in a lack of price-controlling competition between providers. Providers in turn differentiate themselves from each other based on their services, facilities, accolades, and the like – not on value. We meanwhile, as payers, secure a discount; but is a discount worth

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the paper it’s written on, if the rate is excessively inflated many times beyond the value of the discount? This all seems like a great argument to drop your network and utilize reference based pricing. The problem, however, is that many fail to recognize the many benefits and services we secure utilizing networks, above and beyond discounts. While discounts may be the first thing payers think of when PPOs are mentioned, few if any give full credit to the network for other benefits they provide, until the network is gone. Addressing the vacuum left behind when a network is abandoned is therefore a key requirement for a successful plan.

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To address the problem, we must first stop acting like health insurance is the same as auto or home-owner’s insurance. Unlike a car or house, we can’t shop around, stick a price tag on a replacement, and cut a check to the insured. First; there is assignment of benefits. Unlike auto-insurance, where your carrier issues you (the insured) a check; and you have to make the purchase with this “allowance” in mind, with health plans – the consumer doesn’t look at the bill, because the consumer never deals with payment. By receiving an assignment of benefits, the provider becomes the consumer as well; insofar as they have stepped into the shoes of the insured. They hold the services in one hand, and the purse strings in the other. Second; there is no transparency. Unlike other scenarios, where the insurance carrier issues the insured an “allowance” and the insured must behave as an educated consumer (to ensure they get everything they need with the money they have), in healthcare, there is neither a need nor incentive for consumers (patients) to pick and choose which services to pay for, and which to forego. The services received dictate the funds available; the opposite of all other economic exchanges (where the funds in hand dictate the services purchased). So... Can we eliminate assignment? Just hand cold, hard cash over to the insured, and let them decide what to do with it? Not likely. Unlike cars and contractors, health care is often needed on an emergency basis and people don’t have access to information needed to make informed decisions. Furthermore, our society views medical care as a human right, rather than a consumable good. Perhaps this is why, regarding “assignment of benefits” and our chestthumping idealistic view that patients

should be consumers, when push comes to shove many plan sponsors agree that patients should not have to deal with the actual billing and payment for their care. Unlike a car or home, they should be focused entirely on getting well. Health, unlike “possessions” is a sensitive subject, and one about which consumers cannot possibly make rational decisions. Someone may choose a $15,000.00 compact car over a $30,000.00 sedan, but no one is willing to be frugal when it comes to their health. With this in mind, then, it’s easy to forget that healthcare is an industry, and hospitals are businesses. If we get trapped in ideological debates over morality and values, we miss the plain truth – you can’t force anyone to take less than they are willing to accept as payment in full.You either give them what they want, identify alternative forms of payment, or go elsewhere. As one hospital attorney once said to me, “slavery was abolished many years ago.” With this in mind, try to put yourself in the shoes of the provider, and appreciate the knee-jerk emotional reaction many providers have had to reference based fee schedule payments. Despite the fact that millions of lines of data prove that the provider should make a hefty profit off the reference based payment offered by the plan, the mere suggestion that the provider’s services “aren’t worth what the provider thinks the services are worth” is an affront. I often remark that the difference between a reference based “fair market value” fee schedule and a discount is that, with the fee schedule I don’t need to know what the provider is charging. I only need to know what service the provider provided. With a discount, you need to know what the provider is charging. The problem with discounts is that by increasing the amount charged, the discount can always be nullified.

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A 20% discount can be voided by an increase in the actual fee. Without a market-wide fixed price, from which discounts can be taken, there is no way to truly apply a value to said discount. Why then, do payers still cling to network arrangements? For the “other” unsung consideration referenced above. Networks represent more than a discount. They represent an understanding. They secure a pathway for plan participants to receive care without fear of balance billing. The payer, payee, and patient all know that – if and when care is needed – they know how the process will roll out. Security is the greatest benefit of all in a game based on shifting risk. As previously mentioned, the only way to prevent a provider from balance billing a patient for the difference between an amount charged and an amount paid is: (1) pay the remainder, (2) identify other consideration the provider will accept as payment in full, or (3) agree via contract – prior to payment – on a reduced amount the provider will accept as payment in full. Absent a contract, payers can attempt to disincentivize providers from balance billing (by revoking assignment of benefits and paying patients directly, steering patients to other facilities, and leaking stories of the facility’s abuses to the press), but when push comes to shove, disincentives are not prohibitions. Because there is no guaranteed way to prevent balance billing, many payers are loathe to implement such a reference based pricing methodology, and resort to the network contracts that – albeit perhaps more expensive – also provide comfort and security. For this reason, we are now seeing many benefit plans consider implementation of a reference based price fee schedule for all claims, however, they also explicitly state that the plan will pay “negotiated rates” above all else. The Self-Insurer | May 2014

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They subsequently create a narrow network including only a few providers willing to accept payments only slightly greater than that allowed by the fee schedule, in exchange for prompt payment, steerage, and other nonmonetary consideration from the plan. A number of firms are popping up who specialize in negotiations with providers, whose services are now being deemed to be valuable additions to reference based pricing programs, securing deals with providers before treatment is sought. Employers, administrators, and carriers can then instruct participants regarding which providers accept their plan’s payment in full, and what the repercussions are for visiting another provider instead. A final important thing to consider is how this all impacts stop-loss. Stoploss carriers are thrilled to witness efforts on the part of payers to reduce their expenditures. Innovative cost

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containment efforts benefit stop-loss just as it benefits the plans. Unfortunately, due to the uncertainties described here and elsewhere, and a lack of historical data, stop-loss carriers are having a hard time determining the true savings plans will enjoy using such methodologies, and in turn, are having a tough time calculating discounts they can offer when underwriting coverage for such benefit plans. Stop-loss carriers appear to be dealing with these issues in two ways. Some carriers will assess a plan document that generally limits coverage to – as an example only, 140% of Medicare rates – but assume that the plan will actually pay an average of 180% Medicare (or some other inflated amount); quoting a fee based on this assessment. Other carriers underwrite based strictly on the plan terms – in our example, 140% Medicare – but also provide such a competitively low rate, the plan sponsor is willing to sign on, knowing that additional negotiated amounts are entirely on them to pay. In the first instance, the carrier will accept submissions for reimbursement that include additional negotiated payments (meant to stop balance billing), whereas the second carrier will deny all payments made in excess of the amount set forth in the plan or policy. In these instances, the hope is that the savings from the bargain stop-loss fee is enough to make up for the occasional negotiated amount paid outside the terms of the plan document. For the reasons shared above, the rationale behind industry efforts to define fair market values, set fixed prices, and work with reference based fee schedules is in many ways responsible and common sensical. Unfortunately, we cannot force the providers to accept these payments as payment in full. As businesses, providers have a right to charge whatever they want. Perhaps this experience, more than anything else, is forcing payers to appreciate anew what PPOs bring to the table. While efforts

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May 2014 | The Self-Insurer

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to disincentivize balance billing are ongoing and legal arguments have been made to suggest that providers should not be able to demand more than a reasonable profit, there has been no universally shared concrete nationwide example of case law or regulation that protects patients – absolutely – from balance billing after their plan pays less than the provider’s billed amount. This is what we’re seeing in the industry today; and this is why providers will continue to balance bill. Providers do not balance bill to obtain additional funds from the patient. Providers balance bill to disincentivize plans from screwing around with the status quo. To date, it is a winning strategy. It has become increasingly clear, therefore, that the only reference based price fee schedule programs left standing are those that belong to sponsors that are either willing to have their participants be balance billed, are willing to pay fees to organizations that will “deal” with the balance billing, pre-negotiate with individual providers and/or narrow networks, or are willing to negotiate and pay additional amounts to providers – on a case by case basis. In all four instances, some benefit plans are seeing savings over their past network dependent structures; while others have been disappointed by the results. The bottom line? There is no universal answer. The question for most, then, is whether the savings are enough to counter the headaches suffered along the way. Let’s hope those headaches go away... I don’t feel like paying $75 for an aspirin. n Ron Peck, Sr. Vice President and General Counsel, has been a member of The Phia Group’s team since 2006. As an attorney with The Phia Group, Ron 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. In

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addition to his duties as counsel for The Phia Group, Ron leads the company’s consulting, marketing, and legal departments. Ron is also frequently called upon to educate plan administrators and stoploss carriers regarding changing laws and strategies. Ron’s theories regarding benefit plan administration and healthcare have been published in many industry periodicals, and have received much acclaim. Prior to joining The Phia Group, Ron was a member of a major pharmaceutical company’s in-house legal team, a general practitioner’s law office, and served as a judicial clerk. Ron is also currently of-counsel with The Law Offices of Russo & Minchoff. Ron obtained his Juris Doctorate from Rutgers University School of Law and earned his Bachelor of Science degree in Policy Analysis and Management from Cornell University. Ron is also a Certified Subrogation Recovery Professional (“CSRP”).

The Self-Insurer | May 2014

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

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

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

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May 2014 | The Self-Insurer

Regular Members Company Name/ Voting Representative Kyle Fields, President/COO, Appro-Rx, Waynesville, OH

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

Tim Manaka, President, FIA Insurance Services Inc., Pasadena, CA

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

Shelli Lara, President, Innovative Healthcare Delivery, Las Vegas, NV Leonard August, Vice President, Med-X Medical Management, Matawan, NJ

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

Dave Ryan, Senio Underwriter, RE Sutton and Associates a Divison of Brown & Brown, Carmel, IN Julie Yeh, Marketing and Sales Coordinator, Tropics Software Technologies, Sarasota, FL

CHAIRMAN, HEALTH CARE COMMITTEE Robert J. Melillo VP Alternate Funding Strategies USI Insurance Services Meriden, CT

Brent Haggard, CEO, Universal Fidelity Life Insurance Co., Oklahoma City, OK

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

SIIA New Members

David Smith, Exec Vice President, VRx, Salt Lake City, UT

Silver Member Thomas Nuttle, FACHE, VP Business Development, Cottrill’s Pharmacy, Inc., Arcade, NY

Employer Member Wes Kelley, Executive Director, Columbia Power & Water Systems, Columbia, TN

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