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www.sipconline.net

OCTOBER 2014 | Volume 72

October 2014 The Self-Insurer

FEATURES

(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

ARTICLES 14 ART Gallery: XXX-Rated Exposure of the NAIC

Editorial Staff

16 From the Bench: 6th Circuit’s Decision in

PUBLISHING DIRECTOR Erica Massey

6

SENIOR EDITOR Gretchen Grote

A Prescription

for Savings

CONTRIBUTING EDITOR Mike Ferguson

28 PPACA, HIPAA and Federal Health

DIRECTOR OF ADVERTISING Shane Byars EDITORIAL ADVISORS Bruce Shutan Karrie Hyatt

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

by Thomas A. Croft, Esq.

by Ron E. Peck, Esq.

DIRECTOR OF OPERATIONS Justin Miller

Editorial and Advertising Office

SIIA v. Snyder Has Significant Implications for Self-Insured Plans and Their TPAs and Also Poses Perplexing Questions for Stop Loss Carriers

Benefit Mandates: ACA Administrative Simplification Provisions for Health Plans: Time to Apply for an HPID and Prepare for Certification of Compliance

38 Captive Solutions for Medical Stop Loss:

22

Measuring the Impact of Healthcare Reform on Workers’ Compensation

by Steven Kokulak

2014 Self-Insurers’ Publishing Corp. Officers

Take Your Self-Insurance Program to the Next Level by Allison Repke

50 SIIA Takes Lead on Education for ERCs by Karrie Hyatt

INDUSTRY LEADERSHIP

James A. Kinder, CEO/Chairman Erica M. Massey, President Lynne Bolduc, Esq. Secretary

4 SIIA Chairman’s Message Les Boughner

44

Courting a Captive Audience

Stop-Loss captive programs slowly emerge among mid-market employers, but at least one skeptic questions their effectiveness

by Bruce Shutan

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

54 SIIA President’s Message Michael W. Ferguson

The Self-Insurer | October 2014 3


SIIA CHAIRMAN’S MESSAGE Welcome, Fellow SIIA Members and all 2014 National Educational Conference & Expo Attendees

T

he SIIA Board of Directors welcomes you all to Phoenix, and thanks you for being here and supporting SIIA. It is energizing to see the depth and breadth of the attendees at this conference. We have an outstanding group of speakers and educational sessions planned for you this year. We are confi dent that you will enjoy the program, and as always, the opportunity to network with other leaders in the alternative risk industry. The SIIA National Educational Conference and Expo is the premier global event for the self-insurance industry. Every year we not only see a significant number of return attendees but also new attendees from other countries and industry groups who come to experience the value of the conference. Make sure you stop by the exhibit hall where more than 150 companies are showcasing a wide variety of innovative products and services designed specifically for self-insured entities.

Les Boughner

We hope you enjoy your time at SIIA’s 34th Annual National Conference & Expo. If there is anything we can do to make the conference more enjoyable for you, please do not hesitate to ask! I also want to make you aware of the 2015 SIIA Events so that you can plan accordingly. SIIA returns to the Valley of the Sun in March 4-6, 2015, for the Self-Insured Health Plan Executive Forum at the beautiful J.W. Marriott Camelback in Scottsdale, AZ. The globalization of the self-insurance/alternative risk transfer industry is increasing in momentum as effective solutions for the self-insurance needs of companies are adapted to local markets. The SIIA International Conference will focus on Latin America April 13-15, 2015, at the Hilton Panama in Panama City, Panama. We are excited to present a new event this year, the Self-Insured Taft-Hartley Plan Executive Forum at the Marriott Metro Center in Washington, DC, April 29-30, 2015. Self-Insured Workers’ Compensation Executive Forum will be at the Windsor Court Hotel in New Orleans, LA, May 12-14, 2015. The 2015 SIIA events will return to Washington, DC and concludes with the 35th Annual National Educational Conference & Expo at the Marriott Marquis, October 18-20, 2015. Once again, please enjoy your time in Phoenix, I look forward to seeing you here and at future 2015 SIIA Events! n

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October 2014 | The Self-Insurer

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The Self-Insurer | October 2014

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A Prescription for

SAVINGS by Ron E. Peck, Esq.

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October 2014 | The Self-Insurer

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


T

he cost of healthcare in the United States is, by all accounts, excessive. To date, apparent efforts to “contain costs” have in fact focused more on “who” is paying than “how much” is being paid. Reasons for out-of-control prices range from the costs faced by medical service providers in securing malpractice insurance and defending against lawsuits, to ineffi ciencies on the part of payers and payees alike. While the truth is almost certainly a mix of these, including known and heretofore unknown causes, the fact remains that the actual price paid by consumers of healthcare, their benefi t plans and the employers that sponsor them, is too high to remain fi nancially viable. In an effort to meet both the requirements of the Patient Protection and Affordable Care Act (“PPACA”), as well as offer the most robust coverage for the lowest cost, health plan sponsors and administrators alike, are examining cost containment options not considered in the past. A new focus on things like coordination of benefits with other insurance plans (such as workers’ compensation and auto-insurance), as well as subrogation and claims recovery from liable third parties, has garnered more attention. Likewise, the use of fee schedules to cap amounts payable, the use of data to setup reference based pricing mechanisms, enhance narrow networks, execute direct provider arrangements, or even implement a cost-plus mechanism in lieu of networks, as well as wraps and carve-outs, is gaining popularity. One area of particular concern for so many plan administrators, however and the topic we address here is the issue of prescription drugs. Between the refreshed influx of new drugs (not yet available via generic format), specialty drugs and orphan drugs, the industry is preparing

itself for the highest prescription costs it has ever seen. As a result, it will be almost impossible to sustain a modern health plan without implementing new cost containment mechanisms to deal with drug purchasing and prescription benefits. The days of thinking of medical benefits and drug benefits as islands, completely separate and apart from each other, are over. Some statistics indicate that 20% or more of employers’ total health care budget is spent on pharmacy benefits. Add to that the cost of inefficient drug use, improper drug use and the fact that the United States spends just under $300 billion in avoidable healthcare costs due to medication and adherence related problems and you start to realize this is not an “Rx” issue... it’s a healthcare problem. Pharmaceuticals are expensive and they are getting more expensive annually. Pricing growth continues at historic levels. The “what” (as in “what is the problem”) is agreed upon and not at issue here. Rather, the “why” is more important and perhaps most important of all... the “how” as in “how do we address these costs” is the topic of the day. Why are the costs rising? Drugs – in general – are not more difficult to manufacture. In fact, new technologies ought to make it easier to mass produce medicine... right? Furthermore, while the variety of drugs continues to grow, comparatively speaking, they have not suddenly become more effective, subjectively speaking. So... what’s up with these rising costs? Some opine that drugs are more commonly prescribed as a result of an increasing incidence (or perhaps an increasing degree of diagnosis) of the disease, thus increasing the spend in general (versus per dose).1 The numbers generally support this as at least one cause. In 2013, for

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

instance, the percentage increase in use and in spending mirrored each other (and rose). Benefit plans weren’t the only ones dinged by the rising costs, though, meaning that in addition to “more” drugs being purchased, the amount of medication purchased by each patient and the “per drug” spend for both plan and patient, is up too. Out-of-pocket costs continued to rise for patients, despite generic medicines now representing 86% of prescriptions. Total spending on medicines on a real per capita basis grew by 1%, nominal spending on pharmaceuticals reached $329.2 billion in 2013, (an increase of 3.2%, up from a decline of -1.0% in 2012) and real per capita spending increased 1.0% in 2013.2 Drugs are global, as is the costincrease epidemic. Not surprisingly, however, the cost of drugs specifically in the U.S. is out of control – in comparison to global spending. For U.S. consumers, prescription drug costs in the United States are already the highest in the world.3 One statistic indicates we spend 400% more than the UK on common drugs (like statins). According to research from the Organization for Economic Cooperation and Development, or OECD, U.S. spending on pharmaceutical products per person in 2011 was 50% higher than the next closest country and 156% higher than the OECD 34-country average cost per person.4 The fact that drug costs in the U.S. are the highest isn’t an old idea. Remember when we thought everyone would be buying their drugs from Canada? Again – more important to our goal of understanding the costs and addressing them, is analyzing why these costs are so high. In addition to more drugs being prescribed, we also have major turnover in some patents and new complex (and thus more costly) drugs The Self-Insurer | October 2014

7


being invented. The largest clusters of innovation are in specialty therapy areas including oncology, hepatitis C, HIV and autoimmune diseases, which collectively grew by 11% to $73 billion in 2013. There were 36 New Molecular Entities launched in 2013, including ten new cancer treatments and 17 orphan drugs, the most in both segments in over a decade; and in 2013, more orphan drugs – FDA approvals for rare diseases affecting less than 200,000 people in the U.S. – were launched than in the past 10 years. Indeed, there were – for instance – ten new cancer treatments launched; the most in over a decade.5

of drugs in the year or two prior to patent expiration.8 These pricing increases contributed an estimated 5.1% to spending growth in 2013 and protected brand price increases contributed $20 billion to the drug cost growth in 2013, compared to $15.6 billion the prior year.9

This all suggests that the cost of specialty drugs is a key contributor to the overall cost of drug coverage. We are all being inundated by statistics such as 20% to 40% of spending on drugs is on specialty drugs,6 and “spending on new specialty medicines increased 7.7% to $7.5B in 2013 and now account for 69% of new brand spending.7

How, then, benefit plans address the issue of profit making maneuvers, efforts to protect new drugs from budget friendly reactions and performing cost benefit analyses regarding specialty drugs, is the key to success.

The bottom line? Drug spend is up and the specialty drug influx is a major contributor. Spending on specialty drugs is projected to escalate 67% by 2015 and it’s estimated that more than 800 specialty pharmacy drugs are currently in the pipeline; with costs expected to represent up to 40% of an employer’s total medical spend by 2020. Here, then, we encounter some of the arguments we’ve already heard when it seemed like a Canadian drug-pipeline would bankrupt the American pharmaceutical industry. Our system, complete with open-ended rules for drugcompany profit making, benefits and incentives meant to encourage research and development and a patent system meant to protect the pioneers, results in more drugs and improved patient outcomes, but also a hefty price tag. We already know that many drug manufacturers significantly increase the price

Engaging the providers who recommend and prescribe the drugs has taken on a new level of importance. Countering efforts by some manufacturers to influence the providers’ behavior is a mission all payers must take on to contain costs. But providers aren’t the only ones needing attention. Engaging PBMs and other vendors in conversation

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October 2014 | The Self-Insurer

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companies of W. R. Berkley Corporation and both rated A+ (Superior) by A. M. Best. Coverage and availability may vary by state. Insurance coverages are underwritten by Berkley Life and Health Insurance Company and/or StarNet Insurance Company, both member ©2014 Berkley Accident and Health, Hamilton Square, NJ 08690. All rights reserved. companies of W. R. Berkley Corporation and both rated A+ (Superior) by A. M. Best. Coverage and availability may vary by state. BAH AD-2014-0141 ©2014 Berkley Accident and Health, Hamilton Square, NJ 08690. All rights reserved.

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The Self-Insurer | October 2014

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October 2014 | The Self-Insurer

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


regarding new efforts to control patient behavior, is important to costcontainment efforts. Patient’s need to be offered clean, simple to understand options as well, that both provide safe and effective care, while also saving them and their benefit plans vital funds. It is absolutely true that some patient “conveniences” will fall victim to limited options and narrow avenues for medicine dispensary. Choices and convenience have always been the first victims when cost consciousness becomes the new focus. Yet, this is the new approach most seem to be taking. Efforts to contain these costs not only benefit the plan sponsor; (employers and insurance carriers). The ability to sustain health benefit programs hinges upon the affordability of the plan – with a prescription drug component. In addition, the costs trickle down to the participants as well; making it worth their while to engage in cost cutting behavior as well.

Who can help with ramping up and maintaining such programs? The truth is that pharmacy benefit managers (“PBMs”) have got their hands full processing claims and administering drug benefit programs. Although many have offered add-ons to help contain costs, asking PBMs to single handedly strike down the rising cost of drugs is asking too much of them. Plan sponsors, patients and providers need to be involved as well. While PBMs do what they can to contain costs and ensure proper administration of a prescription drug program (managing the purchase of medication), efforts need to be made to proactively mitigate risk before the PBM ever receives or hears about a single claim. This means maximizing the use of transparency and unbiased information, allowing the participant to make educated, cost-effective choices. Selffunded / self-insured health plans are in

a particularly beneficial position. Both the plan administrator and participant can actually analyze the current and historical data, to define areas of need and identify where cost-cutting measures are needed. Investing in a specialty drug program, when no one needs such drugs, may take a back seat to promoting generics and proper drug regimes – if that is where a major area of need exists for the benefit plan. Not only does data allow for a custom program to be built; it also allows the sponsor to measure and analyze the effectiveness of their program. As mentioned by me and many others, sometimes you need to spend a little to save a lot. Sadly, many participants don’t obey their medication regimen. It saves them some money in the short-run and if they aren’t filling their prescriptions, it even saves their plan some funds as well. Those savings are short lived,

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The Self-Insurer | October 2014

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however, once the condition for which the patient was treating worsens and catastrophic loss is suffered. We know that 20% of all new prescriptions go unfilled and 40% of patients do not adhere to their prescribed medications. This leads to greater costs down the road for the patient and the plan. Thus, communication between the participants, pharmacists, physicians and the plan is of the utmost importance – to ensure the most effective, efficient and easy to obey regimen is being prescribed; and patients understand the benefits (health-wise and financially) of obeying. Perhaps it even makes sense to incentivize such behavior. Again – invest a little now, benefit a lot later. If self-funded plans analyze their data, identify cost drivers and take proactive steps now – to educate patients and providers, limit avenues of drug receipt, define parameters for what is appropriate and payable, incentivize cost-cutting behavior by the provider and patient, incentivize adherence, align incentives with costcontainment and thereby avoid conflicts of interest and focus on “stacking the deck” in your favor before a claim is ever incurred, benefit plans can and will turn the tide – benefiting the plan as a whole, its members, and society. n

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October 2014 | The Self-Insurer

Ron Peck, Sr. Vice President and General Counsel, has been a member of The Phia Group’s team since 2006. As an attorney with The Phia Group, Ron has been an innovative force in the drafting of improved benefit plan provisions, handled complex subrogation and third party recovery disputes, and spearheaded efforts to combat the steadily increasing costs of healthcare. In addition to his duties as counsel for The Phia Group, Ron leads the company’s consulting, marketing, and legal departments. Ron is also frequently called upon to educate plan administrators and stop-loss carriers regarding changing laws and strategies. Ron’s theories regarding benefit plan administration and healthcare have been published in many industry periodicals, and have received much acclaim. Prior to joining The Phia Group, Ron was a member of a major pharmaceutical company’s in-house legal team, a general practitioner’s law office, and served as a judicial clerk. Ron is also currently of-counsel with The Law Offices of Russo & Minchoff. Ron obtained his Juris Doctorate from Rutgers University School of Law and earned his Bachelor of Science degree in Policy Analysis and Management from Cornell University. Ron is also a Certified Subrogation Recovery Professional (“CSRP”). References Impact of Rising Prescription Drug Costs, Steven L. Coulter, M.D., BlueCross BlueShield of Tennessee Health Institute, Chattanooga, TN 37402, www.bcbst.com/health-institute/research/ImpactofRisingDrugCosts.pdf.

1

2 Medicine Use and Shifting Costs of Healthcare; Report by the IMS Institute for Healthcare Informatics; IMS Institute for Healthcare Informatics, 11 Waterview Boulevard, Parsippany, NJ 07054, USA; April 2014, www.theimsinstitute.org.

10 Reasons Your Prescription Drug Prices Are So Painfully High, Sean Williams, July 20, 2014, www.fool.com/investing/ general/2014/07/20/10-reasons-your-prescription-drug-prices-are-so-pa.aspx.

3, 4

5 Medicine Use and Shifting Costs of Healthcare; Report by the IMS Institute for Healthcare Informatics; IMS Institute for Healthcare Informatics, 11 Waterview Boulevard, Parsippany, NJ 07054, USA; April 2014, www.theimsinstitute.org.

Impact of Rising Prescription Drug Costs, Steven L. Coulter, M.D., BlueCross BlueShield of Tennessee Health Institute, Chattanooga, TN 37402, www.bcbst.com/health-institute/research/ImpactofRisingDrugCosts.pdf

6, 8

IMS Health, National Sales Perspectives, Report by the IMS Institute for Healthcare Informatics; IMS Institute for Healthcare Informatics; 11 Waterview Boulevard, Parsippany, NJ 07054, USA; Jan 2014, www.theimsinstitute.org

7, 9

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The Self-Insurer | October 2014

13


ART GALLERY by Dick Goff

XXX-Rated Exposure of the NAIC

I

don’t recall treating a XXX subject in this column previously, and I hope it won’t offend anyone. Actually, you won’t have to hide this magazine from impressionable youngsters – the XXX designation in this case is not a movie rating, but the nub of a thorny issue now being considered by the National Association of Insurance Commissioners (NAIC). In last month’s column we reviewed some history of the NAIC’s current proposal to lump all captives that write business in states other than their licensing domicile into the category of “multi-state insurers.” As part of the NAIC’s standards for accreditation of state insurance departments, this definition would have the virtual force of law if adopted. Some say that forcing captives to be regulated as if they were conventional insurance companies would wreck the domestic industry and set captives sailing to offshore domiciles. Today’s objective is to drill down into the proposal’s apparent purpose and its weaknesses as probed by many captive associations, individual state insurance regulators and the Captive Insurance Companies Association (CICA). I hope it will spark further

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October 2014 | The Self-Insurer

interest and outrage among ART participants attending SIIA’s annual confab in Arizona. The proposal by Rhode Island Superintendent Joseph Torti, chair of the NAIC Financial Condition (E) Committee, concerns the use of special purpose vehicles (SPV) and captives reinsuring the risks of life insurers’ excess reserves required by Life Insurance Policies Regulation XXX – not a very sexy designation, after all. My learned colleague Jeff Simpson believes the intent of the proposed accreditation standard is to prevent an insurance meltdown similar to 2008 when certain guarantees by some securitizing SPVs turned out to have insufficient assets to cover the risks. By requiring XXX reinsurers to report more information in more states, Superintendent Torti and the NAIC apparently believe liquidity difficulties will be prevented. “The biggest problem with the proposal is that its language is so broad that all captives reinsuring risks beyond their home domicile would be caught up as well,” said Simpson, an attorney with Gordon, Fournaris, Mammarella in Wilmington, Delaware, and member of SIIA’s ART Committee. Jeff provides an illuminating example: “It’s as if some highway safety agency wanted to regulate sport utility vehicles and defined them as having an engine and four wheels – all cars would be caught up in a regulation intended just for a certain few.” “You can debate whether there

should be additional safeguards for life insurance and their XXX reinsurers,” he added, “but there’s really no reason for the NAIC to take an action that would cripple a much broader segment of our industry.” “With this proposal, the NAIC appears to be sending the message that as an organization it doesn’t trust individual state insurance departments to properly inspect captive reinsurers’ collateral,” Simpson said, “and I don’t think that’s a fair or accurate assessment.” Now we seem to face a proposal moving through a bureaucratic process in a black box by a selfappointed legislature that doesn’t like or understand the captive industry. However, it was interesting to learn that at its August meeting in Louisville NAIC leaders appeared to launch a half-hearted effort to calm our industry. We don’t know whether that was out of a dawning sense of fairness or to make us more docile as we approach our fate. We hope NAIC is taking seriously a range of industry protests that continues to gain momentum. CICA disseminated a template letter pointing out the errors of NAIC’s ways, and several state insurance commissioners have registered their opposition. Last month’s column quoted the request by Fitch Ratings calling for the NAIC to clarify whether all captives should be liable under its proposed accreditation standards and warning that new reporting requirements would materially increase costs for those captives.

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


In addition to its appeal for the NAIC to clarify the purposes and breadth of the new rule, CICA pointed out these factors: • The proposal is unnecessary because the financial soundness of a captive reinsurer’s credit is already protected by review and approval by the regulator of the licensing domicile, along with the captive’s business plan and financial filings. • The proposal appears to violate the Nonadmitted Risk and Reinsurance Act (title v. of the Dodd Frank federal law) that prohibits a non-domiciliary regulator from regulating reinsurance provided to an insurer domiciled in another state. • The NAIC may be violating its own procedures for adopting or changing existing accreditation standards without going through its own due process. It will be interesting to see how this all works out. And by “interesting” I mean whether we wake up tomorrow without a domestic captive insurance industry. n

Do you aspire to be a published author? Do you have any stories or opinions on the selfinsurance and alternative risk

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

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.

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The Self-Insurer | October 2014

15


Bench From the

by Thomas A. Croft, Esq.

6th Circuit’s Decision in SIIA v. Snyder Has Significant Implications for Self-Insured Plans and Their TPAs, and Also Poses Perplexing Questions for Stop Loss Carriers

O

n August 4, 2014 the U.S. Court of Appeals affi rmed the U.S. District Court’s decision of September 7, 2012, throwing out SIIA’s ERISA pre-emption challenge to the Michigan Health Insurance Claims Assessment Act, MCL 550.1731, et seq. (“the Michigan Act”) on the face of SIIA’s Complaint. The trial and now appellate, federal courts determined that SIIA’s position on the preemption issue “failed to state a claim upon which relief could be granted” under Fed.R.Civ.P. 12(b)(6). In other words, these courts concluded that SIIA was just plain wrong as a matter of law, even if everything it alleged in

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October 2014 | The Self-Insurer

its Complaint about the nature and effect of the Michigan Act was true. In general terms, The Michigan Act imposes a tax (or assessment) (currently 0.75%) on “paid claims” by “carriers” and TPAs up to a maximum of $10,000 per insured individual annually. “Carriers” include health insurers generally and ERISA Plan Sponsors in particular. The assessment only applies to services rendered within the state of Michigan to persons who “reside” in Michigan. The regulations promulgated under the Michigan Act state that the home address of an individual as maintained in the ordinary business records of a carrier or TPA establishes a “rebuttable

presumption” that that address is the domicile (residence) of the individual for purposes of the tax. I am no ERISA pre-emption expert, although I will admit to more than a passing familiarity with the jurisprudence concerning it and its development over the past twenty years. In any event, I make no judgments about the propriety of either the District Court’s or the Court of Appeal’s pre-emption analysis, though I question whether this wasn’t a much closer case than either court appreciated under applicable pre-emption law. SIIA’s brief in the Court of Appeals is available here1 and deserves careful study

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with the Court of Appeals opinion itself, here.2 Regardless of the merits of these Courts’ decisions on the pre-emption issues, I question the procedural propriety of their disposition of this case on the face of the pleadings, without any inquiry into the real world facts alleged by SIIA in its Complaint and any evidence about the effect of the Act on the administration of ERISA Plans, both within and without the State of Michigan.

reimbursed by the stop loss carrier and the stop loss carrier is responsible for the assessment on “paid claims” that are... [wait for it... ] “reimbursable to” the stop loss carrier.

Closer to home, for me, however, are the specifics of the Michigan Act as they purport to apply to stop loss carriers, which are contradictory and frankly baffling in several respects. The tax is expressly imposed on “carriers” and TPAs for “paid claims” as defined in the Act. Before delving into what exactly is a “paid claim” under the Act, we need to examine Section 3(3) of the Act in detail:

Subdivision d might make more sense if the word “by” had been used in lieu of the word “to,” thus purporting to impose the tax on the TPA up to the specific deductible and on the stop loss carrier to the extent of the reimbursable excess. But that’s NOT what the statute says. One has to strain to imagine where a “paid claim” would be “reimbursable to” a stop loss carrier. Truth is, I can’t think of one. A refund to the stop loss carrier by the group/TPA on an overpaid claim would be something “reimbursable to” the stop loss carrier, but why should the stop loss carrier be taxed on such an adjustment?

“(3) All of the following apply to a group health plan that uses the services of a third party administrator or excess loss or stop loss insurer: a. A group health plan sponsor is not responsible for an assessment under this section for a paid claim if the assessment on that claim has been paid by a third party administrator or excess loss or stop loss insurer, except as otherwise provided in section 3a(2). b. Except as otherwise provided in subdivision (d), the third party administrator is responsible for all assessments on paid claims paid by the third party administrator. c. Except as otherwise provided in subdivision (d), the excess loss or stop loss insurer is responsible for all assessments on paid claims paid by the excess loss or stop loss insurer. d. If there is both a third party administrator and an excess loss or stop loss insurer servicing the group health plan, the third party administrator is responsible for all assessments for paid claims that are not reimbursed by the excess loss or stop loss insurer and the excess loss or stop loss insurer is responsible for all assessments for paid claims that are reimbursable to the excess loss or stop loss insurer.”

What in the name of all that is rational (much less holy), do these provisions mean? • Subdivision 3(a) tells us that a Plan Sponsor doesn’t owe the assessment if the TPA or stop loss carrier has paid it... This much makes sense – if someone else has paid a tax for you, it seems only logical that you no longer owe the tax. But then we have the phrase “except as otherwise provided in section 3(a)(2).” The problem here is that section 3a2 does not “otherwise provide.” It simply declares that Plan Sponsors and TPAs shall develop a methodology for collecting the assessment from groups with uninsured or self-funded coverage as a percentage of “actual paid claims.” See Section 3(a)(2)(d). The interplay between these provisions is simply unclear. • Subdivisions 3(b) and 3(c) tell us that the TPA owes the assessment on all its “paid claims,” “except as provided subdivision d,” and that the stop loss carrier owes the assessment on all its “paid claims,” except as provided in subdivision d. So subdivision d seems quite important. • Instead of clarifying, subdivision d obfuscates and confuses things further. It says that, where there are both a TPA and a stop loss carrier (quite a typical scenario), the TPA is responsible for the assessment on “paid claims” not

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Maybe the key to understanding the above-quoted provisions is the phrase “uses the services of a third party administrator or excess loss or stop loss insurer” in Section 3(3) quoted above. Does being insured by a stop loss carrier constitute “using the services of ” the stop loss carrier? Perhaps subsection 3 contemplates a situation where the lines between providing excess loss insurance become blurred with the processing of underlying claims by stop loss carriers acting in a dual capacity as a TPA processing claims under the Plan and also as a stop loss carrier. I have criticized such arrangements elsewhere on conflict of interest grounds, but it is possible that the Michigan legislature recognized this blending of functions exists with some carriers and wrote the Act with that aspect in mind. Insuring groups with stop loss insurance alone cannot fairly be characterized as “providing a service” in my view and thus the The Self-Insurer | October 2014

17


entirety of section 3(3) may be inapplicable in most cases to stop loss carriers. Additionally, insofar as potential stop loss carrier liability is concerned, we must look closely at the Act’s definition of a “paid claim.” In pertinent part, it states: “’Paid claims’” means actual payments, net of recoveries, made to a health and medical services provider or reimbursed to an individual by a carrier, third party administrator, or excess loss or stop loss carrier... ” Real world fact: STOP LOSS CARRIERS DO NOT PAY PROVIDERS OR INDIVIDUALS. [Please excuse me for raising my voice]. Ergo, stop loss carriers never “pay claims” within the meaning of the Act and are therefore not subject to the assessment unless they do something completely outside Risk Mitigation 3 the norm of industry custom, practice and common sense, like cutting a

check to a provider directly or, God forbid, paying a stop loss claim directly to a Plan beneficiary. SIIA raised such arguments in its briefs, but neither court’s opinion addressed them. Indeed, neither the District Court nor the Court of Appeals’ opinions ever even mention the words “stop loss” or “excess loss.” In my opinion, the Act simply does not and cannot apply to stop loss carriers, the references in the Act to such carriers quoted above notwithstanding. But that is only my opinion based on my reading of the statute itself in its current form and cannot and should not be taken as formal legal advice without further study. Perhaps the addition of language to policy forms might address any uncertainty in this regard and clearly provide for indemnification from stop loss insureds for any such assessments levied now by Michigan or by other jurisdictions in the future. So, where does this leave us? It leaves TPAs to pay the tax and to recoup it from their clients, including self-insured clients subject to ERISA. It imposes onerous reporting requirements on them, for which they will likely charge. This is a problem for TPAs both inside and outside Michigan, insofar as Michigan residents receiving treatment within the state will be covered by self-insured Plans sponsored by employers everywhere and hence Plan Sponsors/TPAs will technically be subject to the assessment and reporting requirements as far as Michigan is concerned. Perhaps the most ominous aspect of the Courts’ validation of the Act is expressed in footnote 2 of the Court of Appeals’ opinion: “We recognize that each of the fifty states might enact similar taxes and multiple states could potentially claim and individual, perhaps a student, as a

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October 2014 | The Self-Insurer

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resident. This scenario could be burdensome to ERISA-covered entities. This state of affairs, however, is hypothetical and not before us at this point. We prefer to rule based on concrete facts rather than a blind appraisal of future events... ” Indeed. The validation of this Act will invite similar legislation elsewhere. One can only hope that another federal circuit will come to the opposite conclusion, one that is informed by the development of a factual record on the implications of such legislation on the self-funded community. n Tom Croft is a magna cum laude graduate of Duke University (1976) and an honors graduate of Duke University School of Law (1979), where he earned membership in the Order of the Coif, reserved for graduates in the top 10% of their class. He returned to Duke Law in 1980 as Lecturer and Assistant Dean (1980-1982) and as Senior Lecturer and Associate Dean for Administration (1982-1984). He also taught at the University of Arkansas-Little Rock law school, where he was an Associate Professor of Law (1990-91), earning teacher of the year honors. Until 2004, when he specialized in medical stop loss litigation and consulting, Tom practiced general commercial litigation. He was a partner in the litigation section of a major Houston firm in the late 1980s and moved to the Atlanta area in 1991. He has been honored as a Georgia “Super-Lawyer” by Atlanta Magazine for the last eight years running and holds an AV® Preeminent rating from Martindale-Hubble®.

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. References http://stoplosslaw.com/wp-content/uploads/2014/08/SIIA6th-Circuit-Brief.pdf

1

2 http://stoplosslaw.com/wp-content/uploads/2014/08/SIIAMichigan-Decision-August4-2014.pdf

Tom currently consults extensively on medical stop loss claims and related issues, as well as with respect to HMO Excess Reinsurance, Medical Excess of Loss Reinsurance

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The Self-Insurer | October 2014

21


Measuring the

IMPACT

of

Healthcare Reform

on Workers’ Compensation by Steven Kokulak, Senior Vice President, Workers’ Compensation & No-Fault, MagnaCare

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October 2014 | The Self-Insurer

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


A

growing number of employers have asked about healthcare reform and its potential impact on workers’ compensation, a sector that has been typically slow in responding to change in the healthcare market. Workers’ compensation didn’t begin using PPOs until much later than other payers, for example. With medical expenses continuing to be a much larger factor in all workers’ compensation payments, it’s likely that workers’ compensation payors will be paying closer attention to the key trends that are changing the face of healthcare coverage across all sectors: Accountable Care The goals of ACOs are to increase quality and manage costs, while improving timeliness and coordination of care. An ACO seeks to provide patient-centered treatment programs and manage the continuum of care from wellness to chronic disease. This involves electronic information sharing and moving away from fee-for-service payment systems to value-based reimbursement programs focused on quality outcomes and shared risk. Some workers’ compensation payors are already considering paying more than state fee schedule or UCR for quality care. Micro-networks Healthcare systems organized to create high quality physician networks provide robust, targeted access to care by channeling workers toward specific providers with financial incentives. By being consistently rewarded for utilizing providers that cost them less out-of-pocket, worker health behavior is likely to change population health, with better individual health outcomes and reduced expenditures. Smaller networks featuring more qualified doctors help to build stronger doctor/ patient relationships, which can in turn lead to better outcomes. Most workers’ compensation payors are now looking

to use narrower networks of quality providers, at least in states where care can be directed, rather than the typical broader PPO networks. Data Integration Automatically aggregating and consolidating information from a variety of disparate systems and sources, including inpatient, ambulatory and home sites, has been shown to improve continuity of patient care and efficiency. Today, many provider organizations are working to effectively connect data silos to enhance value, safety and efficiency. Predictive Modeling Predictive modeling enables payers to identify the top percentage of covered lives who are at highest risk and highest cost and who will most likely benefit from disease management programs. The goal is to improve health for those patients and lower costs overall. Workers’ compensation payors are paying closer attention to comorbidities and therefore wellness programs.

Rising Costs Will Trigger Change Healthcare reform is designed to improve access to care, change the way accountable care organizations are used and increase consolidation among hospitals and providers. In response, it is expected that total spending will rise and health plans will increase premiums to mitigate financial risks. Recently, Treasury Department officials announced that employers with 50 to 99 workers will be given until 2016 – two years longer than originally envisioned – before they risk a federal penalty for not complying. Companies with 100 or more are required in 2015 to offer coverage to 95 percent of full-time workers and avoid a fine by offering insurance to 70 percent of them next year.1 Medical costs associated with workers’ compensation coverage are estimated to be two percent of the aggregate medical expenditure in the United States. While the federal healthcare law made no direct provisions regarding workers’ compensation, healthcare professionals can expect to feel its indirect influence to varying degrees. On a state-by-state basis, the difference will depend on which states: • allow the carrier or employer to direct care and send injured workers to a hospital network or doctor • have a mandated fee schedule • cap claim amounts If the goals of healthcare reform are successful in terms of prevention and health/wellness, a healthier workforce would have fewer work-related injuries and/ or recover from those injuries more rapidly, putting less burden on the workers’ compensation market.

Cost Shift Toward Health Insurance Markets Some experts predict that costs will shift between the workers’ compensation and health insurance markets, improving the current challenges of dealing with a population that does not have health insurance and separating work-related injuries/ medical conditions from those that are non work-related.2 A RAND study of the Massachusetts’ healthcare system found that based on a review of hospital billings to workers’ compensation claims, the billed charges and treatment volume per workers compensation claimant did not change. The total volume of workers’ compensation billings, however, fell by 5 percent to 10 percent, indicating that some claimants had opted to file claims with their health insurance providers rather than as workers’ compensation.3 In general, workers with chronic medical conditions prefer health insurance to

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The Self-Insurer | October 2014

23


workers’ compensation because they don’t have to deal with claims handlers and medical claim payment systems. Healthcare reform could also shift workers toward group health coverage because it prohibits health insurers from refusing coverage for pre-existing conditions.4 Prior to changes in the healthcare system, some individuals relied on workers’ compensation for at least some healthcare coverage for a pre-existing condition associated with a work-related injury. There is a possibility, however, that increased use of high dollar deductibles and co-payment requirements in the health insurance market could drive some workers back to the workers’ compensation market.5

The Healthcare Provider Perspective A number of doctors oppose the federal healthcare law and because the

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October 2014 | The Self-Insurer

workers’ compensation fee schedule is higher than Medicare, would prefer a workers’ compensation patient over an exchange patient. That said, the workers’ compensation system typically requires more justification of the treatment and demands more formal reports and other paperwork. In some cases, providers may be required to testify before receiving reimbursement.6 From this perspective, the opportunity to direct patients to claim coverage under health insurance instead of workers’ compensation would work in favor of the healthcare providers. The expected physician shortage could increase workers’ compensation costs by delaying the employee’s medical evaluation(s), thereby impeding a carrier’s ability to deny questionable claims as quickly as possible. The shortage would also prevent timely treatment of workers’ compensation conditions. Delays in care tend to slow recovery time and prevent a worker

from returning to work sooner, which in turn extends the medical cost and wage replacement components of workers’ compensation claims. The shortage of physicians and registered nurses will lead to proposed options for appointments with nurse practitioners and physician assistants. But the workers’ compensation system does not normally recognize treatment from these providers, which could pose reimbursement issues and add client approval requirements. If an occupational medicine facility is available, it would be the best option for an injured worker, improving access to care. It is likely, however, that most injured workers would visit their family doctor first.7 Healthcare reform seeks to address physician shortages by providing loanbased repayment programs aimed at primary doctors and offering incentives to medical schools to increase enrollment. But results remain to be seen.

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


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The Self-Insurer | October 2014

25


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excessworkerscomp@midman.com 800.800.4007 midlandsmgt.com

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October 2014 | The Self-Insurer

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The Patient-Centered Outcomes Research Institute, created to perform comparative effectiveness research, is expected to identify the most effective medical treatments and preventive medicine. Such optimized care could get claimants back to work sooner, reducing both the medical cost and the wage replacement component. Evidence-based medical guidelines have increased across the country and been found to decrease workers’ compensation medical costs.8

Long-Term Outlook for Workers’ Compensation At its own pace, workers’ compensation will catch up with the overriding trend toward quality care, rather than simply focusing on price. The true impact of healthcare reform on workers’ compensation coverage will become more measurable heading into 2015 and more definitively in the next two years when the impact of the employer mandate begins to play out. Based on expert speculation, it’s likely that medical expenditures will shift from the workers’ compensation market to the health insurance market because a portion of the uninsured population will no longer need to use workers’ compensation to obtain healthcare. In the long run, access to more affordable care and health insurance will lead to a healthier workforce and improved productivity – the ultimate goal of reform. The future of the healthcare industry is likely to transition away from injury-based care management toward a more patient-centered approach that focuses on prevention and timely care that puts the worker/patient first. n

President and eventually to his current position as Senior Vice President. In this capacity he is responsible for all matters relating to MagnaCare’s Workers Comp and No Fault lines of business, including sales, marketing, business development and compliance. He is also involved in operational structure of the areas which support this division. References Eilperin, Juliet; White House delays health insurance mandate for medium-size employers until 2016. Washington Post; April 2014; www.washingtonpost. com/national/health-science/white-house-delays-healthinsurance-mandate-for-medium-sized-employersuntil-2016/2014/02/10/ade6b344-9279-11e3-84e127626c5ef5fb_story.html; accessed August 18, 2014. 1

Sathiyakumar, Vasanth, et al; The Future of Workers’ Compensation under PPACA; American Academy of Orthopaedic Surgeons; www.aaos.org/news/aaosnow/nov12/ advocacy2.asp; accessed April 16, 2014. 2

Feldman, Judd; FELDMAN: Affordable Care Act stirs paradoxes for employers; Indianapolis Business Journal; November 23, 2013; www.ibj.com/feldman-affordable-careact-stirs-paradoxes-for-employers/PARAMS/article/44723; accessed April 16, 2014. 3

Jones, Derek A. (2013, July 10) ACA: An act of unknown consequences for workers compensation. Millman. Retrieved from www.milliman.com/insight/2013/ACA-Anact-of-unknown-consequences-for-workers-compensation/; accessed April 17, 2014 4

Steve Kokulak joined MagnaCare in 2007 as Director of Workers Compensation and No Fault, coming to the organization from Liberty Mutual Insurance Company where he had served as Senior Trial Counsel and Team Lead. At MagnaCare, he rose to Vice

Jones, 2013

5-8

When it comes to reducing healthcare costs and plan management, you may need some help. Is what you are doing effective? What are you doing that’s different? Are your employees engaged and willing to help? Are your employees “educated consumers?” Are your employees and management satisfied? The thinking that got us to this point is not the thinking that will lead us out.

Providing access to cost effective provider networks

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The Self-Insurer | October 2014

27


PPACA, HIPAA and Federal Health Benefit Mandates:

Practical

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.

Q&A

ACA Administrative Simplification Provisions for Health Plans: Time to Apply for an HPID and Prepare for Certification of Compliance

W

hile much has been written about Affordable Care Act (“ACA”) compliance obligations for employer-sponsored plans – such as the “pay or play” rules, various fees and taxes and insurance reforms – the ACA’s changes with respect to HIPAA’s administrative simplifi cation provisions have received less attention. As deadlines approach, however, it is important for plans to ensure compliance with these requirements. This article discusses two major developments applicable in 2014 and 2015: the requirements to i) obtain a unique health plan identifi er (“HPID”) and ii) fi le a certifi cation of compliance with HHS. Section § 1104(c)(1) of the ACA required HHS to promulgate rules regarding HPIDs for health plans.1 The HPID is a standardized ten-digit number assigned to health plans, which is designed to increase standardization and help covered entities verify information from other covered entities. The level of control a plan has over its own activities determines whether it must apply for its own HPID or whether it might be able to rely on the HPID of another health plan. If the HPID requirement applies, large health plans must obtain one by November 5, 2014 and small health plans must do so by November 5, 2015.

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


In addition, HHS has issued proposed regulations regarding the “certification of compliance” with HIPAA’s electronic transaction standards required by ACA § 1104(h). Most health plans must file the first of two certifications with HHS by December 31, 2015. While much detail regarding this certification remains to be developed, health plans should begin planning so that they can complete the certification’s required testing process when final regulations are issued.

A. HPID On April 27, 2012, HHS issued a proposed rule about HPIDs. The final regulations, issued on September 5, 2012, modified the implementation dates originally set forth in the April rulemaking, but did not substantively modify them.

Who Needs an HPID? The regulations draw a distinction between Controlling Health Plans and Subhealth Plans, based on the level of control the entity has over its activities. Under these regulations, a Controlling Health Plan (“CHP”) is required to obtain an HPID. A Subhealth Plan (“SHP”) is not required to obtain an HPID, but may do so, or a CHP can obtain a HPID on its behalf. A CHP is defined as a health plan that 1) controls its own business activities, actions, or policies; or 2) is controlled by an entity that is not a health plan and if it has one or more SHPs, exercises sufficient control over them to direct their business activities, actions, or policies. The regulations list the following considerations in determining whether an entity is a CHP: 1) Does the entity itself meet the definition of a health plan at 45 C.F.R. § 160.103? 2) Does either the entity itself or a nonhealth plan control the business activities, actions, or policies of

the entity? If the answer to both questions is yes, the entity meets the definition of a CHP. This includes self-insured plans that satisfy the definition of a CHP. A SHP, by contrast, is defined as a health plan whose business activities, actions, or policies are directed by a CHP. In determining whether an entity is a SHP, the following considerations are relevant: 1) Does the entity meet the definition of health plan at 45 C.F.R. § 160.103? 2) Does a CHP direct the business activities, actions, or policies of the health plan entity? If the answer to both questions is yes, the entity meets the definition of a SHP. While it is not entirely clear from the regulations, it appears that insurers may apply for HPIDs on behalf of fully-insured plans.2 Specifically, the insurer’s health plan would be considered the CHP because it controls its own business activities, actions and policies, while the employer’s fully-insured health plan would be considered a SHP because its business activities, actions and policies are controlled by the insurer’s CHP. Nonetheless, more guidance to clarify this issue would be welcome.

Practice Pointer: A “health plan,” as defined in 45 C.F.R. § 160.103, includes, among other entities, a group health plan, health insurance issuer, or HMO. Thus, for example, even excepted benefits such as dental or vision only coverage and health FSAs would be required to obtain HPIDs. Likewise, HRAs and retiree only health plans would be required to obtain HPIDs as well. However, it appears that plans may file for one HPID for bundled plans (e.g., if the plan constitutes one plan for Form 5500 filings), so some of these types of coverage may be bundled with other coverage for HPID purposes, depending on the structure of the plan. For example: Plan Description A single medical plan with three (3) self-insured options Medical Plan with two (2) self-insured options and one (1) fully-insured option Medical Plan with three (3) fullyinsured options and no self-insured options (e.g., no health FSA or HRA) Medical Plan with three (3) fully-insured options and a health FSA

HPID Responsibility Employer obtains one HPID for the entire plan Employer obtains HPID for self-insured options, but insurer also obtains HPID for the fully-insured option. Insurer obtains HPID. Employer’s Medical Plan is a SHP and may be able to rely on the insurer’s CHP HPID. Employer obtains HPID for health FSA, but insurer obtains HPIDs for the fullyinsured options. Employer may have until November 5, 2015 to apply for HPID if health FSA qualifies as a small plan as discussed below.

Practice Pointer: Not all excepted benefits under HIPAA’s portability rules are excepted benefits under the administrative simplification rules. For example, although health flexible spending accounts, stand-alone dental and vision policies and retiree-only plans might be excepted benefits under HIPAA’s portability rules, they are not excepted benefits under the administrative simplification rules and must obtain a HPID.

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The Self-Insurer | October 2014

29


Obtaining an HPID A national enumeration system, known as the Health Plan and Other Entity Enumeration System (“HPOES”), assigns unique HPIDs through an online application process. HPOES became available within CMS’ HIOS system in late March 2013. As noted above, large health plans must obtain an HPID by November 5, 2014. Small health plans must do so by November 5, 2015. For this purpose, a “small health plan” is defined as a health plan with annual receipts (i.e., benefits for a self-funded plan or premiums for an insured plan) of $5 million or less.3 Thus, many excepted benefit coverages (e.g. FSAs, dental or vision only coverage) should be eligible for a one year extension. By the “full implementation date” of November 7, 2016, all health plans must use the HPID in their standard transactions.4

Practice Pointer: Many individuals consider Employee Assistance

Programs (EAPs) to be self-insured plans because they are not generally subject to state insurance laws, but other individuals considered EAPs to be insured. Assuming that an EAP is treated as a self-insured plan, an employer must apply for a HPID if it offers an EAP even if all of its other benefits are fully-insured. However, most EAPs will qualify as small health plans and have until November 5, 2015 to do so. EAP providers should work with counsel to determine if they must obtain a HPID. Additional guidance on this issue would be helpful.

How Does the Application Process Work? Entities must first be registered in HIOS (if they are not already) to sign up for an HPID. Entities can register for HIOS at https://portal.cms.gov/wps/ portal/unauthportal/home/. First, users must sign up as individuals and request

to be linked to the relevant company. The user will then select whether the application is for an HPID (SHP or CHP) or Other Entity Identifier (“OEID”), which, as described below, may be obtained by entities like TPAs who are not required to obtain HPIDs. Keep in mind that plans must sign up for a CHP before signing up for any SHPs (although, as discussed above, HPIDs are permissive, not required, for SHPs). The data elements that are requested in the application for employer-sponsored plans include i) company information (including name, EIN and address); ii) authorizing official information (including name and contact information); and iii) the plan’s NAIC number or payer ID for standard transactions. Although not defined by HHS, it is generally expected that health plans will use the plan sponsor’s EIN for the “payer ID” since they do not have a NAIC number.

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? Offer In-Network access to a nationally recognized, high-quality cancer treatment provider ? Significantly reduce the impact of cancer related costs on your stop-loss premiums and bottom line ? Enhance employee satisfaction by providing additional cancer care options ? Impact the cost of claims that fall outside of your existing PPO option

Contact us today for more information! 866-762-4455 www.UnitedClaimSolutions.com

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October 2014 | The Self-Insurer

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AIG Benefit Solutions

Bring on experience The benefits landscape is constantly changing. For generations, AIG Benefit Solutions has offered innovative solutions to help our clients meet their challenges and prepare for tomorrow.

We offer a diverse portfolio of insurance products designed to help businesses offer competitive benefits that protect their employees and families. • Supplemental Medical Solutions for more complete health coverage • Protection Solutions including life, accident and disability plans • Employer Risk Solutions including stop-loss and captive arrangements • Multi-Product Solutions like ProtectPakSM to simplify benefit offerings

Visit aig.com/us/benefits to learn more about what AIG Benefit Solutions can do for your business. AIG Benefit Solutions® is the marketing name for the domestic benefits division of American International Group, Inc. The underwriting risks, financial and contractual obligations, and support functions associated with products issued by American General Life Insurance Company, The United States Life Insurance Company in the City of New York, and National Union Fire Insurance Company of Pittsburgh, Pa., are the issuing insurer’s responsibility. The United States Life Insurance Company in the City of New York is authorized to conduct insurance business in New York. National Union Fire Insurance Company of Pittsburgh, Pa., maintains its principal place of business in New York, NY, and is authorized to conduct insurance business in all states and the District of Columbia. NAIC No. 19445. Not all policies are available in all states. © 2014. All rights reserved. AIGB100051 R08/14

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HELP YOUR CLIENTS

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

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October 2014 | The Self-Insurer

SLPC 24843 11/13 (exp. 11/15)

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After the information is submitted, an “authorizing official” within the company must approve the application. CMS has created several videos, presentations and explanatory slides to guide plans through the application process.5

Practice Pointer: It will be important to secure an HPID well before the mandatory compliance dates, so that there is sufficient time to work out any administrative issues that may arise with multiple entities implementing the new system. Companies who have not previously signed up within HIOS should allow several days for the various internal approvals that must take place before they can obtain an HPID.

Penalties if HPID Not Obtained

transactions apply to health plans, one which employer-sponsored plans may directly perform (rather than relying on TPAs) is the eligibility for a health plan standard (270 /271), which applies to inquiries between health care providers and health plans regarding a participant’s eligibility, coverage and/or benefits under a plan.

HHS’ HPID regulations do not specify a separate penalty for failing to obtain a HPID. Although not clear, it appears that the same civil monetary penalty that applies to violations of HIPAA’s administrative simplification rules would apply to a plan that failed to obtain an HPID. Thus, a plan that by willful neglect does not obtain a HPID would be subject to a penalty of at least $50,000 for failing to obtain a HPID, plus at least $50,000 each time a standard transaction occurs that requires an HPID, but fails to include an HPID. This penalty is capped at $1.5 million for violations of an identical requirement or prohibition within the same calendar year.

Practice Pointer: Covered entities, including health plans, are required

How will an HPID be used?

There are also several uses for which an entity is permitted, but not required, to use an HPID. CMS has stated that the HPID can be used for “any other lawful purpose” (in addition to a standard transaction).6 The regulations list the following potential uses of an HPID, which CMS believes will increase efficiency: in internal files, to facilitate the processing of transactions; on an enrollee’s health insurance card; as a cross-reference in healthcare fraud and abuse files and other program integrity files; in patient medical records to help specify health care benefit packages; in EHRs to identify health plans; in federal and state health insurance exchanges; and for public health data reporting purposes.

A covered entity is required to use an HPID when it identifies a health plan in a standard transaction. Note that this requirement also applies to business associates when they conduct standard transactions on a covered entity’s behalf. While multiple standard

to comply with HIPAA’s standard transaction rules when they communicate electronically with each other. The following electronic transactions are subject to HIPAA’s rules for standard transactions: • health care claims or equivalent encounter information • eligibility for a health plan • referral certification or authorization • health care claim status • enrollment and disenrollment in a health plan • health care electronic funds transfer and remittance advice • health plan premium payments • coordination of benefits • first report of injury (e.g., to initiate workers’ compensation actions) • health claims attachments (effective January 1, 2016) • other transactions specified by HHS in regulations (e.g., Medicaid pharmacy subrogation)

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The Self-Insurer | October 2014

33


Practice Pointer: While none of these uses currently require an HPID, they are helpful in that they illustrate how CMS intends the HPID to be used. In addition, CMS may decide to mandate some of these uses of HPIDs in the future.

Other Entity Identifiers The HPID regulations also introduce the concept of an OEID for non-health plan entities that may engage in and thus must be identified in, standard transactions. The possible users of OEIDs include third-party administrators, transaction vendors, clearinghouses and other payers. Non-health plan entities are permitted, but not required, to obtain an OEID. However, health plans will want to require their business associates to obtain OEIDs in contractual agreements, particularly any TPAs handling eligibility and/or claim status issues on the plan’s behalf. Entities are eligible to apply for an OEID if they 1) need to be identified in a transaction for which a standard has been adopted by HHS; 2) are not eligible to obtain an HPID or a NPI; 3) are not an individual. Because the adoption of an OEID is voluntary, there is no required compliance date.

Practice Pointer: For employers, the HIPAA standard unique identifier is the employer’s EIN. For providers, the NPI, or National Provider Identifier, is the standard unique identifier.

B. Certification Requirement Another important requirement imposed on plans with respect to HIPAA’s administrative simplification rules is the certification of compliance. Section

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1104(h)(1) of the ACA requires CHPs to file two separate statements with HHS certifying that their data and operating systems are in compliance with the applicable standards and operating rules.7 The first “certification of compliance” applies to the following standard transactions: eligibility for a health plan; health care claim status; and health care electronic funds transfers and remittance advice. It is due by December 31, 2015 for plans that have applied for an HPID by January 1, 2015 (i.e., most large health plan CHPs) and within a year of applying for an HPID for plans that apply for an HPID between January 1, 2015 and December 31, 2016 (i.e., small and new CHPs). Thus, as a practical matter, many health plans that provide excepted benefits and/ or otherwise qualify as a small health plan will have an additional year for compliance. The second certification of compliance – applicable to health claims or equivalent encounter information; enrollment or disenrollment in a health plan; health plan premium payments; health claims attachment; and referral certification and authorization transactions – is, according to the statute, also due on December 31, 2015. However, there are currently no standards or operating rules for these transactions. HHS issued proposed rules on January 2, 2014, setting forth the requirements for the first certification of compliance.8 While much remains to be worked out in the final rules, the proposed rules give a sense of what compliance obligations CHPs should prepare for by the end of 2015. HHS stated in the proposed rules that it intends for the certification to serve as a “snapshot” of compliance, so this is likely a one-time compliance obligation for each required certification.

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Catastrophic medical claims aren’t just a probability — they’re a reality. As a Captive Director, Risk Manager, VP of HR or CFO, QBE’s Medical Stop Loss Reinsurance and Insurance can help you manage those benefit costs. With our pioneering approach to risk and underwriting, we make self-insuring and alternative risk structures possible.

Individual Self-Insurers, Single-Parent and Group Captives For more information, contact: Phillip C. Giles, CEBS 910.420.8104 phillip.giles@us.qbe.com

QBE and the links logo are registered service marks of QBE Insurance Group Limited. Coverages underwritten by member companies of QBE. © 2014 QBE Holdings, Inc.

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The Self-Insurer | October 2014

35


Practice Pointer: The certification

-- HIPAA Credential, or

requirements will take some time to satisfy because they require external testing, so plans should be prepared to act when the final regulations are issued by HHS. In most cases, plans will need to rely on their business associates to conduct this testing. Thus, plans should consider adding provisions to new business associate agreements where the business associate agrees that it will conduct this testing on their behalf.

-- The Phase III Core Seal.

Details of Certification Requirement The proposed rules would require CHPs to submit to HHS: • Number of covered lives, including covered lives in SHPs, on the date the certification is submitted; and • Documentation that the CHP has obtained one of two permissible certifications:

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October 2014 | The Self-Insurer

CHPs will report this information on their own behalf, as well as on behalf of SHPs and business associates conducting standard transactions on their behalf. The term “covered lives” means individuals (including spouses and dependents) covered by major medical policies of a CHP and its SHPs.

Practice Pointer: The use of the term “policy” in the definition of covered lives suggests that the proposed rules only contemplate reporting enrollment counts for fullyinsured plans; further guidance on this subject would be welcome. The HIPAA Credential certification is still under development, but as currently envisioned by HHS, would involve: • Attestation about completing certain external testing of

operating rules (although no specific testing process is specified), • Application form and • Attestation of compliance with HIPAA’s Security, Privacy and Electronic Transaction standards by a senior level executive. The Phase III CORE Seal would involve: • Specified external testing process through a CORE-authorized vendor to obtain the Seal, • Application form and • Attestation (also by senior level executive) of compliance with HIPAA’s Security, Privacy and Electronic Transaction standards. Plans should watch for further development on these methods of certification in the final rules.

Potential Penalties Plans that fail to comply with the certification and documentation of

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compliance requirements (either by submitting the required information late or not at all) may face penalties of $1 per covered life per day, up to a maximum of $20 for covered life, or $40 per covered life if the plan knowingly provides incomplete or inaccurate information.9

at least October 1, 2015. In a final rule issued August 4, 2014, HHS stated that covered entities must continue to use ICD-9-CM through September 30, 2015 and that compliance with ICD-10-CM and ICD-10-PCS will be required beginning October 1, 2015.10

Practice Pointer: The penalties for

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

violations of these provisions are less draconian than other ACA penalties, such as for violations of the “pay or play” rules (under IRC § 4980H) and the PHSA Mandates. However, this penalty will likely be very easy for HHS to enforce, as HHS states that it can compare the list of entities that applied for an HPID with the list of entities that complied with the certification requirement.

Generally, this delay will not impact employers or third-party administrators of flexible spending accounts and health reimbursement arrangements, but thirdparty administrators of self-insured major medical plans and insurers (who have already incurred costs related to the transition to ICD-10) must. n

References This requirement is described in Social Security Act § 1173(b). This rule was required to be based on input from the National Committee on Vital and Health Statistics (“NCVHS”) and be effective no later than October 1, 2012. 1

As written, HHS’s rules could be read to indicate that even a health plan that is fully insured with no self-insured options must apply for its own HPID. However, HHS has typically excluded fully-insured employer health plans from many of HIPAA’s requirements if they do not have access to PHI and have shifted the primary compliance burden, such as the responsibility for providing a Notice of Privacy Practices, to the insurer. Although it is not clear, it appears that HHS may have done the same regarding HPIDs. 2

C. ICD-9 to ICD-10 Code Change Delay HIPAA requires standardized code sets to be used in certain electronic communications of medical data. Currently, HHS has adopted the International Classification of Diseases, 9th Edition, Clinical Modification (“ICD-9-CM”), for diseases, injuries, impairments, health problems and their causes, as well as inpatient hospital services. However, the final HPID regulations adopted the International Classification of Diseases, 10th Revision, Clinical Modification (“ICD-10-CM”) for diseases, injuries, impairments, health problems and their causes, as well as the International Classification of Diseases, 10th Revision, Procedure Classification System (“ICD-10-PCS”) for inpatient hospital services, beginning October 1, 2014. However, the Protecting Access to Medicare Act of 2014 delayed implementation of the ICD-10-CM and ICD-10-PCS code sets until

Fully insured plans should use the total premiums that they paid for health insurance during the plan’s last fiscal year to determine their annual receipts. Self-insured plans should use the total amount of claims paid by the employer, plan sponsor or benefit fund, as applicable, on behalf of the plan during the plan’s last full fiscal year. 3

45 C.F.R. § 162.504. This was corrected from a mistake in the original regulations by 77 Fed. Reg. 60629, Oct. 4, 2012.

4

CMS, “Health Plan Identifier,” March 30, 2014, available at www.cms.gov/Regulations-and-Guidance/HIPAA-AdministrativeSimplification/Affordable-Care-Act/Health-Plan-Identifier.html. 5

CMS, HPID and OEID System Overview, March 2013, available at www.cms.gov/Regulations-and-Guidance/HIPAAAdministrative-Simplification/Affordable-Care-Act/Downloads/HPOESTrainingSlides02132013.pdf. 6

This requirement is described in Social Security Act § 1173(h).

7

Department of Health and Human Services, Administrative Simplification: Certification of Compliance for Health Plans; Proposed Rule, 79 Fed. Reg. 298, January 2, 2014. 8

Language in the proposed rules suggests that this penalty only applies to a “major medical policy,” which is defined as “an insurance policy that covers accident and sickness and provides outpatient, hospital, medical and surgical expense coverage.” Although self-insured plans must obtain certification, the proposed rules do not specify a penalty for those that fail to do so. We expect this will be clarified in the final regulations. 9

79 Fed. Reg. 45128 (August 4, 2014).

10

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The Self-Insurer | October 2014

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Captive Solutions for Medical Stop Loss: Take Your Self-Insurance Program to the Next Level by Allison Repke

A

s the costs associated with providing healthcare coverage continue to rise, companies are looking to improve risk management and reduce expenses. It may seem like the only alternative is to increase employee contributions or cut benefits. However, it is possible to utilize customized risk transfer methods to improve the financial management of an employersponsored health plan. If you are already self-insured, then you know that it is the most widely used alternative method for managing an employee medical benefit plan. This is an alternative way to finance the plan, where the employer takes responsibility for some or all of the

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October 2014 | The Self-Insurer

risk. Claims are settled on a pay-asyou-go basis or out of a pre-funded fiduciary account. The employer can buy stop loss coverage, which insures against bad experience. Self-insurance is a financial management tool that allows for greater control over the plan and improved cash flow. For many years, employers have used captives to insure a broad spectrum of employee benefit risks, including life, disability, workers’ compensation and retiree benefits. Although the captive insurance company is a well-known risk management tool, it is not commonly utilized for employee medical benefits. Over the past several years, more employers have been implementing captive programs for medical stop

loss. This article will examine the structure of a medical benefit captive, how it is analyzed and implemented and define the best candidate for this type of program. The function of a captive insurance company is to underwrite and insure the risks of its owners and affiliates. Like self-insurance, a captive is an alternative risk management tool that provides greater control over how the risk portfolio is managed, which can lead to reduced insurance expenses, improved cash flow, more efficient capital utilization and possible tax benefits. With few exceptions, companies that have multiple lines of insurance coverage and the financial ability to retain risk can benefit from a captive.

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Captive programs are designed to maximize financial leverage through pooled and shared risk. Just as a commercial insurer improves loss experience and makes profit by covering a larger, more diverse group, a business owner can employ this risk management strategy and receive the same benefits. Risk can be diversified by combining across different groups, geographical areas, lines of coverage, units of business and even time periods. For example, like-minded employers can form a group captive to share their health plan liability. Or, a single employer can pool their medical benefit risk with lines of coverage for property, casualty and Premium to worker’s compensation. pay for excess

the reinsurance carrier. One of the many benefits of a captive program is the ability to purchase coverage for the excess layer from the commercial reinsurance market, which typically has

Reinsurer

Claims above captive deductible

loss coverage

Captive

Lines of Coverage

Employer Groups

Premium to fund the captive program

Types of Risk Sharing and Pooling

Time Periods

Geographic Regions

Units of Business

Purchasing stop loss from a captive insurer is functionally the same as from a commercial insurance carrier and has no impact on plan participants. If you are already familiar with the methods of self-insurance, then you will understand how the deductible is established and the premium rates are set. The difference is that the captive owner(s) will also have responsibility for the risk within the captive layer. The following diagram shows the progression of risk retention from a fully insured plan, to a standard self-insurance program, to a captive insurance program. This is just an example; the attachment points will vary based on your chosen primary deductible, actuarial and reinsurance market analysis and the financial goals of your captive program.

Insured Plan

Insured Excess

Insured Excess

Captive Layer Self Insured Retention

Self Insured Retention

Instead of a single medical stop loss contract, there will be two: one between the employer group and the captive insurer and one between the captive and

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Claims above primary deductible

Employer Group

better rates than the retail insurance market. The above diagram illustrates the flow of premium and claims between the parties. There are multiple types of medical benefit captives. An employer can choose which program structure best suits their size and risk appetite. • Single parent captive owners have complete control over the program. This structure is recommended to those with a large number of plan participants, because the captive requires a broad population to achieve proper risk distribution and adequate premium to cover operational costs. • Employers with smaller populations can participate in a group captive. Member-owners increase financial leverage by retaining a higher level of risk than would be possible as an individual entity.The owners also have increased buying power, which can lead to savings through lower reinsurance premiums. By spreading losses across a larger group, there is a higher probability of a favorable loss ratio, which means gains from captive dividends. The Self-Insurer | October 2014

39


• A protected cell captive program is beneficial for groups who want to share risk, but prefer to use an existing captive facility rather than form their own. An employer is able to retain a limited amount of additional risk and benefit from positive experience within the captive layer. Some programs also offer indemnity against bad experience, so that the group does not suffer financially during policy periods with heavy losses. In all cases, the captive will accrue retained earnings and establish a smoother loss cycle, making the financial liability more affordable and predictable.

Types of Medical Benefit Captives Single Parent Large employer with an existing captive

Large employer that is currently self insured

Group

Protected Cell

Affinity groups with/ out an existing captive

Smaller groups or those new to self insurance

The first step in implementing a captive program is to identify the short-term needs and long-term goals of your risk strategy. You will need to understand the size and nature of the risk by collecting information on the current benefit program and past plan experience. Many companies that provide captive consulting offer feasibility studies, which includes actuarial analysis to establish premium and capitalization amounts and financial pro forma to determine the proper risk retention levels. The data analysis provides key metrics to inform and support the optimal structure. Below is a simplified outline of how a captive program is implemented. There are various expenses incurred when starting or running a captive, which should be taken into consideration during the cost benefit analysis of the program. Group is Underwritten Captive Manager

Establish Risk Structure

Premium amounts set

Choose Program Administrator TPA ASO

Choose the Provider Network Best available in region

Just like any business, a captive program will need to employ an accountant to ensure financial health and to maintain the necessary records for submission to state regulators. And just like any insurance company, the program will need the services of an actuary or underwriter to review and rate the risks. The program will also need to establish a method for administering claims. There are several ways to source these services: hiring a complete captive manager, contracting with a Managing General Underwriter, or partnering with a fronting carrier. The ideal employer for a captive program will share the risks and rewards of benefit plan liability and actively manage plan expenses for the best experience. When you take a portion of the risk of a health plan, the issues of loss prevention and loss control are all the more important. As with traditional self-insurance, a benefit of captive participation is improved access to claim data. Analyzing plan experience to understand cost drivers helps to lower these factors and increase efficiencies. The captive program is the financial component of a pro-active risk management strategy. If you are interested in more information on captive solutions for medical stop loss, speak with a Obtain Stop Loss Coverage

Specific

Fronting Carrier

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October 2014 | The Self-Insurer

Wellness Program Case Management

MGU Levels of risk ceded and retained

Contract with Vendor Partners

MGU Custom Other

Aggregate

Claim Analysis

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41


resource to guide your understanding of this emerging risk management tool. This may be a company that provides captive consulting services, the owner or administrator of a group captive program, or a representative from a carrier that

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October 2014 | The Self-Insurer

FINANCAL MANAGEMENT

reinsures these programs. A captive is more flexible and accessible than you may think; it can be designed around your company’s needs and goals. By improving the financial management of your medical risk, you can prepare for negative outcomes and gain from positive results. n Allison Repke is a client services specialist with the Willis Global Captive Practice, focused on captive solutions for medical stop loss. Her background is in product development for the self-insured market, including international medical travel benefits.

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43


Courting a

Captive Audience by Bruce Shutan

Stop-Loss captive programs slowly emerge among mid-market employers, but at least one skeptic questions their effectiveness

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October 2014 | The Self-Insurer

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A

ndrew Cavenagh, president of Pareto Captive Services, LLC, recalls how a midsizeemployer client called one day to complain about spending $100,000 on workers’ comp, but as much as $1 million on benefits – wondering if there was a strategy to get the latter to look more like the former. Then he had an epiphany: What if the promising P&C group captives he worked on at the time could be replicated for the employee benefits space? Welcome to the world of stoploss captive programs (also known by some as employee benefit group captives), which create a shock absorber of sorts that reduces risk and volatility that a 100 or 200 life group would normally have if they self-insured. The programs have caught on in recent years because they give members “the ability to have a sense of shared accountability to each other in terms of utilization claims experience that is difficult to get when you’re part of a large, fully insured pool, where you don’t have any credibility,” says Jeff Fitzgerald, VP of employee benefits at Innovative Captive Strategies. What’s worth noting is that price stability and credibility are in short support for groups of 100 to 400 covered lives that Fitzgerald says are “told they’re not big enough to matter because they’re part of such a large block of a big, fully insured carrier.” The number of stop-loss captive programs has gone from a handful to nearly 100 arrangements over the past seven years or so, he observes – with anywhere from five to 100 members. He has seen huge growth in the past two or three years, particularly in the “heterogeneous” space involving 100 to 400 covered lives on a plan. “It’s still

a very small part of the industry,” he acknowledges, “but if you’re looking at groups of that size throughout the country, that’s an almost uncountable number of employer groups.” A 2013 Milliman report commissioned by the Self-Insurance Educational Foundation estimated that about one-quarter of the employer medical stop-loss market serves 100 or fewer covered employees as measured by the number of employers. That same segment represents only 2% of the market when measured by covered employees, according to the report, which was based on data provided by eight of the nation’s largest stop-loss carriers serving about 50% of the market.

The Wrong Focus While these captives may be commanding attention among midmarket employers, there are skeptics who dismiss them as ineffective. The fact is that nearly 98% of the selffunded employer market does not participate in captives, explains Matt Rhenish, president and COO of HM Insurance Group. He says self-funded employers should devote most of their time, energy, resources and dollars to managing claims, which drive at least $85 of every $100 in health care costs. The trouble with captives is that they attempt to reduce only a tiny part of overall cost, which is to get a better handle on stop loss. “That’s an important thing to do,” he admits, “but it’s significantly less relevant considering it has significantly less impact on a client’s overall financial situation than managing firstdollar claims and claims overall.” Rhenish is unconvinced that these programs offer a better way for selfinsured employers to manage their claims relative to other mechanisms, such as changing deductibles or

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tightening plan documents, that can be done, irrespective of a captive. Another issue is the level of complexity associated with these arrangements. “In some cases, you have to put in up-front capital to fund the captives and there are ongoing costs,” he explains. “Those are all costs that don’t really help reduce your overall claims costs. Maybe you can manage the middle layer a little bit better, but that middle layer is going to be what, 5% of your total claims cost? You’re going to manage it 10% better?” Rhenish points out that banding together will merely extend or share risk across the populations of other captive members rather than actually manage the risk in any meaningful way. “We can’t just make risk disappear,” he says, suggesting that mid-market employers instead “write a straight stop-loss contract that mirrors the underlying plan document.”

Three Programs in One But others see promise in this approach. Cavenagh was so bullish about captives that he actually quit the large insurance company he’d been working for in 2010 because of a “strong belief that the captive management role should be independent from both the broker and stop-loss carrier.” Comparing these arrangements to a three-legged stool that’s grounded by the employer, stop-loss company and group captive, a Pareto Captive Services white paper cautions that “if any of these contracts is not negotiated at arm’s length, the structure is weakened. It is difficult to have an arm’s length transaction if the same entity is negotiating two sides of an agreement.” Cavenagh describes stop-loss captives as essentially three programs wrapped up into one, including a The Self-Insurer | October 2014

45


traditional layer of self-insurance for, say, up to $25,000 per individual and some aggregate stop loss; the captive, or shock-absorbing layer from $25,000 to $250,000; and traditional excess or stop-loss for the portion of claims above $250,000 per individual.

employers will buy a stop-loss policy from a carrier that is going to enter into a reinsurance agreement with a captive that will give a portion of the premiums collected to each employer and the captive is now responsible to pay claims between $25,000 and $250,000.

An employer with a $100,000 claim will pay $25,000 and then request $75,000 from the stoploss captive program, and if there’s any money left over at the end of the year, it’s given back to all the employers that are part of this arrangement. If they run out of money, then the same carrier that has agreed to pay the catastrophic claims agrees to step in and pay claims.

Key objectives of these programs include a search for greater transparency in claims data as part of a partnership approach that leverages the involvement of many smaller employers, according to Fitzgerald, a member of SIIA’s Alternative Risk Transfer Committee, which he says is always on the lookout for medical stoploss and enterprise risk captives for small businesses.

The employer technically isn’t buying a policy from the captive, but rather an “admitted” or “fronting” carrier that will pay all claims in excess of $25,000, according to Cavenagh. In this example, all of the captive

“That’s a very important twist from a regulatory standpoint, because a captive itself is there for not issuing policies in 50 states around the country, which would be illegal,” he explains.

The appeal of these programs isn’t confined to a particular employer or industry. While a construction company that offers wellness incentives certainly would fare better than a white-collar group that’s full of smokers, he says “it’s more about having groups of a like mind” that want to share in the risk.

ACA Program Accelerator Fitzgerald predicts that the Affordable Care Act’s (ACA) reporting requirement, which takes effect in 2015, will create the opportunity for an alternative risk vehicle “because the exchanges aren’t interesting for everybody and the traditional insurance market is really having trouble pricing these groups.” Captive programs can help serve the significant number of working Americans

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October 2014 | The Self-Insurer

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Thankfully, catastrophic and complex claims don’t happen often. But when they do, they can result in significant losses for your business and significant injury to your valued employees. A compassionate claim professional with the right resources and experience can make all the difference in bringing about a positive outcome for you and your injured worker. To learn more, ask your broker or visit helmsmantpa.com.

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SOLUTIONS. SERVICE. INSIGHTS.

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who have never been offered benefits by appealing largely to entrepreneurial business owners who are seeking more control over the pricing of these benefits, he observes. They may include anyone from franchise owners, staffing agencies and professional employer organizations to construction companies and retail stores that employ many hourly and cyclical workers who may not have qualified as full-timers in the past. Another key trend that he sees tied to the ACA is that more carriers are prohibited from pricing or banding their rating of groups by age, gender or even claims experience. “Insurance companies are going to basically be underwriting on a platform that makes it difficult to differentiate themselves because of the bands that they’re locked into,” Fitzgerald says. As a result, he believes better performing groups are going to be subsidizing weaker performing groups without any incentive to do better. The ACA also will continue to drive members who are already serious about wellness and cost-containment strategies “into these sorts of vehicles so that they can be rewarded for the work that they’re putting forward and have some of their own say in the ratings rather than the shrunken rating bands that are going to be allowed by the carriers,” he adds.

In spite of what Rhenish says about captives, Cavenagh expects “exponential growth” for these programs as well as his own company, calling the ACA an accelerant if not an actual cause. “It wouldn’t shock me if in the next year it’s a $500 million stop-loss business,” he says. n Bruce Shutan is a Los Angeles freelance writer who has closely covered the employee benefits industry for more than 25 years.

Stop-loss captive programs seek a common thread, which Cavenagh describes as “temperament of ownership” – the most important determinant. One such example is a refusal to pay a 15% increase to Blue Cross with no usable claims data and terrible population management.

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SIIA Takes Lead on Education for ERCs by Karrie Hyatt

S

mall captives using the tax designation 831(b) have been proliferating over the last five years. With the dynamic growth to this sector has also come confusion and criticism. The Self-Insurance Institute of America (SIIA) seeks to take a leadership role in creating a positive public conversation and in educating the industry, beginning with state regulators, about this growing classification of the captive insurance industry. The first step to creating an understanding of the type of small captives frequently labelled “831(b)” was to give them a name that better reflects their contribution to the captive sector. In June, SIIA’s Alternative Risk Transfer Committee created the name Enterprise Risk Captives, or ERC for short, to better describe these small captives. The name ERC helps to distinguish their role in the industry – to reframe the conversation to focus on their risk management role rather than their tax treatment. 831(b) captives are typically formed by small to medium sized companies that elect to take advantage of the Internal Revenue Code, Section 831(b), which allows insurance companies with premium of $1,200,000 or less to pay taxes only on their investment income, not on their premium income. Just like any other alternative risk transfer vehicle, these small captives must qualify as actual insurance companies – they must insure risk and be structured to accomplish both risk shifting and risk

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distribution. However, 831(b) captives can cover any type of risk, including risks like medical malpractice and workers’ compensation – risks that fall into other well-known categories of captive insurance. Referring to all captives taking the 831(b) election with the same broad label was, in fact, lumping together a number of different types of captives under an undescriptive name. In naming ERCs, SIIA also defined these captives. The Alternative Risk Transfer Committee wanted to focus on the risk management aspects associated with their business. According to Jeff Simpson, an attorney with Gordon, Fournaris & Mammarella, PA and chair of the committee’s

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ERC Working Group, “When people talk about 831(b), what they really mean is this captive characterized by enterprise risk management – a privately held company working its overall portfolio to identify gaps in coverage or high severity/low frequency risks that they haven’t covered before but that they could cover and maybe should cover.” According to SIIA’s definition, ERCs are smaller captives used by privately or closely held enterprises that seek to manage risks not often addressed by traditional insurance; tend to have risks that are low in frequency but high in severity; issue policies that are first party; take the 831(b) tax election; and are structured in a way that could facilitate wealth transfer or estate planning. By defining and guiding the conversation about ERCs, SIIA hopes to homogenize the way they are understood, managed and regulated. Because these small captives are fairly new, they are an unfamiliar quantity to many working in the insurance sector. This can cause concern to the uninformed about the business practices of ERCs. Even companies that set-up and manage ERCs do not have a standardized approach. “The IRS is looking at 831(b) captives trying to understand what is going on. From within the industry there is a circular firing squad approach with captive managers gunning for each other, each one acting like their way of managing them is the only way,” said Simpson. “There are not enough facts and too many rumors circulating about ERCs. SIIA wants to take a leadership position in a space where there is no institutional lead. We need to step up and help guide this conversation.” The second step to creating a new conversation about ERCs was a webinar held in late July specifically for

state regulators. Hosted by Simpson and attorney Charles J. Lavelle, from the law firm Bingham Greenebaum Doll LLP, there were eleven participants from seven domiciles. “The reason we directed it exclusively to regulators is that there is a lot of talk about ERCs, but very little real information. The regulators themselves are still trying to figure out what to do with these things,” said Simpson. “They are trying to figure out how to treat them, how to approach them. We wanted to provide an objective forum for feedback on how they work and how to maybe think about them.” “The webinar was not meant to be an introduction to 831(b)s. Any captive conference you go to will have two or three sessions on that,” continued Simpson. Instead, the webinar sought to dispel many of the myths surrounding ERCs, while providing industry prospective and addressing many of the regulatory issues that have cropped up around them. Specific topics covered were how ERCs are designed, including insurance risk vs. business risk, premiums, pooling, investments and ownership; applications; annual reporting; examinations; and service provider approval. These topics were chosen specifically to help regulators make well-informed decisions about approving, working with and regulating these captives.

last year with a webinar on medical stop-loss captives. This is the second of our efforts to show regulators there is worthwhile counsel available to them through SIIA.” SIIA is currently working on the next step to help define the conversation about ERCs – a reference document for use by the business community. It will provide prospective ERC captive owners the most important questions to ask before starting their own captive. It will cover topics such as feasibility, selecting and underwriting risks, risk distribution, financial modeling, captive manager selection and domicile issues. Also, at the SIIA National Conference & Expo, held in early October, there are a number of opportunities to learn more about ERCs at session panels. “There is so much more to ERCs than their tax-advantaged status,” said Simpson, “And SIIA wants to help direct the public conversation into something more useful and productive.” n Karrie Hyatt is a freelance writer who has been involved in the captive industry for nearly ten years. More information about her work can be found at www.karriehyatt.com.

By seeking to educate regulators on this subject, SIIA is hoping for a trickle-down effect. If regulators are well-informed, they can have a beneficial influence on the ERCs themselves. In addition, SIIA wants to be an independent resource for regulators. “We want them to know that there is objective, reasonable advice available to them through SIIA and give an example of that through our webinar,” said Simpson. “It started

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

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

Directors Jerry Castelloe Vice President CoreSource, Inc. Charlotte, NC Robert A. Clemente CEO Specialty Care Management LLC Bridgewater, NJ Ronald K. Dewsnup President & General Manager Allegiance Benefi t Plan Management, Inc. Missoula, MT

Elizabeth D. Mariner Executive Vice President Re-Solutions, LLC Wellington, FL Jay Ritchie Senior Vice President HCC Life Insurance Co. Kennesaw, GA

Committee Chairs CHAIRMAN, ALTERNATIVE RISK TRANSFER COMMITTEE Andrew Cavenagh, President Pareto Captive Services, LLC Conshohocken, PA CHAIRMAN, GOVERNMENT RELATIONS COMMITTEE Horace Garfi eld, Vice President Transamerica Employee Benefi ts Louisville, KY CHAIRMAN, HEALTH CARE COMMITTEE Robert J. Melillo 2nd VP & Head of Stop Loss Guardian Life Insurance Company Meriden, CT CHAIRMAN, INTERNATIONAL COMMITTEE Greg Arms, Chief Operating Offi cer Accident & Health Division Chubb Group of Insurance Companies Warren, NJ CHAIRMAN, WORKERS’ COMPENSATION COMMITTEE Duke Niedringhaus, Vice President J.W. Terrill, Inc. St Louis, MO

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

SIIA New Members Regular Corporate Members Company Name/ Voting Representative

Daniel Spragg Managing Director Alvarez & Marsal, LLC Newtown Square, PA Robert Clayton Manager Enterprise Reinsurance Blue Advantage Administrators Little Rock, AR John Korangy President CareClix Tysons Corner, VA Beth Lyons Marketing Manager Conifer Health Solutions Frisco, TX Charles Norton-Smith Advisor Dowling Hales New York, NY Patti McCoy Director of Marketing PrismRx Flower Mound, TX Diane Ganser Director Sales & Account Manager Quartz Sauk City, WI

Affiliate Member Aaron Wilkie President Blue Ridge Captive Solutions Spartanburg, SC

The Self-Insurer | October 2014

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SIIA PRESIDENT’S MESSAGE Building a More Effective Association Through Enhanced Member Support

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ou may have noticed several SIIA communications over the past year announcing that leading companies in the self-insurance industry have upgraded their SIIA membership status. Let me take this opportunity to explain this positive trend.

SIIA’s upgraded membership tiers (Silver, Gold and Diamond) all come with extra benefits. But perhaps more important to many of these premium members is that their additional financial support has helped the association expand its government relations and legal defense capabilities. For example, thanks to an increase in membership support the association now has a full-time state government relations director and has been able to retain a contract lobbyist in New York to push for passage of important self-insurance legislation in that state. We are now planning for a further expansion in 2015 and have begun the recruiting process for additional federal lobbyists to be based in our DC office. To finance this expansion, I have personally reached out to dozens of members to see if they would be able to contribute to the cause in a bigger way.

Michael W. Ferguson

Not only have many “rank and file” members pledged to upgrade their memberships over the next year, but several Diamond members have pledged additional voluntary financial support. While this membership response has been positive so far, my hope is that we can further broaden the base of enhanced support so that we can continue to build a more effective association. So if your company is ready to step it up, there has never been a better cause or a better time. n Best regards,

Michael W. Ferguson President & CEO

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