The role of the Actuary in Self-Insurance

Question 1

Advantages of self-funding an employee benefit plan

Answer 1

• Cost savings - state premium tax, health insurer fee, insurer risk and profit margin (retention charges) are avoided, elimination of state mandated benefits
• Closely control cashflows - ER could hold the IBNR reserve themselves and retain the investment earnings on the reserves
• Plan design flexibility - not subject to insurer offerings or State Mandated benefits
• Capture favorable claim experience instead of paying fixed monthly premium
• Immediately reap the benefits of wellness or disease management programs (vs. fully-insured may reap during renewal)
• Can select TPA and how claims are managed

Question 2

Disadvantages of self-funding an employee benefit plan

Answer 2

• No risk transfer - if losses exceed the expected, ER is fully liable
• Budgeting - monthly claim fluctuation must be managed and cash flows can be unpredictable
• Administration complexity - ER needs to arrange all the services needed and ensure all selected vendors work together effectively
• Legal liability - ER may be legally liable if the actions taken by the plan that adversely affect covered EEs

Fully insured is easier for employers to understand. Small ERs typically fully-insured while large self-insure

Question 3

Key Differences between Fully Insured and Self-Insured Plans (a)
Fully Insured Plans

Answer 3

• Plan sponsor transfers certain plan-related risks to insurer
  -Financial (claim costs higher than expected)
  -Operational (plan administration)
  -Litigation (EEs sue for legitimate claims not paid)
  -Fiduciary (select insurer, asset management, investment)
• Plan sponsor remains the primary Fiduciary and considers various factors when selecting an insurer
  -financial strength, claims processing time and practices, reputation, internal control, compliance, cost, expertise, network
• Much day to day decision making authority ceded to insurer
• Contractual Agreement: Plan and Insurer = Group Insurance Policy

Question 4

Key Differences between Fully Insured and Self-Insured Plans (b)
Self Insured Plans

Answer 4

• Plan sponsor assumes all risks (Financial, Operational, Litigation, Fiduciary)
• Plan sponsor realizes potential cost savings (avoided state premium taxes, elimination of state mandated benefits, no health insurer fee, no insurer risk and profit margin, or surplus if claim costs lower than expected)
• Plan sponsor assumes all decision making
  -What benefits to include
  -How benefits are administered
  -Which Provider network to use
  -Which Pharmacy benefit program
• Plan sponsor can unbundle services that insurer bundles in fully insured package (flexibility in plan design)
• Plan sponsors often work with employee benefits consulting firms to understand the risks and operate the plan successfully
• Contract between Plan Sponsor and EEs and is summarized in SPD

Question 5

2 Causes of Variability in Lag between Incurred and Paid Claims

Answer 5

1. Type of Claim - Lag for medical and pharmacy claims differ significantly. Retail pharmacy claims are auto adjudicated at the point of sale.
2. Complexity of Claim
   - Complex claims request reviews
   - Lags on high-cost services create a budgeting issue for ERs and actuaries
   - The lag may cause a claim not to be covered by the stop loss policy depends on the contract

Question 6

Self-Insured Plan Management
Discuss Budgeting

Answer 6

• Budgeted costs are based on the plan “Paid” basis (allowed less costing sharing)
• ER shares Expenses with EEs in the form of EE Contributions
• Steps to develop the Self-Insured Rates
  -Request data from TPA
  -Develop Projections with adj for the changes from proj period to the base period (changes in enrollment, provider reimbursement, benefit), then remove large claims, add pooling charge, trend, admin fees, stop loss coverage

Question 7

Self-Insured Plan Management
Discuss Projecting Claims

Answer 7

1. Determine how many years of historical exp to use
2. Make Credibility Adj
3. Dampen the effect of large claim
   -replace the large claims with pooling charge or stop-loss prem
4. Complete the Paid Claims
5. Convert to a PMPM basis
6. Adjust for changes (plan, network)
7. Trend
8. Convert PMPM to PEPM
9. Add Fixed Fees
10. Compare the New Rates to Current Rates

Question 8

Self-Insured Plan Management
Discuss Reserving (3 Actuarial Methods)

Answer 8

Reserve = Ultimate projected incurred less claims already paid

Actuarial Method to project incurred
* Lag patterns - how long takes the claims incurred in a month to fully complete (e.g., usually at 4 months from the incurred month, 80% of the claims are paid)
* Historical LR - e.g., typically we see a 85% LR in this plan, so we expect some additional claims to come in to stay this level
* Historical IC - consider seasonaity, how much we usually sees in Jan, Feb vs Nov, Dec

Question 9

Self-Insured Plan Management
Risks introduced by Benefit Plan Designs

Answer 9

• Compliance risk if the CDHP qualifies as an HDHP under IRS regulations
• Leveraged trend due to fixed deductibles
• Deferred cash flows due to EEs need to pay up to the ded. Need to build reserve

Question 10

Self-Insured Plan Management
Discuss Risk Mitigation and Risk Transfer

Answer 10

1. Sponsors need to Manage the Financial Risks of
* Natural/Random Claim Volatility - SLI and Actuarial Support in setting reserves could help mitigate
* Catastrophic Events
* Understand the Drivers of Cashflow volatility
* Newly Self-Insured Plans: claim payments are small initial and ramp up later, needs to build a reserve, cash flows is different than long-term self-insured plans

2. Risk transfer through Stop Loss Insurance
* Specific Stop loss vs. Aggregate Stop Loss
* Stop Loss Carrier considerations (financial ratings, contract provisions, terms, limitations, compliance risk, claim administration process, underwriting requirements etc.)
* Potential Gaps may exist in Coverage

Question 11

Self-Insured Plan Management
Drivers of Cash-Flow Volatility

Answer 11

• Understand the expected timing of claim payments
• Certain diagnoses develop claims at different rates
• A narrowr network may results in higher out-of-network claims, which may take longer to present
• Internal processes of TPA affect claims processing time
• Accident claims and claims give rise to third party liability may be subrogated and may take several years to settle
• Provider and Hospital contracts could affect the timing of cashflow

Question 12

Self-Insured Plan Management
Factors influence the impact of Catastrophic Claims

Answer 12

• Purchase of specific and/or aggregate stop loss
• Benefit plan design (incentives to use “centers of excellence”, precertification and preauthorization)
• Network contracting structures (outlier provisions, case rates for service)
• Case management and disease management

Question 13

Self-Insured Plan Management
Specific Stop Loss vs. Aggregate Stop Loss

Answer 13

Specific Stop Loss - Catastrophic losses to any one beneficiary (SSL pays the excess of the losses > specific deductible for each beneficiary)

Aggregate Stop Loss - Protect Plan’s total losses during the year not otherwise coverd by SSL. (ASL pays the excess of aggregate paid losses > aggregate attachment point subjects to a min aggregate attachment point

(e.g., aggregate attachment factor = 1250, employee months = 2700, then aggregate attachment point =3,375,000. If min aggregate attachment is 3,562,500, then use 3,562,500)

Losses in excess of the specific stop-loss deductible do not accumulate toward the Aggregate Attachment Point(because plan sponsor does not pay this portion)

Question 14

Self-Insured Plan Management
Potential Gaps in Coverage

Answer 14

• Stop-loss carriers can terminate the policy at renewal
• Gap may occur due to the lag between claims are incurred, paid, and reported due to the contract basis
• Policy terms with respect to known losses can create gaps (Laser ded applied to members with known losses)

Careful review of the SLI coverage and your plan provision is important. Key areas to review
* International coverage
* Clinical trial defintions
* UCR definitions
* Coordination of benefits
* Medicare eligibility for end stage renal disease claimants

Question 15

Discuss Actuarial Support for the Self Insured Plan

Answer 15

• Determine COBRA premiums for members who lose coverages
• Determine the ACA MV for self-insured plans
• Establish of Creditable Coverage for Retiree Prescription Drug
• Advise plan sponsors whether to self-insurer, project claims, reserving, risk mitigation and risk transfer
• Effect of Other ACA Related Actuarial Issues
  -Adj for taxes and fees
  -Enrollment and expense projections
  -ER Tax Penalties vs. Benefit Expenses
  -Minimum Essential Coverage (MEC) plan cost estimates
  -Set affordable EE contribution
  -Defined Contribution plans
  -Balance benefits and employer budge

Question 16

How does SLI Protect the Self-Insured Plan?

Answer 16

Reduce the claims volatility, helps ER to budget in an acceptable max liability in terms of

• SSL - remove the excess of large claims over the SSL threshold, limits the risk from any individual claimnant and reduces the volatility of severity. This does not protect the high frequency of claims
• ASL - cap employer claim costs at 125% (e.g.) of expected, limiting the maximum ER liability. This helps protect high frequency of claims in a year. This does not reduce the volatility of an individual claim’s distribution

Both SSL and ASL together cap ER max liability at the ASL attachment point. The gap (aggregate corridor), the 25% above expected is the risk ER takes on in exchange for cost savings opportunity

Question 17

Entities involved in a Stop Loss Transaction

Answer 17

1. Plan sponsor solicits bids from Financial Advisors (agents, brokers, TPA), who in return solicits the bids from Administrators and stop-loss Underwriters.
2. Administrators and underwriters submit the bids to financial advisor, who then submits the bids to plan sponsor
3. The winning underwriter issues a stop-loss policy, financial advisor delievers to the plan sponsor
4. Plan sponsor pays premiums to the administrator, who remits to underwriter
5. Plan sponsor funds the claims to administrator, administrator submits the stop loss claims to underwriter
6. Underwriter pays the claims
7. Underwriter remits premiums and submits the claims to risk takers

Question 18

Specific Stop Loss Variations

Answer 18

• No laser guarantee
  -Guarantee no new laser for the renewal year, the existing laser terms still apply, usually come with limit on the increase of renewal year premium to avoid just shifting the known risks arise after the original issue date to the expected cost in premium
• Aggregating Specific Stop Loss
  -Add the total of specific stop loss payments together, only if the sum > aggregating specific stop loss deductible, the stop loss carrier begins to pay

Question 19

Aggregate Stop Loss Variations

Answer 19

• Typically attachment point = 125%, but can be 110%-120%
• Aggregate only SLI (No SSL)
• Aggregate attachment point below 100% of expected claims (submerged aggregate)

Question 20

Optional Features of Stop-Loss Products

Answer 20

• Advance funding, specific accommodation, specific reimbursement, specific advance - provides cash-flow relief to the self-insured plans
• Aggregate accommodation - each month, pro-rate the aggregate attachment point (e.g., 9 months through the year, 0.75 x aggregate attachment point), if the claims to date exceed the pro-rated, carrier pays the self-insured plans the amount, usually needs additional premium for this option
• Terminal Liability Option - add a run-out protection (e.g., for paid contract basis, add 3 months run-out protection)

Question 21

Level Funded Products and Stop Loss Considerations

ER pays a fixed level monthly premium equivalent = expected claim costs + admin fees + stop loss insurance premium

Answer 21

• Allow small groups with good experience to benefit paying less than under community rating
• SLI portion can use the claims experience and apply medical u/w to small groups
• Level funding requires:
  -SLI that includes aggregate stop loss
  -Advance funding or aggregate accommodation options
  -ER must fully funded the aggregate attachment point through monthly fixed contribution
  -ASO uses the claim funding to pay claims

Question 22

Define and Explain when an ER would use each of the following stop loss contract types:

(i) Paid
(ii) 15/12
(iii) 12/18

Answer 22

Paid
* Covers claims paid during the contract year, regardless of when they were incurred
* Useful when ER renews policy with the SL carrier

15/12
* Covers claims incurred 3 months prior to the contract effective date thru the end of current contract year, paid in current contract year
* Useful when ER switching the SL carrier to cover run-in

12/18
* Covers claims incurred in the contract year, paid in current contract year thru 6 months after
* Useful if ER switching to fully-insured in following year

Question 23

Considerations in pricing and underwriting the SSL

Answer 23

• Underlying Plan Design - per person Out of Pocket Max, Managed Care features
• Specific deductible - if set really low, could incur higher costs of admin SSL claims and higher prem
• Contract basis - 12/15 is standard, the number of run-in claims’ months or run-out claims’ months requested could subject carrier to anti-selection
• Known loss underwriting
  -Underwriter could add the expected cost for known losses to premium, apply a laser, or laser pooling
  -For carrier, (adv) laser removes the high cost claimant from the risk pool, (disa) but prem could be higher if those high cost risks are included
  -For self-insured ER, (adv) prem is lower, (disa) they could be better off without the laser
• Adjustments for group risk characteristics
  -Age and gender profile: patterns of excess loss by age and gender are significantly different than the patterns of total loss by age and gender (younger males have higher accident rates, thus higher excess loss than younger females, but younger males have lower total expected costs than younger females)
  -Industry: some industries are more prone to accident then others thus higher risk of excess loss
• Leveraging - the trend of excess loss over SSL ded is higher than the trend of plan’s claim costs. The impact of leveraging increases as the SSL ded increases

Question 24

Considerations in pricing and underwriting the ASL

Answer 24

• As Aggregate attachment point increases, the premium decreases because less likely to hit the attachment point
• As SSL ded increases, the aggregate stop loss prem increases due to less claims are coverd by SSL and more likely to hit the aggregate attachment point
• Underwriting - Profitability depends on careful underwriting
• 2 populations with similar risk characteristics may have same expected claim cost over time but have different fluctuations annually, the one with more fluctuation is more risker in terms of ASL coverage
• Numbre of certificates - aggregate losses of plans with fewer number of certificates are more volatile, requires a larger risk margin
• It is very critical to determine the expected claim costs right

Question 25

Aggregating Specific Stop Loss Considerations

Answer 25

• Sometimes can be used instead of lasering (adv)
• Allows stop loss carrier to avoid the nuisance claims and transfer some risks to self-insured plans (adv)
• Stop loss prem will be lower and more attractive to the group (adv)
• Lower admin and commission costs (adv)
• Mitigate the effect of leveraged trend rate increases (adv)
• Lower profit and more complex calculations (Disa)
• May need to add additional contingency margin due to increase volatility and uncertainty of claim estimates (Disa)
• Measured as a percentage of aggregate specific stop loss ded, the discount on SSL prem is larger for
  larger self-insured plans, lower SSL ded, lower aggregate specific stop loss ded because less fluctuation and higher prob that the aggregate specific stop loss ded portion do not need to be paid

Question 26

Recommend approaches to reduce leveraged trend

Answer 26

• Increase the SSL ded annually indexed to the medical trend will reduce the impact of leveraged trend
• Anything to reduce the trend for large claims will have the greatest impact on leveraged trend - such as increased underwriting, auditing large claims, or case management for large claimants
• Add an aggregating specific stop loss ded