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May 2016

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Work Comp’s

Bitter Pill Ending Opioid Abuse Critical to Speeding Return to Work


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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

Editorial Staff PUBLISHING DIRECTOR Erica Massey SENIOR EDITOR Gretchen Grote

Work Comp’s

Bitter Pill

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From the Bench Louisiana Federal Court Rejects Defendant’s ERISA Preemption Claims in Suit Against Stop-Loss Carrier

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OUTside the Beltway Seemingly Every Day We Wake Up to New Challenges from the States

Ending Opioid Abuse Critical to Speeding Return to Work

Bruce Shutan

Volume 91

CONTRIBUTING EDITOR Mike Ferguson DIRECTOR OF OPERATIONS Justin Miller

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How

Powerful is the

Plan Document, REALLY?

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Onsite Case Management an Effective Way to Control Shock Claim Costs

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Despite Mixed Reported Results, RRGs Remain Financially Stable

Jon Jablon, Esq. and Tim Callender, Esq.

2016 Self-Insurers’ Publishing Corp. Officers James A. Kinder, CEO/Chairman Erica M. Massey, President

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Lynne Bolduc, Esq. Secretary

IRS Still Critical of

831(b) Captives

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PPACA, HIPAA and Federal Health Benefit Mandates So You Heard About HIPAA Phase 2 Audits. What Should You Do Now?

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SIIA Endeavors Recap: 2016 Annual International Conference in Costa Rica

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NEW Legislation May Change That Karrie Hyatt

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Work Comp’s

Bitter Pill Ending Opioid Abuse Critical to Speeding Return to Work

I

t’s no secret that pharmacy costs often tip the scales for self-insured group health plans, but they’re also a significant concern for self-insured workers’ compensation programs for several reasons. The National Council on Compensation Insurance estimates that they account for 18% of the total workers’ comp medical spend. And while at first blush that might not seem to be cause for alarm, consider the potential Domino Effect that’s hidden from view. The #1 Rx challenge for workers’ comp cases involves the use – and misuse – of opioid analgesics for pain relief, says Tron Emptage, a registered pharmacist and chief clinical officer at Helios, an Optum company.

Written by Bruce Shutan


WORK COMP’S BITTER PILL | FEATURE Two examples of common opioid medications dispensed for the management of pain include OxyContin and MS Contin and their generic equivalents where available. He says 60% of the claims Helios manages involve at least one opioid prescription. The issue is clearly a matter of life and death, not just dollars and cents. Concern is mounting about overdose deaths traced to over-prescribed and misused narcotic opioids, which kill 46 Americans daily and increased by 9% in 2014, in the U.S., according to a Helios workers’ comp pharmacy resource guide published in January. What’s equally troubling is that as many as 91% of patients who survived an opioid overdose were prescribed more opioids, the report also noted.

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Mindful of this troubling trend on both the workers’ comp and group health side, the Centers for Disease Control and Prevention recently issued guideline for providers who prescribe opioids for chronic pain. Overall, Emptage estimates that about 75% of the medication spend in workers’ comp are for the management of pain or pain symptoms. The opioid issue is certainly timely. “It’s something that President Obama has spoken about for the past six months,” observes Mark Pew, SVP at PRIUM, whose solutions seek to prevent and eliminate what the firm calls “directionless” workers’ comp claims. “All of the presidential candidates had either friends or family that have either died or have suffered from substance abuse, primarily prescription drug abuse or illegal drug abuse.” Pew believes it could take years to tame this beast “because we’ve created a concurrent and parallel epidemic of heroin use in conjunction with opioids. If we can make it a little bit more difficult for people to get opioids, they turn to heroin, which is

cheaper and easier to get. But we’re making significant progress. It’s top of mind for almost everybody in the work comp industry and it is an important issue to resolve for the employer and the employee.” Brian Allen, VP of government affairs at Helios, says it’s important to pass laws and regulations at the state level to not only create an environment that promotes the safe and effective use of opioids but also establish appropriate guiderails for prescribing that work with and not against, medical evidence and treatment guidelines whether at the state or national level. Solutions include treatment guidelines that limit when, and for how long, opioids can be prescribed, as well as mandating some formularies that require pre-authorization of opioids to ensure they’re medically necessary. Other clinical management tools Allen references include step-down therapy, urine drug monitoring and addiction recovery programs. Opioids have been associated with spiking workers’ comp claims cost and extending the duration of care, which as a result, slows any return to work, explains Melissa Bean, national medical director at Coventry Workers’ Comp Services who is board certified in occupational medicine and family practice. Opioids continue to be the most expensive therapy class, according to preliminary data in the 2015 Drug Trend Report by Express Scripts, the nation’s largest prescription benefits manager (PBM) by volume of prescriptions processed. However, a number of strategies have helped decrease utilization over the past five years, reports Brigette Nelson, Pharm.D., SVP of workers’ compensation clinical management at Express Scripts. One such effort program involves

the PBM’s morphine equivalent dose program that compares the amounts of a drug in different drugs. “If a patient is talking multiple opioid or narcotic medications, you can come up with a cumulative number that shows how much they’re talking,” she explains. “At the point of sale, we actually are able to look at the opioids and add them all together to see if they’re above any limits that might be a problem.” That may be between 50 and 120 morphine equivalents per day.

Strength in Numbers Analytics is critical from both a predictive and clinical perspective because, as Emptage suggests, it comes down to “the old adage you can’t manage what you don’t measure.” Formularies serve as the baseline for any measurement to ensure dispensing of “the right medications for the right patient at the right time,” he adds. The data is indispensible for identifying the potential for overusing or misusing opioids. A predictive clinical analytics program at Helios seeks to identify injured workers early on after their injury who have taken their first opioid, or other medications and are at risk for long-term use of medication. “If they’re seeing multiple prescribers for opioids, that’s an even more significant risk factor,” notes Joe Anderson, director of analytics at Helios. “All those data elements we track and get all those into a format that our pharmacist can identify those that are at the highest risk from our statistical algorithm vs. those that are at the lowest risk at the bottom.” Coventry uses analytics to track which claimants have multiple prescribers and the dosing over time. “We put alerts in place to make sure those claimants are being monitored, receiving proper treatment and getting the care they need,” Bean says. May 2016 | The Self-Insurer

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WORK COMP’S BITTER PILL | FEATURE The managed care organization also conducts drug utilization reviews and employs pharmacists to examine inappropriate reactions in polypharmacy claims, as well as suggest generic medications and alternative prescribing doses to improve health outcomes and speed up the return to work, which ultimately can reduce costs also. Coventry’s clients include self-insured employers, insurance companies and TPAs.

and fractures are some of the most common workers’ comp claims that are being treated with medications anderson reports. He also cites “a bucket of claims that have multiple injuries” involving some combinations thereof and a “long tail claims at the end.

There are systemic problems with the workers’ comp system that complicate prescription drug management, according to Pew. On the one hand, for example, claimants lack any motivation to question their scripts because there are no out-ofpocket costs. In contrast, he says some industry players, including plaintiffs’ or trial attorneys, stand to gain financially by keeping claims open.

“As a pharmacy benefit manager, our goal is to bring it down to cost per claim, not just the cost per medication,” he explains. “You can break down the cost of the overall injured worker’s medication regimen by getting them on more appropriate medications that are more cost effective without detriment to the efficacy level of care.”

Average wholesale price inflation represents another key trend, with increases in generic prices raising some eyebrows. “Last year, we saw increases across all drugs of 11.4% in drug prices and generic prices were up 10%, which continues to be higher than the longer term historical trend,” Anderson says. “We’d expect to see, generic medications about flat. That’s how it was for years in workers’ compensation.” A few particular medications, ibuprofen among them, doubled or more than doubled in price, which he says caught many industry observers off guard.

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Inflammation injuries, contusions

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WORK COMP’S BITTER PILL | FEATURE medication, for example, Nelson says it’s not only more expensive than if it came from a retail pharmacy, but also may not be as efficacious. For example, it would not have the same safety and formulary edits, which could lead to some duplication in therapy. Another concern she expresses involves physicians who lack access to a patient’s full medication history prescribing harmful combinations of drugs, which also can fuel the opioid problem. ■ Bruce Shutan is a Los Angeles freelance writer who has closely covered the employee benefits industry for 28 years.

Pew describes a closed drug formulary in Texas as a “rallying point” for similar efforts that have taken shape in California, Arizona, Oklahoma, Washington, Ohio and Tennessee. There has been “a stronger focus on prescription drug monitoring programs around the country, not only for real-time access and mandating access, but linking data beyond the state boundary so you can have a better picture of things,” he says. Another helpful strategy is to vet polypharmacy claims involving multiple prescribing physicians or pharmacies with the same objective in mind. And as part of that mission, Emptage says taking an alternative medication like an antidepressant or anticonvulsant may be beneficial to claimants to minimize or in some cases, eliminate the use of an opioid for their chronic pain. But at the same time, he cautions that multiple medications or different combinations of sleep aids, benzodiazepines, or antidepressants may not be appropriate and can cause several side effects. “Our goal really is to help manage utilization, making sure that that patient is on the right meds for their injury at the right time in the cycle of their injury,” Emptage explains, especially given dramatic increases in pricing over the past few years.

Managing Comorbidities Part of the Rx utilization review process seeks to understand if there are comorbid conditions, such as depression or anxiety, that might complicate a return to work, Nelson observes. A patient suffering from depression or other mental health challenges “may not be necessarily the best candidate for opioid therapy, or that certainly needs to be taken into account,” she explains. The fear is that these claimants could be more prone to misusing substances. Indeed, patients who are prescribed opioids should be screened for depression, according to recommendations by the American College of Occupational and Environmental Medicine, American Society of Interventional Pain Physicians and American Academy of Neurology. The point of service also plays a role. When a physician’s office dispenses 8

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Bench From the

Louisiana Federal Court Rejects Defendant’s ERISA Preemption Claims in Suit Against Stop-Loss Carrier Candies Shipbuilders, LLC v. Westport Ins. Co., No. 15-1798, in the United States District Court for the Eastern District of Louisiana, February 16, 2016

Written by Thomas A. Croft, Esq. 10

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T

his was a very easy case in my judgement. While the Court’s actual opinion is quite lengthy and detailed, the issues were straightforward and not necessarily deserving of the extensive analysis given them by the Court. Westport issued a stop-loss policy to Candies Shipbuilders (“Candies”) with a $50,000 spec. A prematurely born baby of a Plan beneficiary incurred unspecified, but apparently quite large, medical expenses. Westport denied a portion of these charges for reasons not described in the Court’s opinion. Candies sued for breach of contract, plus extracontractual damages in the form of penalties and attorney’s fees under three Louisiana statutes: La. Rev. Stat. §§ 22:1892, 22: 1973 and 22.1821. Westport moved for summary


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judgment as to the three statutorily based claims for extra-contractual damages, arguing that relief under the first two was barred by Louisiana statutory law and that the claim under the third was preempted by ERISA. The Court granted the carrier summary judgment as to the claims under the first two statutes, first observing that, under Louisiana statutory law, the stop-loss contract was “health and accident” insurance. The first of the three statutes expressly provided that it only applied to “policies other than life and health and accident policies.” Strike one to the plaintiff. The Court also granted summary judgment under the second of the three statutes, because it stated that it “shall not be applicable to claims made under health and accident insurance policies.” Strike two. Both these holdings would seem perfectly simple conclusions from the very language of the statutes themselves. The third statute, La. Rev. Stat. § 22:1821, did clearly apply to “health and accident contracts” by its own terms. Westport attempted to argue in support of its contention that

Candies’ claims should be dismissed under this statute as well because ERISA preempted them. The Court then set sail in its opinion on the different kinds of preemption available under ERISA (“complete” and “conflict” preemption), ultimately concluding that neither applied. Perhaps the plaintiff ’s arguments in this regard were spawned by the district court’s opinion in Bank of Louisiana v. Aetna Healthcare (see http://stoplosslaw.com/cases-and-commentary/bank-of-louisianav-aetna-us-healthcare) many years earlier, in 2004. In my write-up of that decision, I concluded that the Court had simply “gotten lost in the ERISA Funhouse” and misconstrued the law. The federal Court of Appeals in the Bank of Louisiana case set things straight and in my opinion, endorsed the notion that ERISA simply had no effect on runof-the-mill stop-loss cases, which are governed exclusively by state law. See http:// stoplosslaw.com/cases-and-commentary/bank-of-louisiana-v-aetna-life-ins-co. It was this Court of Appeals decision on which the district court relied to hold that no ERISA preemption existed in the Candies case. This result is consistent with all modern stop-loss cases with which I am familiar. They are state law based claims and one need not wander around inside the “ERISA Funhouse” – as this Court did for a time in its opinion – to decide them. So, Westport’s third pitch was outside the strike zone by a good margin and Candies will get a jury trial on its contract and claims for penalties, barring a settlement or other unforeseen developments in this case. ■ Tom Croft 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.

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2016

may Self-Insured Taft-Hartley Plan Executive Forum May 18-19, 2016 | Chicago, IL

Schedule

Taft-Hartley plans refer to the multi-employer pension plans collectively bargained by a union and a group of employers, usually in related industries. Taft-Hartley plans are governed by a trust, half of whose trustees are appointed by the employers and half by the union.

of

This retirement plan model has enabled tens of thousands of small and medium-sized businesses to provide workers with the traditional defined benefit pensions that used to be standard among larger employers, but have now virtually disappeared in the non-unionized private sector.

Events

Self-Insured Workers’ Comp Executive Forum May 24-25, 2016 | Scottsdale, AZ

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.

sept

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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.

36th Annual National Educational Conference & Expo September 25-27, 2016 | Austin, TX

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 13 May 2016 visit For more information www.siia.org


OUTSIDE

the Beltway Written by Dave Kirby

Seemingly Every Day We Wake Up to New Challenges from the States

I

n the comedy movie “Groundhog Day,” Bill Murray’s character wakes up each morning to the very same events as the day before in a seemingly unending succession of identical days into the future. Some in the self-insurance industry may have a similar feeling as a succession of state encroachments on self-insured employee health plans continue to arise. Various states – and agencies within states – are engaged in challenges to self-insured plans in the form of claims tax schemes, limits on stop-loss insurance, demands for proprietary data and other burdens. These challenges appear to ignore the reality that ERISA preemption of state interference with self-insured health plans has been upheld at the highest level, the U.S. Supreme Court. Despite that, states continue to pester the self-insurance industry, often with the tacit if not outright support of the National Association of Insurance Commissioners (NAIC). “It’s usually a question of money,” says SIIA Vice President of State Government Relations Adam Brackemyre. “Most states’ budgets are very tight, many trying to work out of projected deficits. Any revenue they

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can find short of general public tax increases is coveted by legislators.” A current imposition of tax upon self-insured health plans occurred in Illinois where legislature bills (HB 4300 and HB 5750) propose a 1% health insurance claims assessment (HICA) that is estimated to raise between $700 and $800 million and draw federal matching funds for a state with a projected budget shortfall of $4 billion. “We immediately got to work on these bills,” Brackemyre reports, citing efforts to educate the Illinois business community and other stakeholders on the threat to employers who sponsor self-insured plans. The threat of such taxes is high: it has been estimated that a previously adopted Michigan health claims tax has cost employers in excess of $1 billion. (That Michigan plan is now under further review at the behest of the Supreme Court.) SIIA has reached out to key Illinois constituents both in Washington, DC and in the state. SIIA lobbyist Chris Condeluci spoke to top-level business groups who could leverage their influence to Illinois employers and trade associations and from them to the legislature. Catherine Bresler, Vice President of Government Relations for The

Trustmark Companies of Lake Forest, IL has advocated against the Illinois health insurance claims assessment among both legislators and her business network. “It is just counter-intuitive for a state to push up costs of selfinsurance for employers who are doing a good, responsible job of caring for their employees,” Bresler said. SIIA’s Brackemyre wrote to the sponsor of Illinois HB 4300 – which drew the most early support among Illinois legislators – to ask for exemption of self-insured plans from the tax. “We believe that the recent U.S. Supreme Court decision in Gobielle v. Liberty Mutual supports SIIA’s argument that the HICA is preempted by federal law,” Brackemyre wrote. Subsequently HB 4300 sponsor Rep. Jack Franks offered an amendment to his bill to strike the health insurance claims assessment. That amendment had not received a vote by the Illinois House Revenue and Finance Committee as this issue


went to press. Observers estimate that consideration of the Illinois tax could extend into the fall as the legislature is in session pretty much full time. The cost of states’ interference with self-insurance is a burden shared by employers and TPAs alike. Naturally, taxes on health claims revert to employers but there are also in-state demands by various agencies that accrue financial and administrative costs, according to Brooks Goodison, president of the Diversified Group TPA in Marlborough, CT. Goodison cited specific examples of state burdens on self-insured plans:

“We have to pass on costs of collecting fees such as the New York and Massachusetts Public Goods Surcharge or fees for childhood immunization in Connecticut, New Hampshire and Maine. And we have administrative costs that provide no value to our clients,” Goodison said.

by law to report data that’s not ours to give. But states find it convenient to come to TPAs to gather aggregate data rather than take the trouble to contact individual employers.” In “Groundhog Day,” Bill Murray’s character gains freedom from daily repetition by changing his ways. SIIA’s goal is for the self-insurance industry to gain enough educational and political clout to match that success. ■ SIIA members who wish to join the state government relations team are invited to contact Adam Brackemyre at the Washington, DC, office, (202) 463-8161 or abrackemyre@siia.org.

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“In some states we may have three or even four different agencies demanding data from us for various purposes such as studies of outcomes-based payment plans, penetration of childhood immunization, incentive-based payment systems or taxes on claims,” Goodison said. “For any of these purposes we are required

May 2016 | The Self-Insurer

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How

Powerful is the

Plan Document, REALLY?

A

self-funded plan’s governing plan document and the Plan Administrator’s discretion used when interpreting that document are jointly considered to be somewhat like decisions issued by the United States Supreme Court – they are “the supreme law of the land.” To some extent, that can prove accurate with respect to the plan document; the Employee Retirement Income Security Act of 1974 (ERISA) provides that a plan document’s text must be strictly adhered to and fiduciaries of the benefit plan are not permitted to deviate from the document’s terms. A common misconception, however, is that the plan document is the “supreme law of the land” in all of a plan’s relations. Many TPAs have seen first-hand that this is not the case and new situations seem to be cropping up all the time, proving this fact time and again. So, what do we do?

Written by Jon Jablon, Esq. and Tim Callender, Esq.

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THE PLAN DOCUMENT | FEATURE It is paramount that we gain a better understanding of the various scenarios that frequently occur, causing conflict between a plan document and another legal instrument. Through identifying the nuances of these conflicts, we should, hopefully, become better positioned to work preemptively and engage a more thoughtful approach to plan document creation and the interplay between the numerous third-party relationships that are necessary in the self-funded space.

I. Network Contracts

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A common dilemma is the treatment of a plan document by a network agreement. Payers often pay in-network claims at Usual and Customary or similar amounts specified within the plan document, rather than as specified within the applicable network agreement. For obvious reasons, this presents a significant problem and a conflict between two legal instruments. When networks and network providers push back against the payer, for failure to adhere to the network contract, payers frequently rely on the incorrect premise that the plan document “overrides” the network contract. This premise is simply inaccurate. The entities that have entered into the relevant agreements are not the same for each agreement. The plan document is an agreement between the Plan and the Plan participant; benefits can be assigned to a provider, in which case the provider becomes a beneficiary of the Plan and, essentially, a party to the plan document “contract” as well. The network agreement, however, is almost universally entered into between the network administrator and the Plan Sponsor. To make the network agreement even more complicated, it will typically bind the Plan Sponsor to the terms of

a separate contract, which exists between the network administrator and the various providers who make up the network, oftentimes without disclosing the terms of that separate contract, commonly called a “provider agreement.” It is easy to see how the alignment of the various parties is often misunderstood and, quite frankly, how it may seem that the various parties have competing obligations. The Plan Administrator is tasked with administering the plan’s language, while the Sponsor is tasked with complying with the agreement it has signed with the network administrator. The network administrator is obligated to protect the interests of the network providers and the financial health of the network, while also honoring the terms of the agreement between the network administrator and the Sponsor. The practical implications are many: first, since the network agreement is for the Plan’s benefit, it is the Plan that is paying contracted claims (in contrast to the plan document’s language that may not support payment at a contracted rate) and second, while ERISA governs the Plan’s payments (assuming a private, self-funded benefit plan), state law exclusively governs the network agreement. The state law interplay, alone, tends to create some of the most confusing burdens in this contractual comedy, since the usual ERISA remedies and protections that the Plan might enjoy become irrelevant when the legalities of the network agreement are tested in a state court contract action. In short, the plan document and ERISA preemption, tend to become irrelevant when faced with the complicated scenario discussed above – one where state law contract actions become appropriate remedies due to conflicting terms between a plan document and a network contract.

II. Stop-Loss Policies Another example of when the plan document is not the “supreme law of the land” has to do with stop-loss policies. While there are some carriers that will explicitly defer to the plan document for exclusions, definitions and the determination of whether a claim is payable, often the stop-loss carrier is forced to interpret the policy in a manner that “overrides” the plan document. This is not to mean that such a denial is manufactured, or disingenuous; instead, it is a function of the self-insured industry, which relies on a multi-party solution for a single case. More often than not, the various stakeholders may not have had a genuine meeting of the minds when attempting to reconcile the plan document with the stop-loss policy, which may result in gaps – which, in turn, result in stop-loss denials that the Plan believes to be contrary to the terms of its plan document. Such denials typically come in two forms; one is when the stop-loss policy contains its own exclusions and definitions, which differ from and override those within the Plan’s governing plan document. The other form is when the carrier exercises discretion to interpret the terms of the plan document independently from how the Plan Administrator has interpreted that same document during the claims determination process. While the Plan Administrator is constrained by ERISA or other applicable law and certain legal limits are placed on the Plan Administrator’s power to interpret the plan document, stop-loss insurance is an animal unto itself and state insurance law has historically placed no limits on the carrier’s discretionary authority when interpreting a plan document for stop-loss reimbursement purposes. This is one paradigm that exists in the May 2016 | The Self-Insurer

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THE PLAN DOCUMENT | FEATURE self-funded industry that is changing, though; Connecticut, for instance, has enacted legislation that effectively limits a stop-loss carrier’s discretion in terms of plan document interpretation. At first glance, this appears very favorable to self-funded plans within that state; this change, however, is also expected to have the effects of both increasing the cost of stop-loss premiums as well as blurring the line that separates stop-loss from health insurance – which of course has negative effects on the industry as a whole.

III. Administrative Services Agreements Another separate legal instrument that tends to consistently “override” the plan document is the administrative services agreement signed between the Plan Sponsor and its third-party claims administrator (TPA). While TPAs and the health plans

they serve are couched as allies rather than as adversaries, it sometimes becomes the case that a TPA has allegiances, relationships and strategic partnerships that can end up at odds with the Plan. In addition, although most ASO carriers require that the health plans they service utilize the ASO carrier’s own stock plan document, some ASO carriers allow plans to utilize their own existing plan documents. A plan’s ability to keep its own plan document is generally viewed as a good thing – until situations arise where the plan document’s language conflicts with the ASO carrier’s standard policies. The best example of the dilemma described above would be the scenario of medical necessity and “experimental and investigational” determinations.

The governing plan document may provide one thing, while the ASO carrier’s standard policies provide another. It is reasonable to assume that the plan document would control, but that is often not the case in these types of arrangements. ASO carriers have been known to ignore the terms of the plan document in favor of their own internal guidelines, which is especially prevalent among determinations made with respect to network providers. A Long Tradition of Insurance Solutions for Companies that Self-Fund Their Medical Plan Helping to better manage the risks associated with catastrophic claims

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QBE and the links logo are registered service marks of QBE Insurance Group Limited. Coverages underwritten by member companies of QBE. © 2016 QBE Holdings, Inc.

May 2016 | The Self-Insurer

19


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

Small Annual production of 6Small million barrels of beer or less...” Small Small Annual Annualproduction production of of 66 million million barrels barrels of beer or less...” Small

Annual production of 6 million of beer or less...” BIC stays small to provide the utmost attentionbarrels to the most discerning tastes. Annual production of 6 million barrels of beer or less...” BIC tastes. BICstays stayssmall smalltotoprovide providethe theutmost utmost attention attention to the most discerning tastes. BIC stays small to provide the utmost attention to the most discerning tastes. BIC stays small to provide the utmost attention to the most discerning tastes.

Independent Independent Independent Less than 25% of the craft brewery...controlled by an...industry member... Independent Lessthan than25% 25%of ofthe the craft brewery...controlled brewery...controlled by an...industry member... Less craft member... Independent Less craft brewery...controlled brewery...controlledbybyan...industry an...industry member... Lessthan than25% 25% of of the the craft member... BIC stays independent...beholden only to our customers BICstays staysindependent...beholden independent...beholden only only to our customers BIC BIC only customers BICstays stays independent...beholden independent...beholden only toto ourour customers

Traditional Traditional Traditional

A brewer that...derives from traditional or or innovative brewing Traditional Traditional brewer that...derives from traditional innovative brewingingredients... ingredients... AAAbrewer that...derives from traditional or innovative brewing ingredients... brewerFlavored that...derives from traditional or innovative brewing ingredients... maltmalt beverages areare not considered beers. A brewer that...derives from traditional or innovative brewing Flavored beverages not considered beers. Flavored beveragesare are notconsidered considered beers.ingredients... Flavored malt malt beverages beers. Flavored malt beverages arenot not considered beers.

BIC brews benefits with with innovation andand tradition always true to to ourour mission totodeliver value. BICbrews brews benefits innovation tradition always true mission value. BIC andtradition tradition always true mission to deliver deliver value. BIC brewsbenefits benefitswith with innovation innovation and always true to to ourour mission to deliver value. BIC brews benefits with innovation and tradition always true to our mission to deliver value.

303 West Allegheny Avenue Towson, MD 21204 21204 •••Towson, • Towson, 303 West Allegheny Avenue MD West Allegheny Avenue MD 21204 303 West Allegheny Avenue Towson, MD 21204 • Phone: 443-275-7400 Fax: 443-378-8567 • • • Phone: 443-275-7400 Fax: 443-378-8567 303 West Allegheny Avenue Towson, MD Phone: 443-275-7400 Fax: 443-378-8567 Phone: 443-275-7400 • Fax: 443-378-856721204 • www.benefitindemnity.co info@benefitindemnity.co • www.benefitindemnity.co info@benefitindemnity.co • Phone: 443-275-7400 Fax: 443-378-8567 info@benefitindemnity.co www.benefitindemnity.co info@benefitindemnity.co • www.benefitindemnity.co info@benefitindemnity.co • www.benefitindemnity.co 20

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THE PLAN DOCUMENT | FEATURE When the same parent company owns both the claims administrator and the network administrator, the claims administrator’s loyalty lies not with the Plan but with in-network providers. Situations often arise where an ASO carrier’s standard policy is to defer to the treating provider for determinations of medical necessity, even though the plan document might not consider the same claim to be medically necessary. (Common sense dictates that these medical providers are not in the habit of characterizing their hard work as unnecessary.) The result is often that the Plan is forced by its ASO carrier to pay claims that the plan document may not truly allow – all because of a lack of deference to the plan document. This is a practice that tends to undermine the nature of self-funding.

IV. Conclusion As we know and as we see time and again, there are many situations where the plan document does not control the outcome of a situation, even when many interested parties believed that the plan document would, in fact, be the controlling authority. There are solutions here, though and there is a “middle ground” to be reached. Plan Sponsors, oftentimes working through their consultants, should work diligently to have transparent conversations with their vendor-partners, as they put their various self-funded solutions together. Communication is the prime solution here; open and honest communication between all stakeholders and obtaining an expert review of all contracts involved in a given situation can make all the difference down the road. In addition, the implementation process for a new group, or even the renewal process for a self-funding veteran, should not be taken lightly and should be comprehensive, involving every interested party. Multi-vendor communications and lengthy contractual reviews may be resource-intensive, but the time and effort is well worth it. In terms of “middle ground,” there are many areas where this can be accomplished. For many vendors, this might be to transparently work to identify gaps between contracts and the plan document up front, with the goal of either reconciling those gaps, or simply moving forward, but with “eyes wide open,” so to speak.

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For the Plan Sponsor, giving up a certain amount of discretion – such as never paying in-network claims at a rate below the contract rate – will be beneficial to the Plan in the long run, by avoiding bad blood and legal conflicts with providers and networks. In addition, the Plan Sponsor might work to make sure the plan document’s language matches network contracts, ensuring defensible payments.

Tim Callender is a member of The Phia Group’s Legal Department. Tim spent years as in-house counsel for a thirdparty administrator before joining The Phia Group. Tim has experience in direct provider negotiations, plan documents, complex appeals, stop-loss conflict resolution, regulatory and compliance demands, vendor contract disputes and many other areas unique to the industry. Tim has spoken on a variety of topics at respected venues such as the Society of Professional Benefit Administrators (“SPBA”) and the Health Care Administrator’s Association (“HCAA”). Tim currently sits on the Board of Directors for HCAA as well. Prior to his time as a TPA’s in-house counsel, Tim spent many years in private practice, successfully litigating many cases. Tim lives in Boise, Idaho and works out of The Phia Group’s new Boise office, supervising The Phia Group’s Plan Appointed Claim Evaluator (“PACE”) service.

After being admitted to the bars of New York and Massachusetts, Jon Jablon joined The Phia Group’s legal team in 2013. He is well-versed in the ins and outs of ERISA, stop-loss policies, PPO agreements, administrative services agreements and health plans. Jon focuses on providing various consulting services to clients as well as serving as a part of The Phia Group’s in-house legal counsel.

In the alternative, perhaps a Plan Sponsor wishes to avoid stringent, network contracts, so it focuses efforts on direct provider contracting, claims negotiation and even reference-based pricing as tools to manage costs, outside of a network setting. A Plan Sponsor might strive to find a stop-loss partner that will afford the plan a greater amount of deference and grant the Plan autonomy without worrying about losing reimbursement. In addition, a Sponsor should work to ally with a claims administrator that has a strong reputation in the industry and is clearly working with the Plan’s best interests in mind. Lastly, an annual audit of all documents related to a self-funded case is a best practice rarely followed. Even if all vendor-partners remain the same, from year to year, a healthy audit and review of all contracts, against the plan document, by a truly objective reviewer, would be an ideal practice. ■ May 2016 | The Self-Insurer

21


Onsite Case Management an Effective Way to Control Shock Claim Costs

T

he Affordable Care Act (ACA) has been a federal law for more than six years and employers, payers and risk bearers have been working diligently since then to help manage rising healthcare costs (which have out-paced ination every year since 2010). Since the removal of lifetime maximums, as mandated by the ACA, we have experienced a dramatic increase in the severity and frequency of high-dollar claims over the last few years; a recent Sun Life report determined that claims exceeding $2 million have more than doubled since the elimination of lifetime maximums. And that increase is fueling a trend within the self-funded industry to shift away from remote case management to a more direct, hands-on administrative approach, helping to better manage the shock claims that can disrupt actuarial assumptions.

Written by Dwight Mankin and Joseph Sweeney 22

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Providing high-quality, affordable healthcare benefits has long been a goal for employers who sponsor plans for their employees; an attractive benefits package can be a valuable tool that helps recruit and retain quality talent. Self-funded plans have been an attractive fundamental of this goal, as proper assessment and management of self-funded plans has historically proven to be beneficial for employees and a lucrative option for employers. However, the historic regulatory policy sea change that came with the ACA has transformed this practice, making it imperative that brokers, their clients and medical stop-loss carriers


work together to manage the everincreasing frequency, scope and scale of shock claims.

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

The ultimate cost of a catastrophic claim can quickly tip the scales and easily make-or-break an underwriting year, from a stop-loss market perspective. And the manner in which these claims are managed will help determine that cost. That’s why any additional efforts or measures taken to ensure healthcare costs are reasonable and just are received with great enthusiasm by the medical stop-loss carrier. Because their profitability regularly hangs in this balance, medical stop-loss markets expend tremendous effort and energy to determine: whether customary care was administered and a claim meets the terms of the policy and is indeed payable; or if the charges were unusual and care is determined to be investigatory, experimental and ultimately unwarranted. Finding these answers can be challenging and even looking into them can cause a stir. Investigative inquiries from the stop-loss carrier can appear as though they are second-guessing the claims administrator, potentially delay payments, frustrate the employer and leave the broker stuck in the middle facing more questions than he or she probably has answers for. Personal attention is a critical part of this process. Payers have typically relied on telephonic case management to provide care coordination and to obtain additional information on patients who are hospitalized for any variety of conditions. It’s quick, easy and will suffice for the majority of patients’ routine conditions that require a brief hospital stay without post-discharge care. However, for more complex conditions and longerterm, high-dollar claims, telephonic case management can fall short of providing a thorough evaluation of the patient’s care and long-term prognosis.

That’s why a more hands-on and person investigative approach that was popular more than 30 years ago is regaining traction today as an effective means that can make the entire claim reimbursement process easier and more efficient. Onsite RN case management is not a new concept. It was first introduced in 1970 by a company that later became Intracorp and provided case evaluation and recommendations for individuals injured in workers’ compensation situations or automobile accidents. These first RN case managers conducted three-point, in-person contacts: with the patient and their family in the home or hospital; with the treating physicians; and with the employer. By personally assessing the availability of at-home and community resources and establishing an individual relationship with the employer, the patient’s rehabilitation efforts were more effectively coordinated, helping achieve maximum medical improvement and getting people back to work faster, in either full or modified work-duty capacity. This person approach reaped benefits for all parties: • Patients and their families appreciated a face-to-face approach and the case managers’ ability to find and authorize additional resources, expediting recovery and returning them to work faster; • Insurance companies realized savings – from both medical expenses and lost wages – that typically resulted from the case managers’ efforts; • Employers were happy to have injured employees healthy and productive; • And physicians appreciated the additional intelligence that the “boots on the ground” case management assessments delivered. This model was so successful that, by 1980, an entire industry

was thriving, with dozens of case management companies deploying RN case managers to various locations as needed, when needed. Encouraged by these results and the positive reception from property and casualty insurers, Intracorp and other case management companies began to branch out and expanded operations into the commercial group healthcare space. The same onsite model that was working so well for workers’ comp cases was replicated for this new market, with the added component of expanding the RN specialty pool to include case managers who had expertise in specific fields such as oncology, premature births, organ transplants and other medical conditions that were historically driving the majority of group benefit healthcare plan spending. Large group health carriers followed and began to internalize the case management model into their healthcare plan offerings. The pendulum swung soon enough, though and by the mid1990s the onsite model in the group health space began to shift to a telephonic case management model. Driven by the prevalence of onetime surgeries and other relatively low-cost conditions and protected by lifetime caps that limited exposure to exorbitant payments in catastrophic cases, the emergence of telephonic case management programs proved to make health care plans even more cost effective (interestingly enough, workers’ compensation case management continued the onsite model due to the unlimited nature of their exposure and the dual financial burden of medical and lost wage costs). More recently, as Medicare Advantage plans and Managed Medicaid HMOs became popular, most providers deployed the onsite model for their high-risk and high-cost members and continue to use the onsite approach today to manage cost. May 2016 | The Self-Insurer

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Million dollar claims protected by lifetime caps are unfortunately no longer an exception, however, as stop-loss carriers are increasingly responsible for larger and more frequent shock claims. As a result, the industry is adjusting to ensure that high-risk cases are handled by highly trained RN case managers who understand the complexities of the healthcare system and can focus on patients and their family members and assist when costs begin to escalate. Onsite assessment is critical to cost containment and helps all associated parties reach a common goal – the ability to implement an approach that will: • Ensure that an independent onsite review is conducted, providing a comprehensive medical assessment that includes patient/family, physicians and facilities; • Assess family dynamics in order to understand the current situation and help determine what needs to happen next – the post-discharge strategy plays a significant role in controlling costs; • Provide information about condition/treatment options and community resources available to patient/families; • Verify billing to ensure all discounts are applied. More frequent shock claims and the removal of lifetime caps have created a new playing field and this shift impacts everyone at every level. Employers, carriers and payers recognize the many ways an onsite case manager can help control costs without impacting the quality of care. The move away from telephonic interactions to the implementation of personal interaction and administration from onsite case managers is an effective strategy that’s helping to bend the cost curve, keeping catastrophic claims from escalating beyond what’s reasonable, manageable and sustainable. ■

Dwight D. Mankin is President of Communitas, a division within AmWINS Group Benefits offering a wide range of care management services. With more than 30 years in the healthcare industry, he is responsible for the group’s innovative flagship offering, OnSIGHT Health, through which clients gain access to onsite care management services. Dwight may be reached at dwight.mankin@communitas.com Joe Sweeney is the Executive Vice President and Chief Operating Officer of Houston International Insurance Group’s (HIIG) Accident & Health division. HIIG is a Property and Casualty insurance carrier headquartered in Houston, TX, that writes Medical Stop Loss in all 50 states in addition to many other lines of insurance. Joe is a licensed CPA in the state of Pennsylvania and has served in both financial and operational leadership roles within the insurance field for close to 20 years. He is located in Malvern, PA and can be reached at jsweeney@hiig.com

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25


Despite Mixed Reported Results, RRGs Remain Financially Stable This article originally appeared in “Analysis of Risk Retention Groups – Year End 2015”

A

review of the reported financial results of risk retention groups (RRGs) reveals insurers that continue to collectively provide specialized coverage to their insureds while remaining financially stable. Based on reported financial information, RRGs have a great deal of financial stability and remain committed to maintaining adequate capital to handle losses. It is important to note that ownership of RRGs is restricted to the policyholders of the RRG. This unique ownership structure required of RRGs may be a driving force in their strengthened capital position.

Balance Sheet Analysis During the last five years, cash and invested assets, total admitted assets and policyholders’ surplus have increased at a faster rate than total liabilities. The level of policyholders’ surplus becomes increasingly important in times of difficult economic conditions by allowing an insurer to remain solvent when facing uncertain economic conditions Written by Douglas A Powell, Sr. Financial Analyst, Demotech, Inc. 26

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Since year-end 2011, cash and invested assets increased 70.2% and total admitted assets increased 58.4%. More importantly, over a five year period from


year-end 2011 through year-end 2015, RRGs collectively increased policyholders’ surplus 55%. This increase represents the addition of over $1.6 billion to policyholders’ surplus. During this same time period, liabilities have increased 60.8%. These reported results indicate that RRGs are adequately capitalized in aggregate and able to remain solvent if faced with adverse economic conditions or increased losses.

The loss and LAE reserves to policyholders’ surplus ratio for yearend 2015 was 104.5% and indicates an increase compared to year-end 2014, as this ratio was 99.6%. The higher the ratio of loss reserves to surplus, the more an insurer’s stability is dependent on having and maintaining reserve adequacy. Regarding RRGs collectively, the ratios pertaining to the balance sheet appear to be appropriate and conservative.

Premium Written Analysis

Liquidity, as measured by liabilities to cash and invested assets, for year-end 2015 was 65.8%. A value less than 100% is considered favorable as it indicates that there was more than a dollar of net liquid assets for each dollar of total liabilities. This also indicates an increase for RRGs collectively as liquidity was reported at 65.5% at year-end 2014. This ratio had improved steadily in each of the previous five years.

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Loss and loss adjustment expense (LAE) reserves represent the total reserves for unpaid losses and LAE. This includes reserves for any incurred but not reported losses as well as supplemental reserves established by the company. The cash and invested assets to loss and LAE reserves ratio measures liquidity in terms of the carried reserves. The cash and invested assets to loss and LAE reserves ratio for year-end 2015 was 212.9% and indicates a decrease over year-end 2014, as this ratio was 220.8%. These results indicate that RRGs remain conservative in terms of liquidity.

Since RRGs are restricted to liability coverage, they tend to insure medical providers, product manufacturers, law enforcement officials and contractors, as well as other professional industries. RRGs reported direct premium written in eleven lines of business through year-end 2015. RRGs collectively reported nearly $2.9 billion of direct premium written (DPW) through year-end 2015, an

In evaluating individual RRGs, Demotech, Inc. prefers companies to report leverage of less than 300%. Leverage for all RRGs combined, as measured by total liabilities to policyholders’ surplus, for year-end 2015 was 146.4% and indicates an increase compared to year-end 2014, as this ratio was 144.1%. May 2016 | The Self-Insurer

27


was either overstated, exhibited by a percentage greater than zero, or understated, exhibited by a percentage less than zero. The one-year loss reserve development to prior year’s policyholders’ surplus for 2015 was -4.9% and was more favorable than 2014, when this ratio was reported at 24.4%. The two-year loss reserve development to second prior year-end policyholders’ surplus for 2015 was 18.9% and was less favorable than 2014, when this ratio was reported at 14.7%. increase of 3.3% over 2014. RRGs reported nearly $1.7 billion of net premium written (NPW) through yearend 2015, a decrease of 0.8% over 2014.

In regards to RRGs collectively, the ratios pertaining to premium written appear to be conservative.

The DPW to policyholders’ surplus ratio for RRGs collectively through year-end 2015 was 63.8%, up from 59.8% in 2014. The NPW to policyholders’ surplus ratio for RRGs through year-end 2015 was 37.4% and indicates an increase over 2014, as this ratio was 36.5%.

Loss and Loss Adjustment Expense Reserve Analysis

An insurer’s DPW to surplus ratio is indicative of its policyholders’ surplus leverage on a direct basis, without consideration for the effect of reinsurance. An insurer’s NPW to surplus ratio is indicative of its policyholders’ surplus leverage on a net basis. An insurer relying heavily on reinsurance will have a large disparity in these two ratios. A DPW to surplus ratio in excess of 600% would subject an individual RRG to greater scrutiny during the financial review process. Likewise, a NPW to surplus ratio greater than 300% would subject an individual RRG to greater scrutiny. In certain cases, premium to surplus ratios in excess of those listed would be deemed appropriate if the RRG had demonstrated that a contributing factor to the higher ratio is relative improvement in rate adequacy. 28

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A key indicator of management’s commitment to financial stability, solvency and capital adequacy is their desire and ability to record adequate loss and loss adjustment expense reserves (loss reserves) on a consistent basis. Adequate loss reserves meet a higher standard than reasonable loss reserves. Demotech views adverse loss reserve development as an impediment to the acceptance of the reported value of current and future, surplus and that any amount of adverse loss reserve development on a consistent basis is unacceptable. Consistent adverse loss development may be indicative of management’s inability or unwillingness to properly estimate ultimate incurred losses. RRGs collectively reported adequate loss reserves at year-end 2015 as exhibited by the one-year and two-year loss development results. The loss reserve development to policyholders’ surplus ratio measures reserve deficiency or redundancy in relation to policyholder surplus and the degree to which surplus

In regards to RRGs collectively, the one-year loss reserve development to prior year’s policyholders’ surplus ratio would be viewed as favorable while the two-year loss reserve development to second prior year’s policyholders’ surplus ratio would be viewed as unfavorable.

Income Statement Analysis In regards underwriting gains and losses, RRGs collectively were not profitable in 2015. RRGs reported an aggregate underwriting loss for 2015 of $58.7 million, a decrease over 2014 and a net investment gain of $330.1 million, an increase over 2014. RRGs collectively reported net income of $243.6 million, a slight decrease of 0.2% over 2014. Looking further back, RRGs had collectively reported an annual underwriting gain since 2004. While that run had come to an end, RRGs have collectively reported a net income at each year-end since 1996. The loss ratio for RRGs collectively, as measured by losses and loss adjustment expenses incurred to net premiums earned, through year-end 2015 was 79.6%, a decrease over 2014, as the loss ratio was 131.5%. This ratio is a measure of an insurer’s underlying profitability on its book of business.


May 2016 | The Self-Insurer

29

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The expense ratio, as measured by other underwriting expenses incurred to net premiums written, through year-end 2015 was 23.1% and indicates a decrease compared to 2014, as the expense ratio was reported at 23.5%. This ratio measurers an insurer’s operational efficiency in underwriting its book of business. The combined ratio, loss ratio plus expense ratio, through year-end 2015 was 102.8% and indicates a decrease compared to 2014, as the combined ratio was reported at 154.9%. This ratio measures an insurer’s overall underwriting profitability. A combined ratio of less than 100% indicates an underwriting profit. Regarding RRGs collectively, the ratios pertaining to income statement analysis appear to be appropriate. Moreover, these ratios have remained within a profitable range.

The results of RRGs indicate that these specialty insurers continue to exhibit financial stability. It is important to note again that while RRGs have reported net income, they have also continued to maintain adequate loss reserves while increasing premium written year over year. RRGs continue to exhibit a great deal of financial stability. ■ Douglas A Powell is a Senior Financial Analyst at Demotech, Inc. Mr. Powell supports the formulation and assignment of Financial Stability Ratings® by providing analysis of statutory financial statements and business information. He also performs financial and operational and peer group analyses, as well as benchmark studies for client companies. Email your questions or comments to dpowell@demotech.com. For more information about Demotech visit www. demotech.com.

Conclusions Based on 2015 Results

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Despite political and economic uncertainty, RRGs remain financially stable and continue to provide specialized coverage to their insureds. The financial ratios calculated based on the reported results of RRGs appear to be reasonable, keeping in mind that it is typical and expected that insurers’ financial ratios tend to fluctuate over time.

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May 2016 | The Self-Insurer

31


IRS Still Critical of

831(b) Captives

but

NEW Legislation May Change That

F

or the last two tax seasons the IRS has named captives operating under the 831(b) tax designation to their “Dirty Dozen” list – a list the department releases each year warning tax payers of potential tax dodges and scams. However, last December the PATH Act was signed into law which, when it goes into effect, should help to shore up some of the legislative loopholes that have been misused and help to expand the “micro” segment of the captive industry.

Written by Karrie Hyatt 32

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831 ( b ) CAPTIVES | FEATURE

831(b) Tax Designation

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Small to medium-sized captives are referred to by several different names – micro captives and enterprise risk captives are two – but not all small captives take the 831(b) tax designation. 831(b) captives are small to medium-sized companies that elect to take advantage of the Internal Revenue Service 831(b) tax code that allows insurance companies with premium of $1,200,000 or less to pay taxes only on its investment income, not on its premium. Just like any other alternative risk transfer vehicle, these small captives must qualify as actual insurance companies – they must insure risk and be structured so as to act in risk shifting and risk distribution. Captives opting for the 831(b) designation can gain a hefty tax advantage which arouses suspicion in critics that they are not proper insurance companies. Smaller captives electing the 831(b) designation are the fastest growing segment of the captive industry with many domiciles specializing in their formation. According to Les Boughner, chairman of Advantage Insurance Management, “By my analysis, using published numbers, in 2015, there was a global net growth of 103 captives. In U.S. domiciles and domiciles that cater to USA tax payers there was a net growth of 128. In domiciles that cater to small to mid-sized captives there was a net growth of 140. Now you can debate the precise number but not the order of magnitude.” Boughner’s analysis does not take into account protected cells or segregated cell companies, but if there were accounted for then the growth rate of captives would be considerably higher. With their rapid expansion in the last decade, these smaller captives have garnered a great deal of criticism which stems from three main issues: they might be used as tax

shelters; there have been a number of “promoters” engaging in setting up captives who may not have a background in insurance; and they have been used solely as a wealth transfer mechanism. According to Boughner, “[831(b) captives] are being tainted by wealth management firms that know little about captives who are promoting the tax advantages without any regard to the need for a proper structure in accordance with accepted IRS guidelines. Properly structured they perform a valuable function for selfinsured reserves and accruals.”

The “Dirty Dozen” In 2015 and 2016, the Internal Revenue Service placed captives using the 831(b) tax designation on it’s “Dirty Dozen” list. This list, released annually in January and February, highlights tax schemes that target consumers. Called “micro captives” in the IRS press releases, it says that some captives using the 831(b) designation are using it for wealth transfer rather than insuring genuine risk. Falling under the umbrella term of Abusive Tax Structures, which also includes Misuse of Trusts, the IRS warns consumers to be wary of “unscrupulous promoters, accountants, or wealth planners persuade the owners of closely held entities to participate in these schemes.” Among the other eleven tax schemes highlighted were phone scams and email phishing schemes, which topped this year’s list. The other eight were return preparer fraud, offshore tax avoidance, inflated refund claims, fake charities, false padding of deductions on returns, excessive business credit claims, falsifying income and frivolous tax arguments. Being called out on the “Dirty Dozen” list for the second year in a

row shows that the IRS will continue to target 831(b) captives as potential scams and will continue to scrutinize the structures. While being placed on the list does not mean that captives electing the 831(b) designation cannot form or operate, it does add a black mark the captive industry. Industry opinion is mixed. Many feel that the IRS is unduly calling out enterprise risk captives and imparting a taint to the captive industry as a whole. There are those that welcome the scrutiny in order to weed out the promoters using the designation as a tax dodge. “It’s one of those classic examples of a few bad apples spoil the whole bunch,” said Bougher. “There are people who are promoting these things as pure wealth transfer vehicles and they’re going to have to stop. For those of us who have been working to broaden the segment for small to medium-sized companies, there really is no impact.” Jeffrey K. Simpson, director at Gordon, Fournaris & Mammarella, P.A. believes that, “Tax evasion not nearly as prevalent as the IRS thinks. This is merely a new use of a captive insurance to address risks that were historically never addressed. Business sees a new efficiency where the IRS sees something amiss.” While there are no numbers as to how pervasive scheme is Boughner said, “I know most of our major competitors and they, like ourselves, are forming sustainable captives for risk management purposes, not tax purposes.”

PATH Act of 2015 Amidst the criticism and scrutiny of captives filing under the 831(b) election, new legislation was passed in 2015, that could help propel growth in that sector as well as weed out captives that are acting as wealth transfer mechanisms. May 2016 | The Self-Insurer

33


831 ( b ) CAPTIVES | FEATURE The Protecting Americans from Tax Hikes Act of 2015 (PATH Act), a bipartisan bill signed into law on December 18, 2015, by President Obama, will make permanent many expired and currently available tax relief benefits for business and families, as well as making changes to tax compliance issues. For the captive insurance industry, PATH Act will increase the limit of net annual written premiums to 2.2 million dollars for those captives electing the exemption. In addition, the Act also changes the qualifications regarding ownership diversity for those captives. Previous iterations of the code had diversification requirements, but the new law strengthens them. It will require any captive electing for the 831(b) designation to meet a “Diversification Requirement” by one of two ways – the risk diversification test or the relatedness test. In the risk test, “An

insurance company meets the diversification requirement if no more than 20% of the net written premiums (or, if greater, direct written premiums) of the company for the taxable year is attributable to any one policyholder.” “Policyholder” in this instance is defined by IRS attribution rules that state policyholders who are related or have a partnership (trust, estate, or corporation) are considered one policyholder for this test.

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By integrating IHC’s business we are complementing this highly-regarded firm’s wealth of expertise with our own financial strength and global capacity. It’s a powerful combination of expertise and capabilities, and we believe it offers enhanced value to any employer seeking to self-fund their healthcare benefit plan. But there’s another belief that we share with IHC, and that’s in the paramount importance of understanding and supporting the needs of our customers and building strong, enduring partnerships. We wouldn’t have it any other way. We’re smarter together. swissre.com/esl Insurance products underwritten by Westport Insurance Corporation and North American Specialty Insurance Company.

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831 ( b ) CAPTIVES | FEATURE If companies do not pass the risk diversification test, they must pass the relatedness test which, summarized, means that the ownership of the insured business and the ownership of the captive are largely mirrored with a 2% margin of difference. For example: A parent owning the insured business while their child is the primary owner of the captive will not pass the relatedness test. The law goes into effect after December 31, 2016, and will affect captives from fiscal year 2017 and beyond. According to Simpson, “The

PATH Act changes will help because, by addressing estate planning, they eliminate a motive for abuse. But the changes will not solve everything because they do not address everything the IRS views as motivation for abuse and they do not address the IRS’ fundamental distrust of captive insurance arrangements.” Proponents for 831(b) captives are pleased to see the million dollar increase as the $1.2 million limit has been in place for thirty years. As this segment of captives has grown, the lower limit on premium has been restrictive to growing small businesses. Some outlets have reported that the increase in the limit on premium will see a burst of new captive formation. However, Les Boughner believes that this will benefit established captives, not engender a surge of new formations. “Some people seem to think this means there will be more and more captives, I’m not so sure. I think there’s a small segment that will capitalize on it but I don’t think it will suddenly open up the segments dramatically.” How much the PATH Act will affect captives electing the 831(b) exemption remains to be seen, as the full affects will not be known until several years down the road. In the meantime, the IRS will continue to keep close watch on captives misusing the 831(b) designation as a wealth transfer loophole.

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

“The PATH Act changes will help because, by addressing estate planning, they eliminate a motive for abuse. But the changes will not solve everything because they do not address everything the IRS views as motivation for abuse and they do not address the IRS’ fundamental distrust of captive insurance arrangements.” ■ Karrie Hyatt is a freelance writer who has been involved in the captive industry for more than ten years. More information about her work can be found at www.karriehyatt.com.

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

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

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

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

May 2016 | The Self-Insurer

37


PPACA, HIPAA and Federal Health Benefit Mandates:

Practical

Q&A

So You Heard About HIPAA Phase 2 Audits. What Should You Do Now?

A

s you may have recently read (for example, “HHS/OCR Announces Launch of HIPAA Audit Program Phase 2”), the U.S. Department of Health and Human Services’ (HHS) Office for Civil Rights (OCR) has started “Phase 2” of its audit program. Like the Phase 1 audits, OCR intends to use the audits to examine compliance mechanisms, identify best practices and discover risks and vulnerabilities to enhance compliance with HIPAA’s Privacy, Security, and Breach Notification Rules. Phase 2 will be primarily desk audits, although OCR will conduct some onsite audits. If an audit reveals serious compliance issues, OCR might also launch an investigation. So now is the time to look at HIPAA compliance for your health plan and take corrective action, if needed. Business associates should do the same, as they are also subject to Phase 2 audits.

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OCR’s First Step – A Contact Letter Followed by a Pre-audit Questionnaire OCR’s first step in the process was to email notice to verify contact information. After OCR verifies the plans’ contact information, it will email a pre-audit questionnaire to gather data about the size, type and operations of potential auditees. OCR very recently posted a sample pre-audit questionnaire to its website.1 Note that receipt of a contact letter does not mean that you will be audited. HHS says it will select a random sample, which includes not only health plans, but also health care providers and health care clearinghouses, as well as business associates. Practice Pointer : OCR

will request a list of your business associates and their contact information with the pre-audit questionnaire. If you received a contact letter, you should prepare and update your list of business associates 2 immediately using OCR’s sample template. that ignoring HHS’s request will not exempt you from audit. HHS has said that even those that do not respond might be audited. Logically, we would not be surprised if HHS is more likely to take enforcement actions against those that do not respond. It’s a good idea for those that received email notices from OCR to respond in a timely manner (and those that had the notice stuck in their “spam box” or who set the letter aside thinking they could avoid audit should reconsider responding). However, please see our note below regarding possible phishing attempts. © Self-Insurers’ Publishing Corp. All rights reserved.

Practice Pointer : Note

OCR’s Second Step – Selection of Auditees Followed by a Request to Electronically Submit Documentation within 10 Days If selected for audit, OCR will require electronic submission of all responses within 10 business days via its secure online portal. Note that OCR plans to complete most desk audits by December 2016, so you should not wait to see if you have been selected for audit. These audits will move very quickly. In some cases, you might need to scan paper documents, such as business associate agreements, for signatures. If you receive a contact letter, you should gather your

HIPAA compliance documents now and, if necessary, scan copies that are on paper only (see below for the documents OCR is expected to request).

OCR’s Third Step – Desk Audits As noted, OCR will conduct some desk audits of covered entities and business associates. These audits will not necessarily be completed by December 2016, but those selected for desk audits must still submit their documents electronically.

What Documents Is OCR Expected to Request? As of the time of publication, it does not appear that all of OCR’s webpages have been updated to include links to the Phase 2 audit protocol. However, the new Phase 2 audit protocol can be found here.3 Until very recently, OCR representatives were circulating a link regarding the Phase 1 audits as a point of reference.4 Auditors will not necessarily request information regarding each aspect of the Phase 2 audit protocol. However, based on informal comments from OCR representatives regarding recurring compliance issues, we expect them to request the following documents frequently: • HIPAA Privacy Policy and Procedure. • HIPAA Security Policy and Procedure (if separate from the Privacy Policy). • HIPAA Breach Notification Policy and Procedure (if separate from the Privacy Policy and/or Security Policy). • Business associate agreements, which might need to be scanned for signatures. For health plans May 2016 | The Self-Insurer

39


and other covered entities, this means business associate agreements with the health plans’ vendors. For entities that are business associates, this means business associate agreements with covered entities, as well as similar agreements with vendors, subcontractors or agents that handle protected health information (PHI). • HIPAA Risk Assessment, including evidence of security measures to reduce the risks identified in the risk analysis (e.g., risk management plan and accompanying evidence). Although tailored for health providers rather than plans, HHS’s self-assessment tool 5 is a helpful guide. We expect OCR to focus heavily on: – Whether and how “addressable” provisions

and in particular, laptops and USB/thumb drives.

of the Security Rule were treated. “Addressable” means that the covered entity or business associate must determine whether and how to implement the rule based on the circumstances.

» If encryption is recent, a description of alternative measures in place before encryption. » If a decision was made to not encrypt any particular communications or systems that contain PHI, the reason(s) for that decision.

– Efforts to mitigate identified risks. In particular: º Policies/procedures for encryption (which is “addressable” under the Security Rule), including: » Description of all encryption methods used.

º Timely patching of software and updates to antivirus software.

» Methods of encrypting electronic transmissions (including email).

º Attempts to mitigate insider threats (e.g., establishment and termination of users’ access to systems storing PHI, password policies, workstation access, time-out due to inactivity).

» Methods of encrypting mobile devices and media containing electronic PHI,

º Procedures for disposal of PHI (both electronic and paper).

» Dates encryption has been in place.

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www.benefitmall.com/Services/Benefits/Stop-Loss 40

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888.248.8952


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

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May 2016 | The Self-Insurer

41


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Just having group benefits expertise is not enough. At AmWINS, we have taken specialization one step further by creating a practice that enables our team of specialists to collaborate with one another quickly, helping you give the best options to your self-funded clients. That’s the competitive advantage you get with AmWINS Group Benefits.

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º Data backup and contingency plans. º Server configurations, including descriptions of network perimeter devices like firewalls and routers. º Records of repair and maintenance of information systems hardware and physical security (e.g., doors and locks) in locations that contain PHI or systems containing PHI. • Logs of unauthorized uses and disclosures of PHI, including known unauthorized uses and disclosures by business associates. • Documents that describe investigation of potential HIPAA breaches, as well as attempts to mitigate potential and confirmed breaches. • Breach notification letters for confirmed breaches, as well as any assessments that determined an exception applied under the breach notification requirements. • Documentation of requests for access to, and amendment of, PHI, as well as the response to the individual. • HIPAA notice of privacy practices, including records demonstrating timely and correct distribution, as well as links to any websites where these notices are posted. • Records demonstrating that employees with access to HIPAA PHI regularly receive HIPAA privacy and security training (e.g., attendance sheets, signed certifications), as well as applicable training materials. OCR has indicated that it favors annual HIPAA privacy and security training. • Sanctions imposed on employees who violated HIPAA. Note that some employers might be covered entities or business associates themselves, and their health plans might be separate covered entities. For example, a health insurance company would be a covered entity for its insured groups, a business associate for its third-party administration services and the health plan it provides its employees would be a separate HIPAA covered entity. You should be prepared to provide separate sets of documents for all covered entities and business associates that you operate.

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

Practice Pointer: To

the extent you do not have all of these documents or have not fulfilled all the requirements, you should not lose hope. As noted, not all covered entities that receive contact letters and pre-audit questionnaires will be audited. Moreover, OCR’s intent is to “use the audit reports to determine what types of technical assistance should be developed and what types of corrective action would be most helpful.” Being able to show that you are taking steps to correct deficiencies might mitigate against additional HHS enforcement activities beyond correction, such as civil monetary penalties.

The Irony – Watch Out for Phishing Attempts by Hackers Posing as OCR to Get Contact Information or More! No system is perfect, and ultimately it is impossible to prevent fraud completely. That said, OCR has specifically advised covered entities and business associates to check their spam folders to ensure that all emails are received. Ironically, electronic contact letters and desk audits create an opportunity for phishing attacks by hackers who might try to obtain access to sensitive documents by sending similar emails with fake contact letters and creating their own sites for information uploads. In fairness to HHS and OCR, this could also be accomplished through the use of fake paper correspondence. Employers should ensure that their employees refer all electronic or paper inquiries that appear to be from HHS and/or OCR to a single person (for example, the privacy officer). Regardless, employers should advise employees to be on the lookout for phishing attempts related to OCR’s Phase 2 audit.

Final Thoughts If you received a notice from OCR, you should update your list of business associates and their contact information now, as you must submit this list when you receive the preaudit questionnaire. Although OCR ultimately might not select you for audit, you should also start putting together your HIPAA documentation because the process will move very quickly for those OCR selects and all documents must be submitted electronically. Even if OCR has not notified you or does not select you for audit ultimately, an ounce of prevention goes a long way. OCR May 2016 | The Self-Insurer

43


will likely conduct more audits after these Phase 2 audits, and its enforcement activities continue unabated. Conducting a self-audit and updating your HIPAA risk assessment to ensure that the appropriate procedures and documents are in place can mitigate your risk and exposure substantially. ■ The Affordable Care Act (ACA), the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and other federal health benefit mandates (e.g., the Mental Health Parity Act, the Newborns and Mothers Health Protection Act, and the Women’s Health and Cancer Rights Act) dramatically impact the administration of self-insured health plans. This monthly column provides practical answers to administration questions and current guidance on ACA, HIPAA and other federal benefit mandates. Attorneys John R. Hickman, Ashley Gillihan, Carolyn Smith, and Dan Taylor provide the answers in this column. Mr. Hickman is partner in charge of the Health Benefits Practice with Alston & Bird, LLP, an Atlanta, New York, Los Angeles, Charlotte and Washington, D.C. law firm. Ashley Gillihan, Carolyn Smith and Dan Taylor are members of the Health Benefits Practice. Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner’s situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation. Readers are encouraged to send questions by email to Mr. Hickman at john.hickman@alston.com.

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The Self-Insurer | www.sipconline.net

References www.hhs.gov/hipaa/for-professionals/complianceenforcement/audit/questionnaire/index.html

1

2 www.hhs.gov/hipaa/for-professionals/complianceenforcement/audit/batemplate/index.html 3 www.hhs.gov/hipaa/for-professionals/complianceenforcement/audit/protocol-current/index.html 4 www.hhs.gov/hipaa/for-professionals/complianceenforcement/audit/pilot-program/index.html 5 www.healthit.gov/providers-professionals/security-riskassessment


May 2016 | The Self-Insurer

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


SIIAEndeavors Recap

S

2016 Annual International : Conference in Costa Rica

IIA held its annual International Conference at the Costa Rica Marriott Hotel San Jose April 5th-7th. This event was focused on helping U.S.based companies identify and understand potential business opportunities related to self-insurance/captive insurance in key countries throughout Latin America and the Caribbean. The event was also designed to connect U.S. attendees with attendees from Latin America for purposes of exploring partnership and/or business development opportunities. Several attendees participated in a pre-conference excursion to the La Paz Waterfall Gardens. The Gardens are #1 most visited privately-owned ecological attraction in Costa Rica and features the best hiking trails near San Jose, the most famous waterfalls in Costa Rica, rescued wildlife preserve with more than 100 species of animals and an environmental education program.

The educational program kicked off with welcome remarks from SIIA President Mike Ferguson and Costa Rican Ambassador Roman Macaya, Ph.D. Educational sessions covered the following topic: Latin American Business Culture – Do’s, Don’ts and Other Essential Tips, Self-Insurance Business Opportunities in the 46

The Self-Insurer | www.sipconline.net

Tomás Soley, Superintendente de Seguros


Pedro Beirute, General Manager of PROCOMER, the Costa Rican Export Promotion Authority, a government institution, addresses attendees at the PROMED sponsored dinner.

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

Roman Macaya, Ambassador Embassy of Costa Rica

May 2016 | The Self-Insurer

47


Caribbean, a Carrier/General Managers Session, Latin America Medical Travel Trends, Captive Insurance Opportunities in Latin America and Self-Insurance Business Opportunities in South America. At the conclusion of the educational program a private tour of local facilities was coordinated by Massimo Manzi, Executive Director, Council for International Promotion of Costa Rica Medicine (PROMED). PROMED is the board for the promotion and quality assurance of the Costa Rican healthcare industry. Since 2006, PROMED has organized efforts for the development of the global healthcare industry including training, inter-institutional coordination, international promotion and partnerships.

The group visited CIMA San Jose Hospital, CLINICA BIBLICA Hospital, UNIBE Hospital, Century XXI Radiotherapy. “The hospital tours were thorough and impressive. The equipment is state of the art and operated by competent technicians trained in Costa Rica. There is a national commitment as evidenced by the Ambassador to the United States attending the tour with us. Frankly, I wish I had had this 48

The Self-Insurer | www.sipconline.net

“I truly enjoyed the tour of the Costa Rican medical centers. It was fantastic to see the care that is delivered, but also the advancement in technology and innovation that is happening there!” – Mary Seery, Director, National Business Markets, Cancer Treatment Centers of America


tour before having a couple dental implants earlier this year in Florida. It would have saved me a considerable amount of money.” – Les Boughner, Chairman, Advantage Insurance Management “One of my absolute highlights of the SIIA International Conference was the healthcare tour. We had the opportunity to tour four very impressive and different facilities. There were so many aspects to be impressed by in the tour including the genuine enthusiasm that the professionals of these centers had when hosting the tour. I was also struck by the medical expertise and knowledge of U.S. medical practices that the facilities had. They were able to relate expertise that they had in Costa Rica to that of the United States whether that included citing advanced medical technologies, more affordable pricing or decreased political

and legal constraints in Costa Rica. I also appreciated the opportunity to network with the healthcare facility staff and exchange best practices and obstacles in both United States’ and Costa Rican healthcare.” – Daniél C. Kimlinger, PhD, MHA, SPHR, SHRM-SCP, Human Resources and Organizational Psychology Leader, MINES and Associates ■

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May 2016 | The Self-Insurer

49


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

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

Directors

Committee Chairs

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

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

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

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

SIIA New Members Regular Members Company Name/ Voting Representative

Stephen Urban Chief Operating Officer ACI Wayne, PA Derek Lloyd AMS Financial Group Tortola British Virgin Islands Miressa Rivera Associate Administrator Auxilio Mutuo Hospital San Juan Puerto Rico, PR John Snyder Head of Stop-Loss Berkshire Hathaway Specialty Insurance Dana Point, CA Christopher Lewis President/CEO Equitable Plan Services Oklahoma City, OK Stacey Poirrier Strategic Resource Manager HUB International Metairie, LA Nicholas Christos , CEO Independence Underwriting Partners, LLC Malvern, PA Mitchell Bearden Executive Vice President J. Arthur Dail Inc. Charlotte, NC Kevin Doherty, Partner Nelson Mullins Riley & Scarborough, LLP Nashville, TN

Silver Member Jeff Bernhard, President Continental Benefits Brandon, FL


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

Totally Transformed Learn More at ppsonline.com or call 1-877-828-8770. May 2016 | The Self-Insurer

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