Page 1

May 2015


Self-Insurance Group (SIG)

Trustee Training


New Effort Helps Board Members Develop Deeper Expertise

Excess Excess Workers’ Workers’ Compensation Compensation For Single Entities, Groups, & Public Entities For Single Entities, Groups, & Public Entities For Provided by an A.M. Best “A” IX Rated Carrier For Provided by an A.M. Best “A” IX Rated Carrier

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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


4 Self-Insurance Group (SIG)

Trustee Training



New Effort Helps Board Members Develop Deeper Expertise

Volume 79


From the Bench Three’s a Crowd


INside the Beltway Self-Insurance Protection Act Finds Support Among Congress and Business Groups, with Labor Groups Also Taking a Hard Look


OUTside the Beltway Members March on New York Capital to Support Stop-loss Continuation Bills for Groups of 51-100


Reimbursement Arrangement Guidance


PPACA, HIPAA and Federal Health Benefit Mandates IRS Notice 2015-16: Planning for the ACA Tax on High Cost Employer Sponsored Health Coverage (the so-called Cadillac Tax)

Bruce Shutan

Editorial and Advertising Office

May 2015

P.O. 1237, Simpsonville, SC 29681 (888) 394-5688

2015 Self-Insurers’ Publishing Corp. Officers James A. Kinder, CEO/Chairman Erica M. Massey, President

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

Lynne Bolduc, Esq. Secretary



34 46

Are Onshore Captive Domiciles Gaining an Edge?


SIIA Endeavors Self-Insurance “Locked” in with Latin America


Fighting Fraud and Exaggerated Claims: The Advantage of Social Media Daily Monitoring

Jason C . Davis

May 2015 | The Self-Insurer


Self-Insurance Group (SIG)

Trustee Training


New Effort Helps Board Members Develop Deeper Expertise


n a post-health care reform marketplace, it’s easy to lose sight of any oversight concerns beyond group medical plans, but the workers’ comp area is ripe for closer examination. SIIA’s Workers’ Compensation Committee recently completed a high level presentation for self-insurance group (SIG) trustees in the form of a webinar. Several key learning objectives include an overview of group self insurance, the causes of SIG failures, fiduciary responsibilities, plan administrator and vendor management, financial statements and fund management strategy.

Written by Bruce Shutan 4

The Self-Insurer | www.sipconline.net

TRUSTEE TRAINING | FEATURE When a SIG runs into financial trouble or must dissolve, it’s often because trustees who wear multiple hats at work agreed to inadequate insurance coverage, ignored certified actuarial reports, or made other errors in judgment, according to Stu Thompson, a fund manager of the Builders Group who chairs the committee. Within the construction industry that Thompson is a part of, he notes that his peers may not be all that familiar with the inner workings of reinsurance, investments and employee safety programs. “Being a home builder or electrician or whatever is so much different than overseeing the running of a commercial self-insurance group,” he observes. “That’s one of the biggest reasons to make sure that when you have these new board members they understand what they are getting involved with.”

Baseline Education

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The aim was to develop rocksolid standards by which to monitor the health of SIGs and keep this tool a viable option for employers to serve their workers’ compensation requirements, according to Shelly Brotzge, a member of the committee and senior client advisor at the Midwest Employers Casualty Company, a W. R. Berkley Company. “What we were trying to do is get some real basic training together for trustees,” she says. The reason is simple: Many trustees are business owners who lack expertise or meaningful knowledge of how to handle plan oversight or various issues that arise. Depending on whether there are the bylaws of a particular group, as well as term limits or other reasons for rotating leadership, Brotzge says it may be difficult to find people to serve as trustees on a board. “Primarily for those that are new to

the responsibilities of being a trustee, we felt like this initial training would give them at least an overview of things that they do need to be aware of,” she reports. “It may not serve as the be-all, end-all training [for everyone]. It covers a lot of material in a short period of time. Each one of these sections in this training could probably be pulled apart for a whole separate training event.” New trustees may not fully understand the inner-workings of a SIG and lack formal training, adds Carol DiPietro, another member of the committee and regional VP of Meadowbrook TPA Associates. “In order for a fund to be well run and well managed, you need to have a board of trustees that’s informed and engaged,” she says. Duke Niedringhaus, a SIIA director, member of the committee and senior VP at JW Terrill Inc., says “people were really looking for SIIA to take the lead on trustee training and proper governance.” A roundtable discussion on SIGs at SIIA’s annual conference in Phoenix last October saw a consensus emerge about the need for industry action. Among the suggestions made: a need to institute trustee training and a national SIG manager accreditation program, as well as standards of conduct for brokers, administrators and members of boards of directors with meaningful consequences for violations. Noting that “different companies join self-insurance groups for different reasons,” Brotzge says some may join a SIG just for loss control or to have more of a say in how claims are mitigated. Boards of trustees have a significant number of responsibilities as part of a SIG that they may not have as an individual business owner, according to Brotzge. “As I go across the country and meet with boards of trustees in my regular, nine-to-five job, I do find varying

levels of experience and interest,” she says. “I think some standardization would be good.”

Coast-to-coast Insolvency SIIA’s Workers’ Compensation Committee is attempting to start a dialogue with the National Association of Insurance Commissioners to address lax regulation at the state level that has been blamed for various SIG failures, but also avoid an “overreaction” to certain market conditions, Thompson reports. “There were a lot of good groups in New York, but they were brought down by some of the bad ones,” he says. The webinar noted that New York regulators in 2008 shut down eight “trusts” that were managed by the same administrator, whose state license was revoked – leaving behind a deficit of $500 million. It also addressed conflicts of interest involving group administrators and TPAs seeking to grow their business by keeping rates artificially low and understating losses. “As a trustee, you must focus exclusively on the best interest of the fund,” according to the presentation. When voting on SIG premiums, for instance, it’s verboten to “consider the negative impact the rate increase will have on your own company.” In California, Niedringhaus notes that regulators significantly increased the collateral requirements of SIGs. But he also points to several fairly high-profile SIG insolvencies in Kentucky, Tennessee and Illinois. Many of the large cases are driven by a difficulty tracking the development and changes in workers’ comp systems, as well as adverse loss development being significantly higher than anticipated, he explains. “Our general attitude is that a problem anywhere in the country May 2015 | The Self-Insurer


TRUSTEE TRAINING | FEATURE is a potential problem for any SIG,” according to Niedringhaus. “When you have an insolvency, whether it’s in California or New York, it impacts the entire industry.” In some states, he notes that the regulatory focus is on high-hazard industries such as timber or electric cooperatives whose challenging workers’ comp exposures inherently endure market cycles in the SIGs. “If I look broadly across the country at things that are happening with selfinsurance groups, part of the concern is how they are regulated,” Brotzge says. “It varies by jurisdiction. Every state is going to have different rules to the point where in some states the Department of Insurance regulates selfinsurance groups. So they’re watching them fairly similarly to how they would look at the solvency of an insurance company like a Hartford or a Travelers or a Liberty Mutual.”


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In other states, she notes that SIGs are regulated by either a department of workers’ claims or industrial commission whose oversight may be significantly different, while another key geographic difference is the existence of guarantee funds to prevent SIG failures. Brotzge lives in Kentucky, where she recalls a large, heterogeneous fund failure in the early 2000s sparked a regulatory shift to the state’s Department of Insurance from the Department of Workers’ Claims.Thompson credits a large collateral requirement in Minnesota where he’s based for having prevented SIG failures.

Deeper Training Once SIG trustees master the remedial issues, Brotzge says they’ll be given access to other training sessions a deeper focus to improve their effectiveness. Another aspect SIIA’s Workers’ Compensation Committee hopes to develop is best-practice standards. Devising best practices for trustees can be a very valuable tool from a claims management perspective in helping know how to measure the performance of insurance carriers and administrators, according to DiPietro. Brotzge believes that establishing a national accreditation program that holds trustees accountable could prove to be a serious challenge, especially for an organization like SIIA. Her concerns involve reaching a consensus on the level of training and expectation of individuals. Thompson also worries about potential liabilities associated with a SIG trustee accreditation if poor decisions are made and which entity would be responsible for any financial difficulty or insolvency.


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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. BRAD-5072

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May 2015 | The Self-Insurer


Imagine if your credit card billed like a hospital Your credit card bill would show up in the mail stating nothing more than:

...that’s it? I bet you are on the phone within seconds. You would DEMAND to know what the charges were for, whose idea it was to send out such a shady bill, and then you would get that person on the phone and tell them you are canceling the freaking card. As a savvy consumer you know the burden of proof falls on the retailer and not on you—so you have every right to ask for verification.

Of course they want to keep your business, so they kindly offer you 20% off of your bill. Feel better? ABSOLUTELY NOT! A discount on a bill with no details? Double-shady. You see where we are going. It is insanity; no one would put up with it. Guess what makes this even better? Just like that credit card, the burden of proof falls on the hospital, so why, for the love of common sense, is no one making that phone call?

Well, no one but us. We have those people on speed dial. To learn more about how AMPS can help you:  www.advancedpricing.com 8

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Somewhere down the road, DiPietro believes there will be many opportunities for SIGs to branch out into other lines of coverage, such as captives, as well as a combined focus on medical case management between group insurance and workers’ comp. Looking ahead, Niedringhaus notices one key trend will be devising a solution for out-state exposure, which for some SIGs is a critical part of their success. Despite growing concern about SIG solvency, he believes the industry is still on solid footing. “There’s certainly not any kind of noticeable growth in the sector as far as new SIGs being created, but the ones that are out there and have been doing what they’ve been doing for a number of years,” Niedringhaus says. “We continue to see that they’re going to be very solid work comp alternatives that will, in general, outperform the traditional market.”

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

Acknowledging a reduction in SIGs in recent years, Thompson believes the ones that survived the Great Recession “are doing well and have become stronger,” having learned critical lessons through difficult times. Brotzge doubts that there will be much growth in SIGs and predicts more fund failures unless better solutions are developed to help SIGs manage their solvency. “It’s difficult to start a group now,” she observes. “Most states require that a particular amount of money be made available. You could have a member that has a very large claim on the first day that the coverage is effective. So I think from that standpoint, it may be a challenge to start new groups.” ■

SIIA has produced a multi-media presentation focused on helping SIG trustees better understand self-insured workers’compensation programs and their specific governance role. Entitled “The Essential Trustee,” this is a PowerPoint presentation with recorded voice-over that can now be accessed through the Resources (other resources category) section of www.siia.org.

Specific presentation topics include: • Overview of group self-insurance • Causes of self insurance group failures • Fiduciary responsibilities • Plan administrator and vendor management • Financial statements

Bruce Shutan is a Los Angeles freelance writer who has closely covered the employee benefits industry for more than 25 years.

• Fund management strategy

May 2015 | The Self-Insurer


Bench From the

Three’s a Crowd


he Group is peeved that the stop-loss reimbursement claim has not been paid, even though their TPA paid the underlying claim under the Plan. What can happen under such circumstances? As we all know, lots. I infer that the group, either through counsel or directly, asked the TPA why the TPA paid the claim if the stop-loss carrier has refused to pay it, on whatever basis (exclusion under the Plan, under the stop-loss policy, lack of eligibility, or a host of other possible reasons). The TPA will respond that the stop-loss carrier is wrong, being unreasonable, etc. What will the group do next?

Written by Thomas A. Croft, Esq. 10

The Self-Insurer | www.sipconline.net

One option is for the group to sue (or initiate arbitration against, if the stop-loss contract so provides) the stop-loss carrier, on the theory that the claim denial was improper, add

a claim for “bad faith” under one or more of several theories and see how that plays out, leaving the TPA out of the equation. Another, more aggressive option, is to sue both the TPA and the stoploss carrier, arguing that the group did nothing wrong and that either, in the alternative: 1) the stop-loss carrier denied the claim improperly; or 2) the TPA breached its contract with the group and/or negligently paid the claim without adequate investigation. Alternative pleading is perfectly permissible, essentially allowing a claim that says either party #1 is liable or party #2 is liable – either way the group is entitled to a recovery – or so the pleading goes. Another option for the group is to cut a deal with the TPA which says, essentially, that if we don’t win our case against the stop-loss carrier then the TPA agrees to make up the difference.

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

Yet another option I have seen recently is for BOTH the TPA and the group to sue the stop-loss carrier for improperly denying the claim, for bad faith, etc. This is a defective choice in my view, as the TPA has no cause of action against the stop-loss carrier whatsoever. There is no contract between the TPA and the stoploss carrier. Therefore, there cannot conceivably be a breach of contract action. The TPA is the agent of the group – NOT the stop-loss carrier – and it has no rights against the stoploss carrier capable of enforcement in my view. So what explains such cases? One possibility is that the TPA has agreed to indemnify the group for its losses, but wants to piggyback on the group’s (now completely indemnified) claim against the carrier. If there was a valid assignment of the group’s claim against the carrier in return for the TPA’s promise of indemnity, then it is the TPA – and ONLY the

TPA – that has any cause of action against the stop-loss carrier as the “real party in interest,” i.e., the only entity with a real economic stake in the controversy. The group no longer has any damages because it has been indemnified by its TPA. Federal Rule of Civil Procedure 17(a) – and most state analogue rules – require that an action be prosecuted in the name of the “real party in interest.” The typical remedy for an action not being prosecuted in the name of the party with the true economic interest in the transaction is, after a motion or objection by the defendant, that the “real party in interest be substituted “for the plaintiff who isn’t. Often, such a motion cannot practically be brought until after some discovery takes place and the agreement between the TPA and the group is disclosed. A grant of such a motion would eliminate the group from the case. Tactically, I do not think this serves the group well, as leaving the TPA as the only plaintiff in the suit seems somehow less compelling than having the insured group as the sole plaintiff. (Rule 17(a)(3) speaks in terms of “ratification” by the real party in interest as an alternative to substitution, but in my experience, substitution is the more likely outcome.) Under many of the scenarios described above, the defending party (be it the carrier or the TPA) will try to add the “missing party” to the case via what is known as a “third-party action.” For example, a stop-loss carrier might attempt to add the broker or the TPA to the case in a case where the broker/TPA participated in the disclosure process and there was a disclosure-based denial of a large claim. The theory of the carrier might be that the broker/ TPA was negligent in gathering/

providing the disclosure information and should pay all or some of the judgment in the event the group prevails in the case. (There may be many reasons the group chose to sue the stoploss carrier only – the group did not believe that the broker/TPA did anything wrong, a long-time business relationship with the broker/TPA, trial tactical reasons, etc., etc.). In any event, “adding” a party to a case via a third party action is not as simple as it might seem. In the hypothetical above, under Federal Rule of Civil Procedure 14(a)(1), one must get permission from the Court in most circumstances to add the additional party and, whether or not permission is required, must ultimately show that the nonparty “ is or may be liable to it for all or part of the [plaintiff ’s] claim against it.” Otherwise, the thirdparty action is defective and subject to dismissal upon motion of the proffered third-party defendant, the plaintiff, or both. In the above hypothetical, the stop-loss carrier is essentially trying to add the broker/TPA on the theory that the alleged disclosure problems were the fault of the broker/TPA, or at least partially so, such that the broker/ TPA should share in the liability to the group, should there be any. This should not work under existing procedure in the federal – and most state – courts for the following reasons. First and foremost, the broker/TPA could never be liable to the stop-loss carrier defendant: the broker (or TPA) is the agent for the group in the selffunded context and has liability, if any, to the group and only the group and the group has not sued them. So, the stop-loss carrier’s claim cannot meet the threshold test for bringing in a third-party defendant – the broker/TPA cannot be liable to “it.” (Actual fraud May 2015 | The Self-Insurer


might be an exception, but is beyond the scope of the discussion here.). One “end-run” attempted by the carrier in such a situation may be to attempt to rely on the “contribution” statutes of the State’s law applicable to the controversy. Contribution is typically provided in one of many forms in the several states. Essentially, the concept is that where two parties combine to cause a single injury to an injured plaintiff, the liability is apportioned between them in the manner specified by the applicable contribution statute. In the above hypothetical, the carrier would argue that the broker/TPAs actions in allegedly providing defective disclosure and the actions of the carrier (in denying the claim) somehow “combined,” such that an action for contribution lies between the carrier and the broker/TPA, thus providing the predicate for a Rule 14(a)(1) thirdparty action by the carrier against the broker/TPA. This may sometimes be a tactical move by the stop-loss carrier to attempt to implicate the broker/ TPA’s E&O coverage and bring it to the table at a mediation and/or at trial. The astute reader will see the flaw in this tactic. It is this: if the carrier improperly denied the stoploss claim, then nothing the broker/ TPA did caused any damage to the group. Put differently, either there was no disclosure problem sufficient to deny the claim so the stop-loss carrier wrongfully denied it, or there was negligent conduct by the broker/ TPA sufficient to cause a disclosure problem justifying a denial, in which case the stop-loss carrier is not liable for anything. It’s one or the other; it can’t be both. In neither event could the broker/TPA be liable to the stop-loss carrier, and the prerequisites of Rule 14(a) are not present, such that the third-party action should be dismissed. 12

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[There is a related problem – beyond the scope of this article – regarding the status of the broker/TPA and the stop-loss carrier as “joint tortfeasors” under state law – typically a requirement for any valid contribution action to lie. I will spare the reader a discussion of that, but I don’t think it alters the result.] To summarize – there are a myriad of possibilities and angles when brokers, TPAs, groups and stop-loss carriers become embroiled in multi-party litigation. These can be expensive to sort out. The existence of arbitration clauses in either the stop-loss contract or broker agreement or TPA agreement can compound these exponentially. For example, can the broker/TPA be compelled to participate in an arbitration required by the stop-loss contract for claims disputes? The law on these kinds of issues is unclear and evolving and may be the subject of future articles. In the meantime, the old saw about two being a “party” and three (or more) being an unmanageable “crowd” applies in my judgment. At the National Conference in October, I will be narrating a full-fledged “mock mediation” of a three-party dispute between a carrier, a TPA and a self-insured group, complete with counsel, party representatives and an experienced mediator. Those with interest in these kinds of issues may want to attend. ■ Tom Croft is a magna cum laude graduate of Duke University (1976) and an honors graduate of Duke University School of Law (1979), where he earned membership in the Order of the Coif, reserved for graduates in the top 10% of their class. He returned to Duke Law in 1980 as Lecturer and Assistant Dean (1980-1982) and as Senior Lecturer and Associate Dean for Administration (1982-1984). He also taught at the University of Arkansas-Little Rock law school, where he was an Associate Professor of Law (1990-91), earning teacher of the year honors. Until 2004, when he specialized in medical stop-loss litigation and consulting, Tom practiced general commercial litigation. He was a partner in the litigation section of a major Houston firm in the late 1980s and moved to the Atlanta area in 1991. He has been honored as a Georgia “Super-Lawyer” by Atlanta Magazine for the last eight years running and holds an AV® Preeminent rating from Martindale-Hubble®. Tom currently consults extensively on medical stop-loss claims and related issues, as well as with respect to HMO Excess Reinsurance, Medical Excess of Loss Reinsurance and Provider Excess Loss Insurance. He maintains an extensive website analyzing more than one hundred cases and containing more than fifty articles published in The Self-Insurer Magazine over many years. See www.stoplosslaw.com. He regularly represents and negotiates on behalf of stop-loss carriers, MGUs, Brokers, TPAs and Employer Groups informally, as well as in litigated and arbitrated proceedings and has mediated as an advocate in many stop-loss related mediations. Tom can be reached at tac@xsloss.com.

May 2015 | The Self-Insurer


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


the Beltway Written by Ryan Work

Self-Insurance Protection Act Finds Support Among Congress and Business Groups, with Labor Groups Also Taking a Hard Look Reports on evolving legislative and regulatory issues will be focused “Inside the Beltway” for federal matters and “Outside the Beltway” for issues of the states. Stay tuned each month for the latest developments.


embers of Congress and several key players within the U.S. business community expressed support for the Self-Insurance Protection Act (SIPA) which was introduced in Congress as S. 775 and H.R. 1423. The bill would clarify existing law to ensure that federal regulators cannot redefine stop-loss insurance as traditional health insurance. SIIA worked for introduction of the legislation originally during the previous Congress and in the current session. “Given the continued uncertainty we see in the broader health insurance marketplace, the timing of this legislation is particularly important in order to ensure stability in the self-insured market segment,” said SIIA President and CEO Mike Ferguson. “Self-insured health plans often work particularly well for both plan sponsors and plan participants, so it should be in everyone’s interest


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that Congress take action to prevent any possible market disruption due to unwarranted regulatory action.” Many self-insured employers who rely on stop-loss insurance would be forced to discontinue their health plans if federal and state regulators continue to advocate for identifying such plans as health insurance. At present, selfinsured employee health plans cover approximately 100 million in the U.S., amounting to 61 per cent of the commercial health insurance market. U.S. Representative Phil Roe (R-TN) joined Senators Bill Cassidy (R-LA) and Senate HELP Committee Chairman Lamar Alexander (R-TN) to introduce SIPA. Notably, Rep. Roe and Senator Cassidy are both physicians who understand the importance of self-insured plans and the stop-loss insurance that makes them feasible. SIIA CEO Ferguson, Senior Director of Government Relations Ryan Work and Washington Counsel Chris Condeluci worked with the Senate HELP Committee and House Education and Workforce Committee staffs as well as the staffs of individual legislators on introduction of the SIPA bills. “Stop-loss insurance is an essential tool for these employers as it helps to manage financial risk while providing

employers more flexibility in designing the right plans for their workers,” said Rep. Roe as the bills were introduced. “This legislation will simply prevent federal regulators from redefining and regulating this safeguard as traditional health insurance, which it was never intended to be.” “We need to protect health care options that give patients the power, like self-insured health plans,” said Sen. Cassidy. “By protecting stop-loss coverage, millions of employers can continue offering health care to their employees without the risk of a health care claim hurting their business. This bill is one way to ensure that many families can keep the doctors and the health care plans they have and like.” With the goal of bipartisan support in both houses of Congress, former Representative Bart Stupak (D-MI) continues to represent SIIA in visits to many Democrat representatives to assure them that SIPA is not intended to be another piece of legislation simply attacking the Affordable Care Act (ACA). Most Taft-Hartley health plans covering labor organizations are also self-insured and would be strengthened through passage of SIPA, so SIIA has also engaged several of its


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May 2015 | The Self-Insurer



Schedule of



Self-Insured Workers’ Compensation Executive Forum May 12-13, 2015 Windsor Court Hotel | New Orleans, LA SIIA’s Annual Self-Insured Workers’ Compensation Executive Forum is the country’s premier association sponsored conference dedicated to self-insured Workers’ Compensation employers and group funds. In addition to a strong educational program focusing on such topics as analytics, excess insurance, wellness initiatives and risk management strategies, this event will offer tremendous networking opportunities that are specifically designed to help you strengthen your business relationships within the self-insured/ alternative risk transfer industry.


More Info coming soon! Self-Insured Executive Summit September 14-16, 2015 Apex City of London Hotel | London, England


35th Annual National Educational Conference & Expo

October 18-20, 2015 Marriott Marquis | Washington, DC SIIA’s National Educational Conference & Expo is the world’s largest event dedicated exclusively to the self-insurance/ alternative risk transfer industry. Registrants will enjoy a cutting-edge educational program combined with unique networking opportunities, and a world-class tradeshow of industry product and service providers guaranteed to provide exceptional value in three fastpaced, activity-packed days.


The Self-Insurer | www.sipconline.net

› For more information visit


members who are active in this market space to help build union support.

Stop loss insurance and Assist America...

Th e

Pe rfe

ct Pa i



The Self-Insurance Defense Coalition (SIDC), a broad group of employer and industry organizations organized by SIIA, quickly announced its support of SIPA. SIDC is comprised of the Council of Insurance Agents & Brokers (CIAB), the National Association of Manufacturers (NAM), the Heating, Air-Conditioning & Refrigeration Distributors International (HARDI), the National Association of Health Underwriters, the National Association of Wholesaler-Distributors, the National Association Management Group, the National Retail Federation and the U.S. Chamber of Commerce. SIDC’s letter to Senators Cassidy and Alexander expressed “strong support” for SIPA so that employers and Taft-Hartley plans remain “able to continue providing quality health benefits to their workers and members through self-insured group health plans.” As work continues to encourage bipartisan support in Congress, SIIA members have been enlisted to contact their Senators and Congressmen with appeals to support SIPA. Further indications of Congressional support and SIIA grassroots activity will be covered in future issues of The Self-Insurer. ■

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

For questions or to obtain support materials to pass along to colleagues for their communications to representatives, contact Ryan Work in SIIA’s Washington legislative office at (800) 851-7789 or rwork@siia.org.

Advantages of Attaching Assist America to a Stop Loss Product Risk Management Advantages: • Early intervention on an accident or medical emergency

significantly decreases the severity and magnitude of the incident. Assist America is able to get medical help to the traveler from the closest, most appropriate source possible.

4 This will both drive down claims costs and give the employee the best care possible. • When the assistance claims are paid for by Assist America there is a lowered risk of hitting both the aggregate and specific deductibles.

4 Specific deductibles could be hit with one medical evacuation without our assistance. Problem: One medical emergency may be all it takes to hit your deductibles. Solution: Assist America, since 1990. For more information, email Assist America: stoploss@assistamerica.com

May 2015 | The Self-Insurer



the Beltway Written by Ryan Work

Members March on New York Capital to Support Stop-loss Continuation Bills for Groups of 51-100


IIA took a dose of reality to New York legislators with messages from thousands of residents and voters delivered personally to their Albany offices. A platoon-sized group of SIIA members and allied stakeholders met with members of the New York Senate and Assembly in support of bills that would protect the self-insured employee benefits plans of many smaller employers in 2016 and beyond. The SIIA members asked senators and assembly members to pass S.2366 and A.1154, which would protect the ability of self-insuring employers to continue stop-loss contracts for groups of 51 to 100. Under current New York law, stop-loss policies for groups in that range would be prohibited after January 1, 2016, part of legislation that structured the state’s application of the federal Affordable Care Act (ACA). Regarding earlier passage of a law increasing the definition of “small employers” to conform with the Affordable Care Act (1 to 100), Senator James Seward (R-Otsego) admitted, “We didn’t really see the impact (of increasing the state’s stoploss ban) on self-insured entities at that time.” Sen. Seward, chairman of the Senate Insurance Committee, is the primary sponsor of S. 2366. 18

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He was joined by Assemblymember Kevin Cahill (D-Ulster), chairman of the Assembly Insurance Committee who sponsored A.1154, in speaking with SIIA members prior to their Albany Lobby Day. Similar stop-loss continuation bills were introduced in the 2014 legislative session with mixed results. The Senate bill was passed with a bipartisan majority but the Assembly bill failed to gain traction and was never brought to a vote in the Insurance Committee. “I know how important stop-loss is for insurers – it’s an essential part of health care,” Assemblymember Cahill told the SIIA group. Senator Seward and Assemblymember Cahill and key members of their staffs joined in a pep-rally of sorts with 20 SIIA members before their walk to Albany’s historic state capitol where group meetings were scheduled for them in 32 offices of Senators and Assembly members. Scheduling was weighted toward Democrat Assembly members to make sure they understand the importance of stop-loss insurance to smaller employers who sponsor self-insured plans. Sen. Seward, now in his 20th year in the New York Senate, was effusive in his support for the stop-loss continuation bill in addressing SIIA members. “We shouldn’t undo what’s working today,” he said regarding the possible cessation of stop-loss insurance for thousands of smaller employers. He echoed the oftrepeated words of President Obama to the effect that people who like their current health plans should be able to keep their health plans. “If we don’t pass these bills there will be a major disruption in the market next year,” he added. Assembly Insurance Committee chair Cahill signaled possible bipartisan support for the stop-loss continuation bill when he said,

“We need to make sure people get the coverage they need so that they get the health care they need.” SIIA has identified approximately 1,700 employers with almost 130,000 employees whose health plans are threatened under current New York law. “We’re just asking for a continuation of the historic practice,” noted one SIIA member in attendance. The SIIA group included Robert Melillo, Second Vice President and Head of Stop-Loss for Guardian Life Insurance Company and chair of SIIA’s Health Care

Committee. In the Albany meetings he noted the power of relaying concerns of voters to legislators. “When you talk about the needs of so many thousands of residents and voters in their districts, that really gets their attention. When they heard the actual numbers of employees involved they picked up their pens and started making notes,” he said. Mr. Melillo noted that a significant portion of Guardian’s group insurance clients have fewer than

“Most of the legislators we visited were not aware of the impending deadline and the possible loss of stop-loss insurance for this marketplace,” he said. “Once (SIIA) participants briefly explained the history and why we were concerned, most legislators quickly understood our position. It wasn’t topof-mind for them but when we could link it to the sponsors and the issue at

hand we received significant support.” Mr. Sernyak won’t let the issue fade following the Albany meeting. “SIIA has led the way to organize these meetings to make the most of our members’ time for hopefully a good outcome. I will continue to support local and national efforts whenever asked and encourage my colleagues to join in – it’s imperative to our industry’s future.”

SIIA Members Attending New York Lobby Day Chris Arnold, Reagan Companies; Jim Bushey, UltraBenefits; Stella Chung, HHC Group; Joe DeCresce, Guardian; Don Doerr, POMCO Group; Tom Doran, Medical Risk Managers; Richard Fleder, ELMC, LLC; Pat Gillespie, Cigna; Brooks Goodison, Diversified Group; David Kane, York International Agency; Michelle Marto, United Healthcare; Brian Meara, Guardian; Robert Melillo, Guardian; Maggie Moree, Aetna; Bruce Roffe, HHC Group; Chip Sernyak, CoreSource; Charlie Soleau, Diversified Group; Manny Yifat,

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Leading Edge Administrators.

100 employees. “The prohibition of stop-loss coverage for the 51 to 100 employee segment in New York would eliminate our ability to help our broker and consultant partners migrate groups with an interest in self-funding to a solution that includes stop-loss coverage.” Chip Sernyak, Regional PresidentNortheast of CoreSource, noted that legislators he met were generally unaware of the stop-loss continuation bills prior to the SIIA groups’ visits.

The Albany Lobby Day group included (from left) Don Doerr, POMCO Group; Stella Chung, HHC Group, Reporter Dave Kirby; Bruce Roffe, HHC Group and SIIA’s Adam Brackemyre.

May 2015 | The Self-Insurer


Manny Yifat, Director of Product Development of Leading Edge Administrators in New York City said that his clients’ losing stop-loss protection would mean, “They will no longer be able to self-insure and will have to provide worse benefits at a higher cost. They may even be forced to drop coverage altogether.” He added, “SIIA did a great job of putting together the program and having a clear agenda, making sure we could speak to the legislators who were in the right position to support the bills. I will definitely continue to participate in future advocacy and will push my clients and colleagues to do so as well.” SIIA’s Adam Brackemyre of the Washington, DC legislative office worked with New York counsel Tom Faist in arranging the itinerary of legislative meetings. “Our lobbyist is just one person and can only meet with so many legislators at one time,” Brackemyre said. “We had 20 industry experts, many of them constituents of the legislators they visited. Many Senators and Assembly members said they would contact the bill sponsors’ offices and we had four legislators agree to cosponsor the legislation after meeting with our group.” With an indefinite deadline for final consideration of the bills within the leisurely schedule of the New York Legislature, SIIA will continue to work toward passage of a stop-loss continuation law. Opportunities for SIIA members’ grassroots efforts will continue to emerge. In the meantime, phone calls or visits to members’ New York representatives are vitally important. Contact Adam Brackemyre in SIIA’s Washington office at (800) 851-7789 or abrackemyre@siia.org. ■ Lobby Day participants from Central and Western New York meet up with participants from New York City Team and discuss their group meetings and find legislators are sympathetic to SIIA’s legislation.


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As a Captive Director, Risk Manager, VP of HR or CFO, QBE’s Medical Stop Loss Reinsurance and Insurance can help you manage those benefit costs. With our pioneering approach to risk and underwriting, we make self-insuring and alternative risk structures possible.

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Reimbursement Arrangement Guidance


ome much anticipated guidance and some temporary relief, has been received from the IRS recently in the form of Notice 2015-17. IRS Notice 2015-17 elaborates on the IRS’s position with regard to the application of Code Section 4980D to certain types of reimbursement arrangements.

Code Section 4980D of the Internal Revenue Code sets forth the excise tax, above and beyond the ‘pay or play’ penalties, that may apply to failures by an employer sponsored group health plan to comply with specific coverage mandates and prohibitions as set forth in the Patient Protection Affordable Care Act (PPACA). The Notice reiterates previous guidance that employer payment plans are group health plans and therefore subject to the market reforms set forth in the PPACA. Employer payment plans, as referenced in Notice 2013-54, refer to any arrangement whereby employers reimburse employees for some or all of the premium expenses incurred for an individual health insurance policy or directly pay premium expenses for an individual health insurance policy.

Written by Cori M. Cook, J.D. CMC Consulting, LLC 22

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Notice 2015-17 was released in late February of this year to supplement and clarify some of the vagueness associated with Notices 2013-54 and 2013-40 that were released two years ago. The new guidance applies to: transition relief for small employers from the applicable excise tax under Code Section 4980D; payment plans established by S-Corps for employees who also hold 2% or more

in shares; Medicare premium reimbursement arrangements; TRICARE related HRAs; salary increases to assist employees with coverage in the marketplace; and tax treatment of employer payment plans.

Transition Relief for Small Employers It has not been uncommon for certain employers to offer reimbursement of health care costs to their employees, or at least certain employees. In Notice 2013-54, the IRS held that these employer payment plans are not in compliance with PPACA and employers will therefore be subject to an excise tax until compliance is established. These employers will also be required to file IRS Form 8928, essentially detailing their violations (self-reporting requirement). However, this latest notice from the IRS gives small employers only a very welcome transitional relief until June 30, 2015, providing them extra time to essentially eliminate the varied employer payment plans and replace them with an option that complies with PPACA and avoid any tax consequence and the selfreporting requirement. Please Note: This transition relief does not apply to Applicable Large Employers (ALEs). According to the regulators, a suitable alternative, the SHOP Marketplace, is up and running for small employers. The IRS realizes that these changes take a significant amount of time to understand, let alone implement and are holding off on the penalty phase to allow small employers to transition. Unless we hear otherwise, beginning July 1, 2015, full enforcement of this provision of PPACA will become effective and small employers will be treated as the ALEs are being treated today.

Treatment of S-Corporations As it currently stands, if an S-Corp pays or reimburses premiums for individual health care coverage of an employee who is also a 2% or more shareholder, the payment counts as income, but this amount is deductible under Code Section 162(l).

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The IRS mentions in Notice 2015-17 that “[t]he Departments are contemplating” whether or not to make this particular activity subject to any market reforms. For the moment a (quick) sigh of relief may be in order, as least through the end of 2015, as they’ve acknowledged no excise tax will be assessed for failure to satisfy the market reforms simply because they have this 2% shareholder-employee healthcare arrangement. The Notice reiterates the single-employee exception under Code Section 9831(a)(2), which provides that if a group health plan has fewer than two participants who are current employees on the first day of the plan year, it generally is not subject to market reforms. The IRS mentions this to set the foundation for its clarification that if an S-Corp has more than one employee and a healthcare reimbursement arrangement is available for each employee, even if only one of those employees is a 2% shareholder, the reimbursement arrangement for the employees actually constitutes a group health plan subject to market reforms. The IRS goes on to state that if an employee is covered as a spouse or dependent of another employee, the arrangement would be considered as covering only one employee. (For example, if an employer has two employees and has implemented a healthcare reimbursement arrangement for both, they get a two-for-one deal so long as one employee is covered under the plan of the other as a spouse or dependent).

Medicare Premium Reimbursement Arrangements Under Notice 2013-54, reimbursement or payment by an employer for Medicare Part B and/ or D (all or in part) premiums are considered employer payment plans. Additionally, these employer payment plans cannot be integrated with Medicare in hopes of complying with PPACA because Medicare is not considered a group health plan. If an employer payment plan is set up for more than two employees, the employer again has a situation where a group health plan is formed and is subject to market reforms. However, Notice 2015-17 ensures employers that under certain circumstances, employer payment plans that reimburse Medicare Part B and/or D premiums are considered integrated with a group health plan and therefore permissible if: 1. The employer offers a group health plan (other than the employer payment plan and/or excepted benefit coverage only) to the employee that provides minimum value; 2. The participating employee is actually enrolled in Medicare Parts A and B; 3. The employer payment plan is available only to those enrolled in Medicare Part A and Part B or Part D; and 4. The employer payment plan limits reimbursement to Medicare Part B or Part D premiums and excepted benefits, including Medigap premiums. Please Note: The Medicare Secondary Payer Regulations still apply.

TRICARE Related HRAs Similarly, for integration purposes, an employer payment plan cannot May 2015 | The Self-Insurer


be integrated with TRICARE in hopes of complying with PPACA because TRICARE is not considered a group health plan. Payments or reimbursements made by an employer for some or all of the medical expenses for employees covered by TRICARE will be considered a Health Reimbursement Account (HRA) and subject to market reforms if covering two or more active employees. Notice 2015-17 provides, however, the HRA arrangement will satisfy the market and healthcare reforms under the following conditions: 1. The employer offers a group health plan (other than the HRA and/or excepted benefit coverage only) to the employee that provides minimum value; 2. The employee is actually enrolled in TRICARE; 3. The HRA is only available to those enrolled in TRICARE; and

4. The HRA is limited to reimbursement of cost sharing and excepted benefits, including TRICARE supplemental premiums. Please Note: Similar to the Medicare Secondary Payer Regulations, employers are prohibited from offering incentives to employees to decline employersponsored group health coverage.

Salary Increases for Employees In an attempt to circumvent many of the issues set forth above, employers have been increasing salaries for their employees in an effort to assist in the payment of coverage in the individual market. However, according the Notice 201517, this type of arrangement will not be considered an employer payment plan if and only if the increase in salary is not dependent upon the employee purchasing coverage. If the employer

demands proof of purchase or pays for the coverage directly, however, that action does constitute an employer payment plan.

Tax Treatment Revenue Ruling 61-146 allows, under certain conditions, the reimbursement of premiums (directly or indirectly) for non-employer sponsored coverage to be excluded from the employee’s gross income. However, it is important to remember that this Revenue Ruling has a narrow focus. As set forth in Notice 2015-17, arrangements whereby employers are providing reimbursements and/ or payments (pre or post tax) will likely be considered employer payment plans, group health plans and therefore subject to the market reform provisions of PPACA as well as the potential excise tax under Code Section 4980D.

It’s all about you at Meritain Health Client-centric, customized healthcare plans Your employee population has unique needs. We get it. That’s why Meritain Health works with you for custom-fit benefits. You can pick and choose from our product suite, or opt for your own preferred vendors. And you can rest easy that you’ve chosen the benefits your workforce needs for good health.

To learn more about our customized benefit plans, contact Meritain Health at 1.800.242.6226. Or visit us online at www.meritain.com.

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


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May 2015 | The Self-Insurer


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The guidance provided in Notice 2015-17 has been helpful in clarifying the Departments position and I anticipate that additional guidance will be forthcoming. In the interim, for all those employers sponsoring group health plans today, TPAs and other industry service providers are best positioned to help them avoid any unintended consequences. It is no surprise that many variations of employer payment plans exist today and it is important for those employers to understand if they are eligible for some transitional relief and whether they will need to self-report and pay any applicable excise tax for failure to comply with the regulations and guidance we have received to date. ■ This article is intended for general informational purposes only. It is not intended as professional counsel and should not be used as such. This article is a high-level overview of regulations applicable to certain health plans. Please seek appropriate legal and/or professional counsel to obtain specific advice with respect to the subject matter contained herein. Cori M. Cook, J.D., is the founder of CMC Consulting, LLC, a boutique consulting and legal practice focused on providing specialized advisory and legal services to TPAs, employers, carriers, brokers, attorneys, associations and providers, specializing in health care, PPACA, HIPAA, ERISA, employment and regulatory matters. Cori may be reached at (406) 647-3715, via email at cori@corimcook.com, or at www.corimcook.com.

The best defense is a good offense. Win your market with a winning workplace.

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Defend your most important asset: your employees. With a benefits plan from HealthSmart, you’ll have a healthier, more productive workforce as well as a healthier bottom line. We support and empower your employees to attain optimal health through engaging wellness and disease management programs. And for every dollar HealthSmart clients spend on case management, they save nine. We are the nation’s largest independent administrator of health plans for self-funded employers—in 2014, our 1,600+ team members paid $6 billion in medical claims. HealthSmart’s mission is to improve member health and reduce healthcare costs. Find out how we can create a win for you. sales@healthsmart.com

May 2015 | The Self-Insurer


PPACA, HIPAA and Federal Health Benefit Mandates:



IRS Notice 2015-16: Planning for the ACA Tax on High Cost Employer Sponsored Health Coverage (the so-called Cadillac Tax)


n February 23, 2015, the IRS issued Notice 2015-16 (the “Notice”)1, which provides important insight (and requests public comment) on positions the IRS may take with respect to Code § 4980I (often referred to as the “Cadillac Tax”). Interested parties may submit comments to the IRS by May 15, 2015. Employers, insurers and third party administrators should begin now to plan their compliance strategies for this confiscatory excise tax. Code § 4980I, which was added by the Affordable Care Act (“ACA”), imposes a 40% excise tax on any “excess” health benefit provided to an employee (including


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former employees and retirees). The tax is not deductible for federal income tax purposes. “Excess benefit” is defined as the excess (if any) of the “aggregate cost of the applicable coverage” over the “applicable dollar limit” for an employee for the month. The Notice primarily addresses the definition of applicable coverage, how to determine the cost of applicable coverage and the application of the annual dollar limit to the cost of applicable coverage.

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Employer-Sponsored Benefit

Subject to the Code § 4980I tax?

The following coverages will generally be included in the definition of applicable coverage: Health FSAs Yes HSAs and Archer MSAs (employer contributions, including Yes salary reduction contributions) On-site Medical Clinics (unless medical care is “de minimis”– a concept for which Yes the IRS has requested additional guidance) Retiree Coverage Yes Multiemployer Plan Coverage Yes Specified Disease and Hospital or other Yes, but only if provided on a pre-tax fixed indemnity health coverage basis HRAs Yes Executive Physical Programs Yes The following coverages will generally not be included in the definition of applicable coverage: Military Based Coverage No Certain types of excepted benefit coverage such as accident or disability income, liability (or a supplement to liability coverage), workers’ compensation, auto medical payment, No credit-only, and long-term care coverage. Specified disease and hospital or other fixed indemnity coverage is excluded if funded on an after-tax basis. HSA/Archer MSA after-tax employee contributions that are deductible by No the employee EAPs that qualify as excepted No (would otherwise be included in benefits under recent regulations the statutory definition of applicable (potentially excluded) coverage but IRS has indicated in the Notice that EAP that constitutes excepted benefits will likely be excluded. IRS has requested comments on excluding EAPs). Insured and Self-insured limited scope No (statute only excludes fully insured Dental and Vision coverage dental and vision; however, like EAPs, the IRS has indicated in the Notice that self –insured dental/vision that otherwise qualifies as an excepted benefit is likely to be excluded. IRS has requested comments on excluding self-insured dental and vision.

The Notice is the first step in the formal process that will ultimately lead to regulations. The Notice is not guidance, i.e., cannot be relied upon, but does provide valuable insights as to the IRS thinking on the tax. The IRS intends to issue another similar request for comments on other issues, including procedural issues with respect to calculation and assessment of the tax. After comments on the two notices are reviewed, proposed regulations will then be issued (which will also be open for comment).

What is Applicable Coverage? The tax applies to “applicable employer sponsored coverage”. Applicable employer sponsored coverage (“applicable coverage”) includes group health plans (as defined in Code § 5000) sponsored by all employers, including private, governmental, non-profit and churchbased employers and applies to both self-funded and fully insured coverage. Further, with a limited exception for fixed indemnity coverage and specified disease coverage provided on an after-tax basis, the full actuarial value of the cost of coverage, determined in a manner similar to COBRA premiums is considered, whether paid for by the employer or by the employee on a preor post-tax basis. The Notice details and to some extent clarifies, which health related benefits are “applicable coverage” for purposes of the statute.2 While most employers recognize that their primary health coverage is considered, other types of coverage also are taken into account. We have included below a high-level overview of the types of health benefits that the Notice indicates will be included in the definition of applicable coverage.

Practice Pointer: Impact of HSA Contribution Rules. Many employers are surprised May 2015 | The Self-Insurer


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to learn that pre-tax employer contributions are included in the calculation. Many employers have been moving toward implementing high-deductible health plans and HSAs to control healthcare costs. Employer and employee pre-tax salary reduction contributions to HSAs are included in the 4980I calculation, as well as the cost of the underlying HDHP coverage. In the event that these amounts combined would exceed the tax thresholds (see below), the employer could reduce the overall cost by reducing the employer contributions, the employee pre-tax contributions or both. Employees could still make after-tax contributions (including after-tax facilitated by the employer) and take an above the line deduction for

those contributions on their tax return. Any reductions would need to be consistent with the HSA comparability rules.

How is the Cost of Applicable Coverage Determined? The cost is calculated on a monthly basis, based on the coverage in which the employee is actually enrolled and is determined separately for self-only and other than self-only coverage. The IRS intends this process to be similar to the COBRA premium determination process (particularly the concept of “similarly situated individuals”). There are special rules for self-insured plans and various types of account-based plans (e.g., health FSAs, HRAs, HSAs and Archer MSAs). The Notice outlines a number of possible approaches to determining cost, some of which the IRS indicates

may apply for COBRA purposes and some of which may be limited to the 4980I tax. For example, the cost of selfonly and other than self-only coverage must be determined separately for purposes of the 4980I tax.

How is the Annual Dollar Limit Applied to the Cost of Coverage? The annual dollar limit differs for self-only and other-than-self-only coverage. The statutory dollar limits are set at $10,200 and $27,500, respectively; however these limits will be adjusted before they go into effect in 2018 by a specified health cost factor. After 2018, the limits will be adjusted for cost-of-living adjustments. In addition, adjustments are permitted based on (i) the employee population’s age and gender mix; (ii) the high-risk status of the employee population (categories of which are listed in the

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May 2015 | The Self-Insurer


statute); and (iii) retiree status. Note that the other-than-self-only limit applies to multiemployer plan coverage.

Practice Pointer: This number is lower than what most people would consider to be “Cadillac”-level health insurance. Depending on the health care cost factor adjustment for 2018, it could catch a wide swath of employer-sponsored coverage in 2018 and the inflationary adjustment CPI-U after 2018 lags behind historic health care trend rates.

Calculation and Payment of the Tax If triggered, the tax is paid by: 1. The insurer, for fully-insured coverage; 2. The employer, with respect to employer or salary reduction contributions to an HSA or Archer MSA; and 3. The “person who administers the plan benefits” for other coverage (e.g., selfinsured coverage including FSA and HRA coverage). Regardless of the entity responsible for paying the tax, the employer is responsible for calculating any excess benefit subject to the tax and notifying the entity(ies) responsible for paying the tax. The employer can be subject to penalties for incorrectly calculating the excess benefit. In the case of multiemployer plan coverage, the plan sponsor (generally, the joint board of trustees) is responsible for calculating the excess benefit. Issues relating to the calculation and payment of the tax are expected to be addressed by the IRS in another notice.

What Should Plan Sponsors Do Now? The 2018 effective date for the so-called “Cadillac plan tax” may seem far away and, given current legislative proposals surrounding the ACA and tax reform, it is always possible that the tax may be amended, repealed, or replaced before it goes into effect. However, such possible future developments are speculative at this point. Given the thresholds for the tax, the term “Cadillac” and luxury it implies is a misnomer. Many plans may be caught. Triggering the tax may also have implications for financial statements. It’s not too early for plan sponsors to be thinking about plan design over the long term and, particularly, being aware of benefits that will, or won’t, be captured by the so-called Cadillac tax.

2015 Benefits Checkup With constant regulatory changes in health and welfare benefits, it’s important for plan sponsors to evaluate whether their benefits compliance is on track and make any necessary changes. Pressing issues for 2015 include (i) making the necessary offers of coverage to full-time employees to avoid penalties under Code § 4980H; (ii) preparing for Code §§ 6055 and 6056 reporting in early 2015 with respect to offers of coverage and the provision of minimum essential coverage; and (iii) deciding whether to incorporate the cafeteria plan changes set forth in IRS Notice 2014-55. If you missed our 2014 year-end checklist, you can find it here.3 ■


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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, Johann Lee, Carolyn Smith and Dan Taylor provide the answers in this column. Mr. Hickman is partner in charge of the Health Benefits Practice with Alston & Bird, LLP, an Atlanta, New York, Los Angeles, Charlotte and Washington, D.C. law firm. Ashley Gillihan, Carolyn Smith and Johann Lee are members of the Health Benefits Practice. Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner’s situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation. Readers are encouraged to send questions by email to Mr. Hickman at john.hickman@alston.com. References The Notice can be found here: www.irs.gov/pub/irs-drop/n-15-16.pdf


Applicable coverage is defined as coverage under an employer-sponsored group health plan that is excludable from an employee’s gross income under Code § 106 (or would be excludable if it were employer-sponsored coverage).




May 2015 | The Self-Insurer


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espite a reported downturn in inflation, US Healthcare continues to produce shocking examples of outof-control costs. This reality is clearly seen in the treatment of musculoskeletal diseases. All told, the total direct costs are estimated at over $500 billion per year and rising.1 According to the American Journal of Orthopedics, over a third of Americans reported some musculoskeletal condition that significantly impaired their normal routines. For many these issues develop into the “need” for serious orthopedic procedures and joint Written by Jason C . Davis 34

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IMPLANT WARS | FEATURE replacements, which are among the most profitable surgeries in all of medicine, typically paying the most money to providers, in ratio to the time a surgeon spends in the operating room.2 It therefore comes as no surprise to discover that, in the last 10 years, the occurrence and associated costs of serious orthopedic procedures have jumped by 300%. Current projections are that this trend will continue and we may see a 400% increase in joint replacements by 2030, meaning more implant charges.3 As it relates to joint replacements, one of the most important cost drivers are implants that can make up 40% to 70% of total procedure costs, rising to 90% for many spine procedures.4 Moreover, it seems that the questionable quality of the implants, though not entirely responsible for runaway expenses, also adds to the long-term total costs and the theory that many downstream surgeries we will see are going to be “do-overs” (also known as revisions). Why? Because...

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About 18% of hip replacements and about 8% of knee replacements in the U.S. are for revision surgery resulting from defective or failed devices. The six best-selling hip and knee implant companies collectively issued 1,334 recalls for components of their devices over the past 10 years.5 This is arguably due in part to the manner in which the implants are approved and cleared for distribution in the US. Currently, implant manufacturers do not need to show that their implants are safe or effective; they simply have to show that it is roughly the same or similar to one that is already approved for use, resulting in over 90 percent of devices being cleared for use without appropriate safety verification.6

The bottom line is that the frequency of serious orthopedic procedures and corresponding implant costs, in many markets, have been and continue to be out of control. As such, even the most diligent administrator feels powerless in the face of these excessive costs, finding it nearly impossible to understand or justify network discounts, negotiate claims with providers, get cost information, or apply reasonable and appropriate pricing. In light of this ongoing and concerning trend, it is critical that self-funded payers and their administrators understand this industry, take a hard look at their exposure on high-cost implantable devices and adopt cost-containment best practices to ensure they are protected from these soaring costs.

More Surgeries What is the reason for this steady and significant increase in serious orthopedic surgeries and joint replacement procedures? Regardless of whose opinion you read, you will be told that the reason for more orthopedic procedures is because (1) we are getting older and (2) we are getting heavier. This, however, does not fully capture the often overlooked third factor : consumers are simply being offered greater access to more surgical options. Adjusted data from the Orthopedic and Arthritis Center for Outcomes Research demonstrates that obesity and the aging population fails to account for the 134% increase in total knee replacements between 1998 and 2007 (overall, a 300% increase).7 So how do we account for it? Though perhaps too simplistic a correlation, the number of ambulatory surgical centers (“ASC”) have also doubled in the last 10 years and more surgeons are securing ownership or a form of financial interest in these ASCs.8 In fact, there are venture capital firms that seem to specialize in recruiting surgeons to be part-owners of an ASC. “So what,” you might ask? Well, one study found that of 941 surgeons that became owners of an ASC, they performed between 52% and 111% more surgeries than non-owners.9 As one Doctor reminds us,

“Surgeons are busy and they like to operate. A professor from my residency would say, ‘There is nothing more dangerous than a surgeon with an open operating room 10 and a mortgage to pay.’” It has been widely documented that the US healthcare system rewards over-utilization and many hospitals will give bonuses to surgeons if they perform more procedures; it’s an “eat what you kill” mentality. One doctor was exposed for performing 500 unnecessary stent procedures with a personal record of 30 in one day!11 The Institute of Medicine has estimated that 30% of all healthcare spending is waste, which includes unnecessary procedures. An example of this is when Medicare discovered that 10% of spinal procedures were performed and paid for, but did not follow established standards of care.12 Self-funded payers and their administrators would be well-served to educate consumers on the shortcomings of some surgeries which are often unnecessary May 2015 | The Self-Insurer


IMPLANT WARS | FEATURE and encourage second opinion protocols. Fortunately, some highquality facilities have adopted “patient centric” and “collaborative decision making” best practices and are seeing radical changes in surgical decisions. For example, some have seen up to 50% of spinal fusion referrals end up not being actual candidates for surgery or having greater health benefits through non-invasive treatments.13 In light of the above, it is not a stretch to suggest that at least part of the increase in serious orthopedic procedures and joint replacements is attributable to the provider community pushing for these surgical options more often than ever before.

implants involved. For example, hip implant list prices have increased over 300% from 1998 to 2011. A hip implant currently costs approximately $350 to manufacture, but once all the middlemen are paid and the bells and whistles are added, hospitals and physicians end-up paying approximately $4,500 to $7,500.14 The final and most significant blow is the mark-up applied by the provider, who now effectively becomes an implant reseller. At The Phia Group, not only are we are seeing a 300% average mark-up on already highpriced implants, but we have also seen other even more egregious charges, such as a hip implant billed at $60,000 (a 1000% mark-up).15

More Costs Not only has the frequency of serious orthopedic procedures and joint replacement surgeries increased, but so has the cost of the surgical

A Tale of Two Facilities: Hospitals and ASCs Hospital CEOs are not compensated on the quality of care

they deliver, but rather based on profit, patient volume and marketing campaigns.16 As a consequence and subject to a cost assessment and severity-weighted outcome analysis, many larger hospitals often offer lower quality care at much higher prices. How can this be? Large hospitals have comprehensive services for a variety of conditions ranging from cardiac care, cancer treatments and orthopedics, just to name a few. These large facilities have sizeable fixed costs (65-85%) regardless of how many patients are admitted for care or if their beds remain empty.17 This “fixed-cost dilemma” means that they are compelled to accept Medicare or Medicaid patients who do not reportedly cover costs. The following is a statement from the American Hospital Association (“AHA”) on the topic:

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IMPLANT WARS | FEATURE Hospital participation in Medicare and Medicaid is voluntary. However, as a condition for receiving federal tax exemption for providing health care to the community, not for profit hospitals are required to care for Medicare and Medicaid beneficiaries. Also, Medicare and Medicaid account for 58 percent of all care provided by hospitals. Consequently, very few hospitals can elect not to participate in Medicare and Medicaid.18

Medicaid Fact Sheet 2015” Medicare only pays a hospital on average 88% of their costs whereas Medicaid was found to pay 90%.19 These payments are particularly challenging for providers regarding implant claims since the implants make up a large portion of the costs that are barely (if at all) being recovered. In the end this means that the bulk of Medicare and Medicaid reimbursements for these services flow directly into the implant manufacturers’ and their intermediaries’ pockets.

As it relates to implants specifically, the Medicare and Medicaid reimbursement for implants is “bundled” into the total payment of the ambulatory payment classification (“APC”) or the diagnostic related group (“DRG”). Since these implants are not separately reimbursable for costs; this often creates a short-fall.

This does not translate, however, to less patient volume for orthopedic procedures (as one would think), because these large hospitals (typically part of large health systems) also have more healthcare services to offer which means large managed care contracts with major payers, carriers and PPOs. Further, consumers often associate “bigger” and “more expensive” with “better.” For this reason, large hospitals and their associated surgical centers often have the largest market share as it relates to orthopedic surgeries.

According to the AHA in the “Underpayment by Medicare and

This in turn leads to large hospitals needing to aggressively negotiate with suppliers, possibly limiting implant choices for their surgeons and shifting costs to private commercial payers in the form of higher charges. This dynamic potentially reduces the quality of the selected implants and may compromise the quality of care.20

In contrast, independent ambulatory surgical centers (ASCs) are smaller facilities that offer only certain types of care like orthopedics. Often these facilities market themselves as “focused factories” which theoretically have the potential to increase value and quality. It is worth noting that these facilities


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also do not typically accept Medicare or Medicaid patients and so they do not have to shift costs to private payers as larger hospitals do. This allows for more pricing flexibility.

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Dr. Keith Smith of the Oklahoma Surgery Center, an ASC that is pioneering transparent and fair pricing in healthcare, shared the following thoughts on implant charges:

We do not mark up the price of implants at our facility. After all, these items are rarely if ever actually part of our inventory, but here on “consignment.” Typically an implant representative brings the implants to our facility and an invoice is generated only after we actually use them. I believe that there is no justification for adding a markup to implants that are not part of a facility’s inventory and this is the case for the vast majority of facilities and their relationships with vendors. Fortunately, this “what can I get away with,” “who cares what it costs, anyway,” method of doing business in the healthcare industry is experiencing the great 21 scrutiny and calumny it deserves. If taken at face value, it seems like most providers in fact do not buy or own the implants, nor keep them as part of their inventory. Yet, as we know, most

facilities still add a sizeable mark-up on implant charges. Interestingly, at The Phia Group, we have also seen entities that make this implicit consignment business arrangement explicit by intermediating the sales and collections of implants. That is, you may get a bill from a hospital for a hip surgery and a totally separate bill from the implant supplier along with a “supplier cost invoice.” Do not confuse this for being the manufacturers invoice as this is likely yet another marked-up claim under the guise of a “direct to supplier” deal. Buyers beware! Without proper cost information, how would you know the difference?

Hospital vs. Independent ASC Most hospital joint replacements are paid for under some form of a fixed rate contract. As we have said, this is also how Medicare and Medicaid pay for these procedures. In increasing measure, some ASCs are trying to carve out implant reimbursement May 2015 | The Self-Insurer




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IMPLANT WARS | FEATURE separately in order to compete with the bigger hospitals. In fact, some ASCs are simply happy to recover their costs if they can secure higher volume contracts with larger payers: We are having success obtaining implant carve outs with our private payers because they recognize the cost savings ASCs offer them. Even securing cost only for implants increases our volume by allowing us to retain cases that would otherwise be sent to the hospital.22 Dr. Keith Smith addresses fair implant pricing as a major competitive edge: Very simply, our refusal to mark up the price of implants has made us very difficult to compete with when it comes to securing the business for individuals and entities with the sticker shock of an actual healthcare consumer.

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Physician-owned independent ASCs can, however, also sometimes have a downside. As mentioned above, this dynamic can lead to over-utilization. We have also seen In-Network (INN) surgeons who actively refer patients to out-ofnetwork (OON) facilities where they are part-owners and the charges are outrageous. Of course, the Plan can ensure that it has higher cost-sharing for OON providers, but some of

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these ASCs charge so exorbitantly for the implants that in most cases it does not actually contain costs to have higher member responsibility. In the end, why would a patient ever “choose” an OON facility and face all the additional “shared” costs that come with it? The Phia Group is seeing that in many instances, there are no actual additional “shared” costs for the member. It seems that there is often a “wink wink / nudge nudge” agreement between the physician and member that he or she will not be billed the balance for going to the OON ASC – and practically speaking, INN or OON is then irrelevant from the patient’s perspective.

A New Direction: Bundled Payments Case rates are all-in-one flat rates for facility charges, but a flat rate does not always necessarily mean a fair rate. Some of these “case rates” simply do not produce value for the payer even though the “discount” percentage may appear impressive. For this reason and for the sake of more price transparency, payers are often favoring contracts with providers for a surgical hosting fee and a “carve-out” for the implants on a “cost-plus” basis. This model is also used by many states for workers’ compensation programs.

Large hospital systems have taken notice of the emergence and physician referral advantages of ASCs. Very recently, Tenet Healthcare Corporation announced that they will buy United Surgical Partners International, a major player in promoting physician owned ASCs. As more services migrate to an outpatient setting and physician owned facilities continue to take a market share (by controlling referrals); look for this trend towards consolidation to continue.

Recently and in increasing measure, however, the market is producing bundled case rates for orthopedic procedures. A “true” bundled payment (not just an APC or DRG) would typically include defined components of physician care, implant diagnostics, surgery, hospital care and postoperative care after surgery (typically between 30 and 90 days); all for one fixed price. If there is a post-operative issue related to the surgery, the provider must address it on their dime. Beyond the targeted cost savings,


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IMPLANT WARS | FEATURE early results show that bundling will improve the quality and value of the care delivered. This makes sense, as the provider offering the bundled services now has control over the entire episode, which should reduce costly readmissions and reduce the unnecessary use of expensive “clinical pathways.” Simply stated, the bundling model encourages the right care at the right time; anything more or less is penalized.

Protect the Plan

but there is an argument to be made that even an otherwise accurate standard itemized bill is not actually completed without the implant log, which provides make, model and SKU of the implants.

Proactive Contracting As shown, the market is clawing for a piece of this billion dollar industry and so there may be valuable deals to be struck in your local market. ASCs present an interesting option for healthcare payers as they arguably offer better quality and value than the one stop shop model of larger hospital systems, which can feel like a maze at times to consumers. As such, it makes sense to explore these options for direct contracting and creating member incentives for using the lesser known facilities. Lastly, many of these facilities are open to discussing bundled pricing. At The Phia Group, we are seeing many of our clients having success with this strategy.

Now that we have outlined the implant problem and some of the market dynamics, we must look towards best practices. First and foremost, it is important to ensure that your plan document is properly written to ensure that you are protected from high-dollar implant charges. These implant specific definitions and provisions should harmonize with your general usual and reasonable or maximum allowable reimbursement language. Further, you can consider having the plan not accept a claim as clean or complete until the provider submits an implant log. The Phia Group has seen an itemized billing with a single line item called “ortho implant, miscellaneous” and there was a unit number of “1;” however, when we requested the implant log, we discovered that there were 11 implants that were being billed. Ironically, the provider billed for every tab of Tylenol (billed at $6.40 each), but did not provide itemized detail of the $35,000 implant charges. The implant log (or better yet, the cost invoice) is a critical component for high-dollar implant claim review. The request for the implant log may bump up against some network contracts, 42

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Ad Hoc Negotiations What do you do if you have a claim with high dollar implant charges? The first consideration is whether it is INN or OON. If it is INN, you must review the payer access agreement to see what options the contract allows for claim review and negotiations. Some PPO contracts have soft-spots whereas others are virtually ironclad in preventing any additional cost-containment. That is not to say that there are not options if the contract is a challenge; it just means that your odds of success are admittedly lessened. That said, no matter how good or flexible the PPO agreement is; if the SPD language isn’t good, then it doesn’t matter anyway. The default is that billed charges are to be paid in full; only the SPD can prevent that. The final consideration is cost data on the implants, which can be difficult to acquire and providers will typically not disclose their costs by sending their cost-invoices. Remember that there is no fixed price for implants; there are a range of acquisition costs which must be considered. For this reason, payers must find




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IMPLANT WARS | FEATURE data solutions or an expert partner if they want to be on equal footing with the provider for a settlement discussion.

Conclusion In the absence of meaningful regulation on implant charges, payers are left with the burden to attempt to control their own implant cost burdens. As shown, this can be achieved through thoughtful plan design, consumer engagement and education, savvy contracting and strong claim review and negotiations. With proper measures in place, self-funded payers and their administrators can protect themselves from predatory billing practices and re-invest the savings into the health and wellbeing of their members. ■ Jason C. Davis is Business and Product Development Consultant at The Phia Group. He specializes in medical claim review/negotiations and cost-containment program development including vendor, network and provider contracting. With the goal of combating the steadily increasing costs, Jason routinely consults The Phia Group’s industry leading attorneys on complex claims provider negotiations, payment disputes and balance billing management. Prior to joining The Phia Group, Jason was a key member of another cost-containment firm holding positions in claim negotiations, cost-containment R&D, business development and upper management. References American Journal of Orthopedics, January 2013. Marty Makary, Unaccountable: What Hospitals Won’t Tell You and How Transparency Can Revolutionize Health Care, (Bloomsbury USA, 2013), chapter 11. 3 John Hopkins, Why Things Are So Very Unfair for Medical Device Makers in America www.searcylaw.com/why-things-are-so-very-unfair-for-medical-device-makers-in- August 14, 2013. 4 OR Business Performance column, Collaborate with surgeons and vendors to control high-end supply costs, OR Manager, volume. 28 No 8 August 2013. 5 Susan Perry, Hip and knee implants should come with warranties, Consumers Union says, www.minnpost.com/second-opinion/2013/09/hip-and-knee-implants-should-come-warranties-consumers-union-says September 12, 2013. 6 Ibid. 7 E Losina te al. The dramatic increase in total knee replacement utilization rates in the United States cannot be fully explained by growth in population size and the obesity epidemic, J Bone Joint Surg Am. 94(3):201-7. doi: 10.2106/ JBJS.J.01958. Orthopaedic and Arthritis Center for Outcomes Research, Department of Orthopedic Surgery, Brigham and Women’s Hospital, February 1, 2012. 8 Ambulatory Surgery Center Association, ASCs: A Positive Trend in Health Care, www.ascassociation.org/AdvancingSurgicalCare/aboutascs/industryoverview/apositivetrendinhealthcare 9 Christine A. Yee, Why Surgeon Owners of Ambulatory Surgical Centers Do More Surgery Than Non-Owners, WC-12-17. www.wcrinet.org/studies/public/abstracts/why_surgeon_owners_do_more_surgery-ab.html May 2012. 10 Michelle Crouch, 50 Secrets Your Surgeon Won’t Tell You, Reader’s Digest Magazine www.rd.com/slideshows/50-secrets-your-surgeon-wont-tell-you/ October 2012. 11 Makary, Unaccountable, 138. 12 Peter Eisler and Barbara Hansen, Doctors perform thousands of unnecessary surgeries, www.usatoday.com/story/news nation/2013/06/18/unnecessary-surgery-usa-today-investigation/2435009/ June 20, 2013. 13 Ruth Coleman, in discussing efficacy of ClinifiT Centers of Excellence Program, November 2014. 14 This section draws from information listed in Elisabeth Rosenthal, In Need of a New Hip, but Priced Out of the U.S, www.nytimes.com, August 3, 2013. 15 See also Russell J. Andrews MD, Too Big to Succeed: Profiteering in American Medicine, chapter 16: Where Has All the Money Gone? Wealthy Middlement in Medical Devices, iUniverse, February 19, 2013. 16 Richard Gunderman, Why Are Hospital CEOs Paid So Well? www.theatlantic.com/health/archive/2013/10/why-are-hospital-ceos-paid-so-well/280604/ October 16 2013. 17 Alicia Caramenico, Hospitals’ fixed costs drive up healthcare expenditures, www.fiercehealthcare.com/story/hospitals-fixed-costs-drive-healthcare-expenditures/2013-10-07 October 7, 2013. 18 American Hospital Association, Underpayment by Medicare and Medicaid Fact Sheet, www.aha.org/research/policy/finfactsheets.shtml 2015. 19 Ibid. 20 J. Clark Venable MD, Knee Replacement Surgery: A Race to the Bottom?, https://wakingupcosts.net/knee-replacement-surgery-a-race-to-the-bottom/ June 9, 2014. 21 Dr. Keith Smith, a private interview, April 9, 2015. 22 Jaimie Oh, 6 Ways to Increase Profitability of Your Orthopedic-Driven ASC, www.beckersasc.com/orthopedic-spinedriven-ascs/6-ways-to-increase-profitability-of-your-orthopedic-driven-asc.html November 1, 2010. 1

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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, stop-loss carriers, PBMs and other service providers.

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Are Onshore Captive Domiciles Gaining an Edge? With additional captive domiciles entering the picture, more U.S.-based captives are starting to choose onshore domiciles more often.


hen a captive insurance company is in the formation process there are many domicile options it can choose from. In the early history of captives, domiciles were few in number and were primarily offshore, but in the last ďŹ fteen years more and more U.S. states have passed captive legislation giving captives the opportunity to choose domiciles closer to home. As the captive insurance sector continues to grow, the expansion of captive domiciles gives new and established captives more choices in which to license their company.

Brief Background

Written by Karrie Hyatt 46

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An onshore captive domicile is a U.S. state has passed laws allowing for captive formation. Similarly in Europe, onshore domiciles are those that fall under the jurisdiction of the European Union. Offshore domiciles are usually territorial islands or small countries. Beginning with Bermuda in the 1960s as the original offshore domicile, many islands in the Atlantic also became domiciles including The Cayman Islands, The Bahamas, Barbados, Anguilla, and the British Virgin Islands. Other island domiciles include Gibraltar, Guernsey, Malta, and Singapore. There are also nations that operate as captive insurers such as the Qatar Financial Centre.

In the United States, Vermont is the primary onshore domicile. The state was an early adopter of captive laws and is ranked along with Bermuda and The Cayman Islands as the top domiciles in the world. Other states that adopted captive law early, beginning in the late 1980s, were Colorado, Hawaii and Kentucky, but the total number of captive domicile states remained low. Since 2000, more than twenty states have adopted captive law or revised existing captive law, bringing the number of onshore captive domiciles to around 35, in order to get a piece of the expanding captive pie.

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Onshore vs. Offshore The original captive companies were domiciled in Bermuda. Following their successful operations, other territories began welcoming captive insurance companies. Originally offshore domiciles offered flexible regulation for the nascent captive insurance industry. Flexible regulations were important thirty to forty years ago when managers were still working out the logistics of running captives, as it gave them the wiggle room to discover the best ways to run their businesses. One of the primary reasons offshore domiciles are still attractive is that they often are still more flexible with their regulations and still have lower capital requirements and still have lower or no taxes on premium. There are also some specific third-party risks that are more sensibly insured offshore. Another added benefit is that offshore captives have been regulating captives far longer than most U.S.based state domiciles and have the infrastructure to support their needs. Yet, now that the captive industry is well-established, many of the original benefits that offshore domiciles offered have been reduced. In recent years, as both captives and onshore domiciles have become more reputable and sophisticated in their operations, the reasons for captives domiciling offshore

have greatly diminished. With the advent of more states adopting captive law, regulators have had to become more educated, knowledgeable, and savvy in the regulation of captives. The states that are dedicated to bringing captive business to their region are keeping their captive laws up-to-date to meet the conditions required by new captives while continuing to regulate them responsibly. When considering an onshore domicile versus offshore, there is generally more transparency in U.S.-based domiciles regulation and oversight. More transparency in captive transactions enhances the perception of the legitimacy of captives in the financial sector. While captive industry detractors may not be satisfied, the transparency required by onshore domiciles goes a long way to improve the industry’s reputation. The expanded onshore domicile market has improved market competitiveness which has helped to make U.S. domiciles more economical than offshore domiciles. In addition to costs, domiciling onshore can also be more convenient. Domiciling closer to a company’s main offices is more expedient and cost-effective than dealing with overseas regulators. According to Thomas P. Stokes, practice leader for JLT Insurance Management US – a captive management company that operates in both the United States and in several offshore domiciles, “Most new captives, with U.S. parents, choose the U.S. domiciles for simplicity and economy of operating costs.” Michael Corbett, the captive director for the Tennessee Department of Commerce and Insurance, agrees, “It would be a guess, but given the activity in various onshore domicile of the past three years, I would say there is definite choice to house captives onshore.” Offshore domiciles are still attractive to captives, but the advantages they had are reduced as domiciling onshore is

usually less expensive. With more states introducing captive law, captives now have better access to more localized regulation and oversight. According to Corbett, “Choice is not a factor if the product does not suit the need. From my vantage point, the regulation onshore meets the need of the owner.”

Redomiciling from Offshore to Onshore Many states that have adopted captive law in recent years have done so with the intention of luring offshore domiciles to redomicile onshore. As captives become established they will sometimes reorganize to a different domicile that is more favorable to their current state of business. States such as Texas, which has a number of Fortune 500 companies, passed captive law purposely to try to bring the captive insurance companies of large corporation into the state. However, there has been little movement towards redomiciling from offshore to onshore. According Marsh Risk Management Research division’s annual report on captive from May 2014, “The Evolution of Captives: 50 Years Later,” only eleven out of the 1,148 captives analyzed for the study chose to redomicile in 2013. The study stated that the results did not indicate that redomiciling would become a trend soon. Yet, many onshore captive managers are seeing more interest in redomiciling from offshore captives. Stokes said that it isn’t “officially a trend yet, but we have seen [some] captives redomiciled to the U.S., and we have performed analyses for offshore entities considering redomiciling.” “We’ve seen our share,” said Corbett. “Bermuda and Cayman have both seen movement to Tennessee. We are also seeing many captives that were formerly offshore in Turks and Caicos, Anguilla and others that are... redomesticating back to Tennessee.” May 2015 | The Self-Insurer


The Future of Onshore Domiciles The outlook for U.S.-based domiciles is becoming brighter. New domiciles entering the market have to be competitive in what they can offer captives – both new and established. This in turn encourages established captive domiciles to tweak and improve their own laws in order to stay ahead of the competition. Captive insurance companies now have a much broader selection to choose from and the ability to pick the domicile that can best serve their individual needs. According to Corbett, “The decision to domicile onshore seems simple to me. Twenty years ago, there were few viable onshore choices and the expertise was dominated by offshore locations. Today, that is no longer true. Onshore locations like Tennessee with a business friendly environment and an active effort to “regulate to yes,” make the desire to house a captive offshore less attractive. While the offshore locations still offer a great place to have a board meeting once a year, the cost of being away from the office can no longer be ignored.” While some captive critics say that all these new captive domiciles mean that there is a “race to the bottom” in regulation, captive regulators understand better than anybody how important it is that captives be perceived as legitimate insurance alternatives. Captive oversight will remain robust, and perhaps become even more transparent as state and the National Association of Insurance Commissioners work to develop national guidelines for captive regulation. In addition, Solvency II will be fully implemented at the beginning of 2016. Solvency II is a directive by the European Union that will standardize insurance regulation among its members, primarily in the form of capital requirements related to solvency issues. The requirements that go into effect next year will likely see Europe-

based captives redomicile onshore in Europe. Bermuda, the leading captive domicile in terms of numbers, is looking to align its captive capital and solvency rules with those of the European Union in order to remain an attractive domicile for its European captives. “[This] could, if fully implemented, provide an edge to U.S. domiciles at some point in the future,” said Stokes. U.S captive domiciles will continue to be separate entities with a wider variation of regulatory requirements and oversight that will allow onshore companies more flexibility in choosing the right domicile for their captives. ■ Karrie Hyatt is a freelance writer who has been involved in the captive industry for nearly ten years. More information about her work can be found at: www.karriehyatt.com.

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SIIA Endeavors Self-Insurance “Locked” in with Latin America


IIA held its International Conference April 13-15th in Panama. Many industry experts now see Latin America as a promising new frontier for self-insurance/captive insurance. The agenda focused on the emerging self-insurance business opportunities in this important region of the world.

Prior to the official start of the conference, a group of attendees participated in a local tour, sponsored by the Self-Insurance Educational Foundation (SIEF). They visited the Panama Canal and saw several ships pass through the Miraflores locks. After a brief driving tour of the city, the group had a guided walking tour though the Old Town section of the city. They concluded the tour with lunch at a local restaurant.

latest trends and developments in medical travel. Greg Arms, Zuleika Tello, Vice President of Pan-American Life Insurance Group, and Ludwig Hoogstoel, Director, International Sales for ING Employee Benefits Global Network gave a case-study session on Latin American companies are utilizing pooling arrangements for group benefits programs. William R. Schultz Jr., CEO and Managing Director – Caribbean at Pan-American Life Insurance Company of Trinidad and Tobago, LTD and Alex S. Rizo, Vice President, Accident and Health for Pan American Life Insurance Group gave a report on the grassroots development in selfinsurance for Latin American and Caribbean companies, focusing on what is happening “on the ground” in key countries and highlight the evolving roles for TPAs, brokers and carries in this grassroots movement.

The educational sessions began with a welcome and short presentation on the state of the insurance industry from Tony Eleta, the president of APADEA, the Panama Insurance Association which represents all licensed insurance companies. Former Commissioner of Insurance of the British Virgin Islands, Nigel Bailey, gave a presentation on captive insurance opportunities in Latin America. Bob Repke, President/CEO of Global Medical Conexions, spoke about the 50

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There was an insurance carrier panel discussion with Pablo de la Hoya, General Manager at Acerta Insurance Company, Tony Eskildsen, President of Enterprise Risk Management Inc. and Carlos Mauricio Moreno Cruz, DirectorRiesgos y Seguros-Colombia, Centroamerica y Caribe – Colombia of CEMEX discussed their

May 2015 | The Self-Insurer


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AIG Benefit Solutions

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Visit aig.com/us/benefits to learn more about what AIG Benefit Solutions can do for your business. www.aig.com/us/benefits Policies issued by American General Life Insurance Company (all states except NY), The United States Life Insurance Company in the City of New York (all states), and National Union Fire Insurance Company of Pittsburgh, Pa. (all states). Each insurance company is responsible for the financial obligations of insurance products it issues and all are members of American International Group, Inc. (AIG). © 2015. All rights reserved. AIGB100051 R03/15


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experiences and future outlook for this importance regional marketplace. Attendees then went to an offsite dinner hosted by Willis North American Captive and Consulting Practice, where they enjoyed a buffet of Panamanian cuisine and a traditional folklore dance performance. The educational sessions started the next day with a presentation from Patricia Alvarado, the Manager, Risk Management Section for Department of Administration and Finance Authority of the Canal of Panama. She discussed the key elements they use to minimize risk and prevent, detect and stop its possible negative impact. Edison Raphael, Managing Director of Cardea Health Solutions gave a presentation on the opportunities for self-funding in the Caribbean. The conference concluded with a presentation on the evolving regulatory environment for self-insured health plans in Latin America from John Rooney, Attorney at Law, John H. Rooney, Jr., P.A. ■ SIIA would like to thank all who attended this year in Panama, and all the sponsors: Complete Health Systems, LC Equian Fairmont Specialty, a Division of Crum & Forster Global Benefits Group, China Health Portal Solutions Hi-Tech Health, Inc. Niki’s International Ltd. Nueterra © Self-Insurers’ Publishing Corp. All rights reserved.

PartnerRe America Insurance Co. Passport For Health Re-Solutions, LLC SIEF Willis North American Captive & Consulting Practice

May 2015 | The Self-Insurer


Fighting Fraud and Exaggerated Claims: The Advantage of Social Media Daily Monitoring


he reality and importance of Social Media in the lives of people everywhere on the planet is clearly evident. Measurable statistics to this fact have been obtained and published for the entire world to see, although we are all witnesses of the birth, evolution and worldwide astounding growth of Social Media. • 52% of online adults use two or more social media sites. • For the first time, more than half of all online adults age 65 and older use Facebook. This represents 31% of all seniors. • For the first time, roughly half of internet using young adults age 18-29 (53%) use Instagram. And half of all Instagram users (49%) use the site daily.1 • Almost as many people use Facebook as live in the entire country of China (according to Caitland Dewey of the Washington Post).2

Written by Miguel Caraballo 54

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Many companies and organizations have also taken advantage of Social Media to promote their businesses and products and the effects on marketing and branding has been phenomenal and advantageous. There is no doubt about the economic impact of Social Media. A 2012 article written by Quentin Hardy and appearing in the NY Times Bits section, indicates that according to a McKinsey Global Institute lengthy study, Social Media could add 1.3 Trillion to the economy! Those are astounding figures.

Those of us who are involved in claims environments must understand that Social Media is valuable to us in our industry, especially when we realize that fraudulent claims are being filed annually to the tune of billions of dollars across all lines of coverage. Claims fraud is a reality that impacts the world of Self Insured’s and Insurance companies worldwide. We must realize that Social Media can also be of great value and advantage in the fight against fraud and soft fraud or simply exaggerated claims. The reality is that the best time to engage in Social Media investigations is when a claim is initially filed, on the front end, from the very beginning. Claims handlers are waiting long after a claim is filed before conducting Social Media investigations. Social Media investigations and daily monitoring from the beginning of the claims process can reveal pertinent information as to what the claimant’s true capabilities are. In addition to this, daily monitoring can provide the kind of information that can serve to enable and activate surveillance and other investigative activities in a more economical way and that can produce better results. The following are real cases from Social Media Mining and Daily Monitoring:

Case Study One

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Claimant: Timothy Nadir (name changed to protect privacy). A 40-year-old male who filed a worker’s compensation claim that he sustained a lower back and left leg injury on May 14, 2014. Social Media: There were several photos posted of the claimant that revealed a new employer and describing his current activities. He was found away from the address on record, living in a camper and towing boats at a lake. Plenty of photographs

were posted and obtained as evidence. These were some of his Facebook post: July 29, 2014: “It’s official. I am L1 Tow Boat Captain Timothy Nadir. I love working and living on the lake. My movie days are over. End of a chapter and beginning of a new one. Thank you Tom and Robin for passing along the torch. I love this life. Noooooooooo stress... God bless.” August 4, 2014: “When people break down, I get to go cruising on my Tow Boat. Thank u faulty equipment.” August 30, 2014: “Boat docked and another successful tow complete. I get some satisfaction out of helping people stranded on the lake. I should have found this job a long time ago.”

Case Study Two Claimant: Paul Northerner (name changed to protect privacy). A 50-yearold male who reported a claim of heat exhaustion to the face and strained back on June 6, 2006. Social Media: Daily monitoring revealed the claimant running a karate school. Business and personal social media sites were found and daily monitoring was able to obtain information on an upcoming martial arts event. Surveillance was initiated and the claimant was found fully active and engaged in activities that contradicted his injuries. Claim was settled. This was one of his Facebook posts: September 18, 2014: “Lots of great deals coming up as we come to the end of the year! October is Breast Cancer Awareness Month and we are going to be kicking

for a cure by offering $5.00 kickboxing classes for the whole month of October! Classes are Tuesdays and Thursdays from 7 to 8:15; our program is designed for all health and fitness abilities! No appointment needed hope to see you here wearing your pink!”

Case Study Three Claimant Dorothy Lodge (name changed to protect privacy). A 48year-old woman who reported a claim of a torn rotator cuff, torn biceps tendon, torn labrum and torn scapular injury. Social Media: Discovery of social media and daily monitoring revealed that the claimant was a body builder. Information was found to confirm that and in fact, the discovery that she teaches yoga at a local gym near her home. It was discovered that she was active hosting yoga work-shops and other exercising activities. Photos posted on her profile show her doing headstands and shoulders exercises. These were some of her Facebook posts: July 11, 2014: “And people say bodybuilders lack flexibility!!!! These are some open shoulders!!!” July 12, 2014: “Teaching my boy max head stands at age 4!!! Already I’m preparing him to see the world upside down so he gets a new perspective.” Prior to the explosion of Social Media, these claimant’s would have more than likely continued to collect workers compensation benefits driving up claims cost. Fortunately, claims handlers are beginning to see the advantages of Social Media mining and daily monitoring. May 2015 | The Self-Insurer


Miguel Caraballo is director of investigations for Tri-Starr Investigations, Inc., located in Stockbridge, Georgia. He is involved in the investigation of suspicious and fraudulent claims in the area of workers compensation, general liability and property and casualty claims. He was involved in a major investigation in Puerto Rico for a large insurance carrier that resulted in FBI intervention and one of the largest bust for insurance fraud in the history of Puerto Rico. References Pew Research Center www.pewinternet.org/2015/01/09/ social-media-update-2014/


2 Washington Post www.washingtonpost.com/news/theintersect/wp/2014/10/29/almost-as-many-people-usefacebook-as-live-in-the-entire-country-of-china/

While the numbers of people using social media sites continues to go up and statistics show many economical benefits, it’s also good to know that we in the claims industry are bringing the numbers of fraudulent and exaggerated claims down, which will ultimately benefit all! â–


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May 2015 | 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

2015 Board of Directors CHAIRMAN OF THE BOARD* Donald K. Drelich Chairman & CEO D.W. Van Dyke & Co. Wilton, CT CHAIRMAN ELECT* Steven J. Link Executive Vice President Midwest Employers Casualty Co. Chesterfield, MO PRESIDENT* Mike Ferguson SIIA Simpsonville, SC TREASURER & CORPORATE SECRETARY* Ronald K. Dewsnup President & General Manager Allegiance Benefit Plan Management, Inc. Missoula, MT

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

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

Committee Chairs ART COMMITTEE Jeffrey K. Simpson Attorney Gordon, Fournaris & Mammarella, PA Wilmington, DE GOVERNMENT RELATIONS COMMITTEE Jerry Castelloe Castelloe Partners, LLC Charlotte, NC HEALTH CARE COMMITTEE Robert J. Melillo 2nd VP & Head of Stop Loss Guardian Life Insurance Company Meriden, CT INTERNATIONAL COMMITTEE Robert Repke President Global Medical Conexions, Inc. Novato, CA WORKERS’ COMP COMMITTEE Stu Thompson Fund Manager The Builders Group Eagan, MN *Also serves as Director


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SIIA New Members Regular Members Company Name/ Voting Representative

Michael Pastor VP Business Development Cook Group Solutions, LLC New York, NY Robert Moore, Presiden L.R. Webber Associates Inc Hollidaysburg, PA Larkin O’Keefe, CEO MedTrak Services Overland Park, KS Kathryn Jordan, CEO NC Medical Travel/ ProMed of Costa Rica Clemmons, NC Alex Snedeker, Vice President Snedeker Risk Mngt. Inc. Havana, IL Karl Volkmar, Principal and Sr. Consulting Actuary United Health Actuarial Services Inc Carmel, IN Jeff Thomas,VP-Client Services Ventanex Carrollton, TX

Silver Members Josh Miller, CEO KeyState Captive Management Las Vegas, NV Donald Wayman, Vice President Opus Investment Management Inc. Worcester, MA John Sarno, Vice President The Affiliated Physicians & Employers Health Plan Trust Piscataway, NJ Dean Addem The igia Group Washington, DC

Diamond Member Carol Berry, CEO Health Care Administrators Assoc. Minneapolis, MN

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