Role of Actuary in Self-Insurance - Employee Benefit Plan

Question 1

Regulation of Emplpyee Benefit Plans

Answer 1

Stop-Loss Insurance Regulations (SLI)
a. SLI is used to protect self-insured health plans from the impact of large losses

b. State regulators do not have authority over self-insured employer-sponsored plans, but have authority over SLI

c. While states can regulate SLI, it is up to federal regulators to determine whether an employer plan violates the federal requirement for sufficient retained risk by the plan in order to maintain its status as self-insured

Question 2

Key Differences Between Fully Insured and Self-Insured Plans

Answer 2

1. Fully insured plans
   a. A plan sponsor transfers certain plan-related risks to the insurer
   ▪ Financial risks: the risk that actual claims deviate unfavorably from expected claims

▪ Operational risks: administrative operations of the plan fail or cost more than expected

▪ Litigation risks: a plan participant sues the plan for failure to pay legitimate claims

▪ Fiduciary risks: plan assets, including employee contributions, are squandered

b. Plan sponsor remains exposed to some plan risks

c. Plan sponsor remains the primary fiduciary and considers various factors when selecting an insurer, negotiating contract terms and deciding to continue using an insurer
▪ Insurer’s financial strength
▪ Cost
▪ Claims payment timing and practices
▪ Governance and internal controls
▪ Compliance record and reputation
▪ Expertise, reporting ability, appeals process, complaints record
▪ Provider network breadth

d. Plan sponsor cedes much of the plan’s day-to-day decision-making authority to the insurer

e. Contractual agreement between the plan and the insurer is a group insurance policy

2. Self-insured plans
   a. Plan sponsors who consider self-insurance do so to realize potential cost savings from
   ▪ State premium tax savings
   ▪ Elimination of state-mandated benefits
   ▪ Avoidance of the health insurer fee
   ▪ Removal of insurer expenses and risk charges in fully insured coverages
   ▪ Savings in claims costs

b. Since it has assumed the plan’s risks, the plan sponsor also assumes decision-making authority
▪ How benefits are administered
▪ What benefits to offer
▪ Which provider network to utilize
▪ Which pharmacy benefit program to offer

c. The plan sponsor is able to unbundle the services that the insurer bundles in a fully insured package

d. Plan sponsors often work with an employee benefits consultant to understand the risks they face and operate their plans successfully

e. The contractual agreement between the plan sponsor and its plan’s members is represented by the plan document, typically summarized in the SPD

Question 3

Advising Plan Sponsors Whether or Not to Self Insure

Answer 3

1. Advantages of Self-Insurance
   a. Cost savings
   ▪ Lower premium taxes
   ▪ Elimination of state-mandated benefits
   ▪ Avoidance of the health insurer fee
   ▪ Removal of fully insured expenses and risk charges

b. A self-insured employer can capture favorable claims experience, whereas an employer with fully insured coverage must pay the monthly premium regardless of its actual experience
▪ If actual experience and the expenses of a self-insured plan exceed monthly premiums, then the employer bears the higher costs

c. Self-insurance allows employers the flexibility to design benefit plans that meet their needs, whereas a fully insured carrier may offer a more limited set of plan options

d. Immediately reap the benefits of wellness or disease management programs that may reduce costs and curb medical inflation
▪ While these programs come with fees, the savings are 100 percent owned by the self- insured employer
▪ Employers who fully insure pass the savings on to the fully insured carrier
▪ Savings realized by the fully insured carrier could result in reduced renewal premiums, so the fully insured employer may realize the cost savings too

2. Disadvantages of Self-Insurance
   a. The unpredictability, both in amount and in the timing, of self-insured claims.

b. While the actuary or employee benefits consultant will project claims to determine the employer’s budget for employee benefits, costs and utilization of health care are not fully predictable.

c. A favorable claims variance generates a surplus for the employer, but an unfavorable variance can
stress an employer’s cash flow
▪ When actual experience is worse than projected, the employer may pay more than it would have paid had it been fully insured
▪ That volatility can be managed by transferring some of the plan’s exposure to high frequency or severity of claims

d. Besides financial risks, the self-insured plan sponsor is exposed to other risks such as fiduciary, legal and reputational risk
▪ As a plan fiduciary, the employer must assure that plan assets are well managed and used for the legitimate purposes of the plan
▪ When members appeal coverage denials, employers are exposed to litigation and potential reputational risks
▪ Self-insured plan sponsors are also exposed to the administrator’s operational risk

e. Fully insured arrangements are easier for employers to understand, and the fixed premium allows for a pure transfer of risk at a known expense

f. Smaller employers will typically fully insure their medical expenses while larger employers who can accept more claim volatility often choose to self-insure
▪ When smaller or more risk-averse employers self-insure, they likely purchase stop loss insurance (SLI)

Question 4

Self-Insured Cash Flow

Answer 4

1. Two causes of variability in lag between Incurred and Paid Claims
   a. Type of claim
   ▪ Lag for medical and retail pharmacy claims differ significantly
   * Retail pharmacy claims are auto-adjudicated at the point of sale, i.e. the pharmacy determines the plan design and collects the appropriate copay or coinsurance
   * Pharmacy claims have very little lag and do not require significant effort when reserving

b. Complexity of claim
▪ Though more complex than retail pharmacy claims, many medical claims are also auto- adjudicated, though not generally at the point of sale
▪ Complex medical claims require additional claim reviews to ensure the appropriate expense is invoiced to the employer
▪ Complex surgeries could take many months to be paid from the time of incurral
▪ This lag in high-cost services creates a budgeting issue for employers and the actuaries
▪ Many employers purchase SLI to protect against high-cost claims. Depending on the stop-loss policy’s contract basis, the lag between incurred and paid claims may cause a claim not to be covered by the stop-loss policy

2. Flow of funds
   a. Typically, invoicing of claims is handled on a daily or weekly basis

b. The employer establishes a trust or bank account with the TPA so that funds can be withdrawn as needed

c. Many TPAs specify a minimum account balance in order to assure that funds are sufficient

d. The lag in payment to providers can vary from a few days to several months

Question 5

Self-Insured Plan Management

Budgeting and Reserving Considerations

Answer 5

1. Budgeting For and Projecting Claims
   ▪ Budgeted costs are typically based on the plan’s “paid” dollars only, which is allowed costs less member cost sharing including copays, coinsurance and deductible

▪ An employer shares the total expenses with its members in the form of employee contributions

▪ General steps of the process used to establish self-insured rates
* Request data from the TPAs
* Gather data, review, and discuss observed data anomalies with the TPA
* Develop initial estimates using projections with adjustments for enrollment changes, benefit changes, network/provider reimbursement changes, large claims, trend, administrative fees and SLI

▪ A typical projection methodology
* Determine how many years of historical medical and pharmacy experience to use as the base period
* Make credibility adjustments. Experience can be blended with a benchmark rate to determine an average expected rate
* Dampen the effect of particularly large claims on the projection
- If the employer purchased SLI, claims above the stop-loss deductible can be removed from experience and the stop-loss premium added in
- If the employer has not purchased stop loss, the actuary might remove any claims that exceed 10–15 percent of expected claims and replace the actual large claims with a pooling charge
* Complete the historical paid claims information to reflect a true incurred basis (i.e. account for claim lag)
* Divide the costs of the base period by the number of member months to convert to a PMPM basis
* If benefit changes occurred, adjust for plan changes using a continuance table or actuarial value calculator
* Be sensitive to shifts in in-network and out-of-network claims as a result of changes in network and contribution strategy
* Project the base period claim costs forward by applying trend
* Convert PMPM to a PEPM (per employee per month) based on the covered member-to-employee ratio. To this amount, add fixed fees such as admin and stop loss
* If current rates exist, compare the new rates to the current rates

2. Reserving for Outstanding Liabilities
   ▪ Employer would need assistance in reserving
   ▪ Employee benefit consultants may refer to these outstanding liabilities as reserves, incurred but not reported (IBNR), or incurred but not paid (IBNP)
   * Actuarial methods consist of evaluating lag patterns, historical loss ratios or historical incurred claims
   * Reserve = projected ultimate incurred claims less claims already paid at the valuation date

Question 6

Self-Insured Plan Management

Risk Mitigation and Risk Transfer

Answer 6

1. Benefit Plan Design
   ▪ Different benefit plan designs introduce risks to be managed, which may give rise to:
   - Deferred cash flow, as employee deductibles need to be satisfied prior to employer responsibility
   - Leveraged trend due to fixed deductibles
   - Compliance risk if the CDHP qualifies as an HDHP under IRS regulations

▪ Self-insured plans may also need to consider risks arising from other areas
- Plan designs that include both fully insured and self-insured options may present opportunities for selection
- Coverages can be tailored beyond what current regulations require for fully insured plans

2. Understanding the Financial Risks
   ▪ Self-insuring exposes the employer to the risk that claims vary from what is expected
   - May create cash-flow challenges for the plan sponsor

▪ The plan sponsor assumes the financial risk of funding the plan to not only pay ongoing claims but also to endure unforeseen variations cash flows

▪ SLI manages the financial risks of self-insuring by transferring some of the plan’s financial risk to an insurance company
- Specific stop-loss insurance protects from large single claim events
- Aggregate stop-loss insurance protects the plan sponsor from an accumulation of adverse events in total over the entire coverage period

▪ There are important aspects of the financial risks that plan sponsors need to manage
* Natural/Random Claim Volatility
- SLI can help mitigate the risk of catastrophic claims
- Actuarial support is necessary to ensure adequate reserves

• Drivers of Cash-Flow Volatility
• Understanding the expected timing of claim payments is critical to managing the liquidity of self-insured plans
• Understanding certain diagnoses develop claims at different rates
• Hospital contracts and timely payment provisions in some network contracts can also drive the timing of cash flow
• Accident claims and claims that give rise to third-party liability may be subrogated and may take years to be settled
• A narrower network results in a higher occurrence of out-of-network claims, which may take longer to be presented
• Internal processes of TPAs impact the timing of claims processing
• Newly Self-Insured Plans
• Cash flow of newly self-insured plans is different from longer-term self-insured plans
• When transitioning from fully insured to self-insured plans, claim payments emerge at a small percentage and ramp up significantly in the second, third and fourth months
• During this lull in claim volume, excess cash flow can be used to build a reserve
• Claims in subsequent years will exhibit some seasonality, and this can cause cash flow to be better (i.e., lower claims) at the beginning of a year and vice versa
• Catastrophic Events
• Introduce volatility into liability of the plan and cash flows
• The impact of catastrophic claims on a benefit plan is influenced by:
  ▪ Purchase of aggregate and specific stop-loss insurance
  ▪ Network contracting structures (e.g. outlier provisions, case rates and fee for service)
  ▪ Benefit plan design (e.g. incentives to use “centers of excellence”)
  ▪ Precertification and preauthorization
  ▪ Case management and disease management

3. Risk Transfer Through Use of Stop-Loss Insurance
   ▪ SLI transfers some of the financial risks assumed by a self-insured plan

▪ Specific stop loss protects the plan against catastrophic losses during the policy year with respect to any one plan beneficiary
* For example, a specific stop loss at a $50,000 specific deductible. The plan pays all losses, and the stop-loss policy reimburses the plan for its losses in excess of $50,000 for each individual who, in total for the policy year, exceed $50,000 in plan benefits

▪ Aggregate stop loss protects the plan if the plan’s total losses during the year are extremely high
* For example, if the plan’s expected claims are $1 million, the stop loss carrier may cover the plan’s losses in excess of $1.25 million (i.e., 125 percent of expected claims), which is called the aggregate attachment point. The plan is responsible for paying all losses, and the stop-loss policy reimburses the plan for losses that exceed the aggregate attachment point, subject to a minimum called the minimum aggregate attachment point

▪ Losses in excess of the specific stop-loss deductible do not accumulate toward the aggregate attachment point. Illustration below is from source reading

▪ Stop-Loss Carrier Considerations
* A questionnaire to assist plan sponsors in understanding differences among stop loss carriers focuses on multiple areas
- Financial stability indicators, such as carrier financial ratings
- Managing general underwriters versus direct writers and their flexibility o Data requirements for underwriting and claim payment
- Contractual provisions, terms, conditions and limitations
- Claim administration capabilities
- Compliance and legal issues

• Actuaries can assist in quantifying the risk and trade-offs between carriers
• Evaluating adequate aggregate and specific limits under the policy
• Evaluating the potential trade-off in policy terms
• Evaluating the appropriateness of policy premiums

▪ Potential Gaps in Coverage
* Careful review of the SLI policy alongside the provisions in the plan document is recommended to avoid gaps in coverage

• Key areas to review
• Experimental definitions
• Clinical trial definitions
• Coverage of claims outside the U.S.
• Usual, reasonable and customary definitions
• Medicare eligibility for end-stage renal disease claimants or covered retirees
• Coordination of benefits and subrogation provisions
• Administrative fees such as legal fees or network access fees
• Cost containment vendor fees
• State surcharges and assessments
• Stop-loss policies are usually annually renewable, meaning the carrier can terminate the policy at renewal, thus creating a gap at renewal
• Gap may occur due to the lag between when claims are incurred, paid and reported to the stop-loss carrier due to the contract basis
• Timing gaps may arise due to reporting requirements, proof of loss and time limitations under the stop-loss policy
• Stop-loss policy terms with respect to known losses can create gaps
• Stop-loss insurers require plans to provide information about their members with known losses
• The carrier may cover the plan but only if a higher specific deductible, a lasered deductible, is applied to the members with known losses
• Known losses may include claimants who meet certain criteria
  ▪ Have received specified diagnoses (i.e., particular ICD code), ▪ Have incurred claims > 50% of the deductible,
  ▪ Have large pended claim amounts, or
  ▪ Are on a transplant waiting list

▪ Seeking Competitive Bids
* Benchmark expected claim costs could be acquired by seeking competitive bids with several carriers
* Variation across carriers can serve as an approximation for expected volatility
* The carriers’ aggregate factors are not an estimate of expected claims, but an aggregate attachment point, which is higher than expected claims
* Other marketing considerations may be reflected in the aggregate factors, so they may represent the carrier’s best effort to compete for the business
* Actuaries help analyze bids and compare differences in claim projections

Question 7

Other Actuarial Support for the Self-Insured Plan

Answer 7

1. COBRA (continuation of benefits for members who lose health coverage from an employer)
   - COBRA premiums are derivable directly from fully insured premiums
   - The IRC and ERISA describe two methods for determination of the “applicable premium” to be paid by a COBRA participant of a self-insured health plan

▪ The premium for any period of continuation coverage shall equal a reasonable estimate of the cost of coverage for similar beneficiaries which is determined on an actuarial basis, and takes into account factors prescribed in regulations

▪ On the basis of past cost, the premium for continuation coverage equals
* Cost to the plan for similar beneficiaries for the same period occurring during the preceding determination period (explained below), adjusted by
* Trend in the implicit price deflator of the gross national product for the 12-month period ending last day of the 6th month of such preceding determination period
- Determination period: The determination of any premium shall be made for a period of 12 months and shall be made before the beginning of such period
- An actuary requested to determine COBRA premiums would need
▪ The plan’s claims data (both paid and incurred) for the review period
▪ All applicable administrative and vendor costs
▪ Any stop-loss premiums, parameters and reimbursements and projected covered lives for
the coming determination period

• The actuary projects the total cost of the plan and allocates those costs across the different types of covered lives

2. Determining the ACA Minimum Value (MV) for Self-Insured Plans
   - Actuaries evaluate whether the self-insured plan satisfies the MV
   - The flexibility of benefit design available to self-insured plans must be balanced with actuarial evaluation of MV if the attainment of MV is a goal
   - To meet MV “status,” a plan does not only need an MV calculation of at least 60 percent, but its benefits must include substantial coverage of physician and inpatient hospital
3. Effect of Other ACA-Related Actuarial Issues on Self-Insured Plans
   - The Cadillac tax, MV determination, adjustments for taxes and fees
   - ACA created other challenges for actuaries working in the self-insured market
   ▪ Enrollment and expense projections
   * Projections under different contribution and relative benefit value scenarios, tax penalties versus benefit expenses, contribution/participation tradeoffs, affordability requirements, plan enrollment versus exchange enrollment, including analysis of paying exchange penalties as an alternative to stop-loss premium

▪ Minimum essential coverage (MEC) plan cost estimates
* Self-insured plans that meet MEC requirements must provide the ACA-mandated preventive care benefits with no cost sharing and without any annual or lifetime limits and must cover dependents to age 26
* Actuaries can evaluate the costs and risks for these benefits

▪ Setting affordable employee contributions
* To avoid all ACA penalties, the employer needs to (1) offer employees coverage and cost sharing that meets the MV standard, and (2) set employee contributions at a level “affordable” in relation to those employees’ income
* If a program is fully insured, the total cost is a known quantity against which contribution levels required to meet the affordable level tests can be compared
* A self-insured plan, by comparison, faces issues like those related to determining COBRA applicable premiums but on a larger scale

▪ Balancing benefits and employer budget
* Need to understand how different benefits for different populations affects the underwriting risk
* Following ACA, new actuarial models were required to work with stop-loss carrier partners on plans where individuals could migrate across benefit classes
* Some of the reasons for concern regarding this new population were:
- Open enrollment choices could lead to adverse selection
- Very little information was known about their health situation, or
- They were not represented in the claims experience of the group

▪ Defined contribution plans
* Employers are considering plans that provide rich primary or intermediate benefits, but which limit other types of coverage to avoid large claims
* Actuaries consulting to self-insured plans are therefore frequently asked to match a set of benefits with a budget as opposed to being given a plan of benefits and then asked, “What is the premium for that plan?”

4. Establishment of Creditable Coverage for Retiree Prescription Drug Plans
   - CMS requires that employers who offer a drug plan to Medicare individuals file an annual report and notify employees, disclosing whether each plan offered is creditable to Part D Medicare coverage
   - Coverage is considered creditable if the actuarial value of the coverage is equal to or exceeds the value of standard Medicare Part D
   - For fully insured plans, this process is assisted by pre-established tables with guidance from the carrier and CMS on how to complete the disclosure process
   - For the self-insured plans, this requirement often necessitates the use of actuarial expertise