Alternative Funding 101

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Alternative Funding 101

• February 22, 2007

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Course Objectives

• Basic financial concepts.
• Understand the methods of alternative funding.
• Articulate key components of claim projection.
• Define Stop Loss insurance.
• Articulate key features and benefits of partial
  self funding.
• Understand Stop Loss contracts.
• Explain a basic Stop Loss quote and illustration
  of costs.

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Financial Concepts

• Key Components of Premium
• Expected Paid Claims
• Incurred
• Paid or Recorded Claims
• Pooled vs Non-Pooled
• Reserve Change
• Accounting
• Claims Payment
• Incurred but Unrecorded (IBNR or UNR)
• Extended Liability Reserve (ELR)
• Pooling Charge
• Expenses/Retention
• Administrative Services (i.e., ID cards, claims
  processing)
• Profit
• State Premium Taxes
• Commissions or Broker Compensation
• Margin
• Claims Buffer (for some funding and accounting
  arrangements)

4
Financial Concepts

• Rating Methodologies
• Pure Community Rating
• Community Rating by Class
• Experience Rating
• Group-Specific Community Rating (GSCR)
• Portfolio Rating
• Accounting Basis
• Retrospective
• Prospective

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Financial Concepts

• Accounting and Funding Arrangements
• Conventional (fully insured) Prospective
  Funding/Acctg.
• Conventional (fully insured) Retrospective
  Funding/Acctg.
• Minimum Premium Funded (Retrospective)
• Health plan holds reserves
• Minimum Premium Unfunded (Retrospective)
• Customer holds reserves
• Administrative Services Only

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Financial Concepts

• Minimum Premium
• Since insured, state mandates must be followed
• State premium taxes only on Basic Premium
• Customer funds claims up to maximum (Liability
  Limit)
• Cost Components
• Liability Limit
• Expected Paid Claims
• Margin
• Basic Premium
• Reserves (funded)
• Retention
• Pooling

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Financial Concepts

• Advantages of Minimum Premium
• Tax Savings
• Cash Flow Improvement
• Reserves
• Terminal Liability Limit in some cases (for
  Unfunded caps runoff liability)
• Simplified Banking
• Claims Services
• Pooling
• Booklet-Certificates

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Financial Concepts

• Administrative Services Only (ASO)/
• Administrative Services Contract (ASC)
• Cost Components
• Retention/Service Fee
• Expected Paid Claims

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Financial Concepts

• Administrative Services Only (ASO)
• Advantages
• Improved Cash Flow
• Tax and risk charge savings
• Simplified banking
• Full services
• Benefits design flexibility
• No state mandates

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How Stop Loss Works

• Administrative Services Only (ASO) Stop Loss
  Insurance
• What is Stop Loss insurance?
• Optional coverage designed to provide
  catastrophic risk protection to self-funded
  customers.
• Individual Stop Loss (ISL) protects against an
  individual catastrophic claim.
• Aggregate Stop Loss (ASL) sets the employers
  liability for ALL claims paid for their members
  over a predetermined time period.
• All claims minus those reimbursed under ISL are
  considered
• The employer liability limit is called the
  attachment point, usually expressed as a
  percentage of expected claims (i.e., 125 of
  expected non-pooled claims).

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How Stop Loss Works

• Individual Stop Loss is usually combined with
  Aggregate Stop Loss.
• Individual Stop Loss can be offered by itself.
• Typical ISL deductibles
• 50k, 75k, 100k, 125k, 150k, 175k, 200k
• Available ASL coverages
• 110, 115, 120, 125, 130, 135
• Contract Basis
• 24/12, 18/12, 15/12, 12/12, 12/15, 12/12/w/TLO,
  PAID

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How Stop Loss Works

• Key Terms
• Date Incurred.
• Date Paid date claim processed and check
  released.
• Checks issued basis date check is produced.
• Checks cleared basis date check is cashed and
  cleared the banking system.
• The difference between checks issued and cleared
  is usually between 7 10 days.
• Policy Period represents the 12-month period
  during which premiums are paid.

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How Stop Loss Works

• 12/12 Claims incurred and paid during 12-month
  policy period.
• 12/15 Claims incurred during first 12 months
  and paid during the policy period plus 3 months
  (12315).
• 15/12 Claims incurred 3 months prior to the
  effective date and paid during the policy period
  plus claims incurred and paid during the policy
  period (31215).
• PAID Normally used in renewals as it covers
  claims paid in 12 months regardless of date
  incurred.
• TLO Terminal Liability Option is provided to
  cover run-out claims in the event an account
  terminates.

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How Stop Loss Works
12/12 12/15
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How Stop Loss Works
15/12 Paid
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How Stop Loss Works

• 12/12
• Typically represents 9 months of mature claims,
  thus referred to as immature.
• This is the least expensive contract type in the
  first year.
• The increased cost of going from immature to
  mature without regard to trend 33.3.
• 12/12 with TLO
• The TLO option only comes into play if the
  account terminates and will cover claims incurred
  during policy period and paid during the run-out
  period.
• TLO 3 months.
• TLO 6 months.

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How Stop Loss Works

• Terminal Liability Option (TLO)
• Can be purchased on the effective date or at
  renewal.
• Provides protection for run-out claims if
  contract is terminated.
• TLO 3- or 6-month options.
• The TLO 3 is typically an upfront 4 load to
  12/12 premium rates.
• If elected at year end, group must pay additional
  2 months of premium at the mature premium rates
  and aggregate factors. Would be calculated at the
  mature attachment factors for additional 3
  months.
• If not elected, no additional premium or
  attachment liability charged.

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How Stop Loss Works

• Aggregate Stop Loss
• Expected claims are calculated for a policy
  period.
• The expected claims are increased by a corridor
  percentage, i.e., 125.
• All claims incurred and paid during the time
  period specified, except those reimbursed under
  the ISL contract, are totaled and compared to the
  aggregate attachment point.
• Claims in excess of the aggregate attachment
  point would be funded by the carrier.
• Some carriers offer a monthly budgeting feature
  that caps a policy holders monthly funding
  liability.
• Minimum attachment point.

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Lasering

• Lasering
• Process by which the ISL limit is increased for a
  known large claimant that is expected to
  continue.
• Generally used on new business cases only.
• Occasionally used in conversions and renewals
  when loading premium to account for ongoing large
  claimant is financially unfeasible.
• May have multiple lasers depending on number of
  known large claimants.
• Example Leukemia claimant is expected to undergo
  a BMT in the upcoming year. ISL requested is
  100k, would probably laser at 250k.
• At renewal, new lasers are generally not imposed.

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Factors Impacting ISL/ASL Pricing

• ISL pricing is often based on DEMOGRAPHICS of
  group.
• Number of males and females.
• Number of employees with covered dependants.
• Area factors by product.
• Product.
• Age of employees.
• Type of industry.
• Contract type.
• ASL pricing is mostly determined by expected
  claims level, size of the group and some
  integration of product discounting.

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Stop Loss Renewal Pricing

• Major components of renewal increase
• Leveraged trend.
• Contract change (on first-year renewals).
• Demographic changes.
• Ongoing large claimants.
• MCR consideration (after three years of
  experience).

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Impact of Leveraged Trend

• 100k ISL level.
• Large claim of 150k in 2005.
• ISL excess of 50k in 2005.
• Medical trend is 10.
• Same claims in 2006 expected to be 165k (150k
  1.1).
• 2006 ISL excess is 65k.
• This is 30 increase in excess claims funded by
  Stop Loss (65k/50k 130).

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Stop Loss Advantages

• Automatic and immediate reimbursement improves
  cash flow.
• ASL coverage includes monthly budgeting feature
  provides cash flow advantages and less
  variability.
• No new lasering of additional claimants at
  renewal unless requested by customer.
• Plan administration services and Stop Loss are
  thoroughly integrated, eliminating the need for
  Stop Loss claims submissions or third-party claim
  adjudication.

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Stop Loss Advantages

• Coverage for transplants and mental
  health/substance abuse included as any other
  claim.
• Stability of carrier no reinsurance.
• Regular Stop Loss auditing.

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Information Required

• What information is required to evaluate and
  finalize the
• underwriting of Stop Loss?
• Monthly enrollment and paid claims for a 24-month
  period to within 60 days of the proposed
  effective date.
• A current census that includes the following
• Employee age, zip code and gender.
• Coverage election by product.
• Dependant coverage elected.
• Employee status (i.e., active, PT, cobra,
  retiree, in the waiting period, waived coverage).
• Detailed current and proposed benefits
  descriptions.
• Large claims information.
• Usually those over 25k.
• Amount paid in last 12 months.
• Diagnosis, prognosis, current status.

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Underwriting Stop Loss

• How do we underwrite Stop Loss?
• Individual Stop Loss is based on the demographics
  of the group.
• Aggregate Stop Loss is calculated as a percentage
  of expected claims adjusted for the requested ISL
  deductible.
• Factors used for the aggregate premium
• Expected claims.
• Size of group.
• Contract type.
• Product discounting.

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Underwriting Stop Loss

• How do we handle known claims?
• No quote.
• Lasers.
• Premium loads.
• Increasing the ISL and ASL.
• No action.

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Underwriting Stop Loss

• What you will typically receive when requesting a
  Stop Loss
• quote
• The illustration of costs.
• Financial and caveat document.

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Self-Funded Exhibits

• Self-funded and Stop Loss financial document
  (terms, conditions, caveats, add-on pricing,
  etc.).
• Fee and rate sheet (ASC fees, Stop Loss rate,
  claims projection and Stop Loss aggregate).
• Stop Loss exhibits/ features.
• Stop Loss illustration of costs.
• Monthly budget feature.
• Reimbursement immediately.

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Performance Guarantees

• Service
• Flexible based on customer needs/concerns.
• Typical parameters include
• Installation.
• Account management.
• Member services ASA.
• Claim TAT.
• Claim financial accuracy.
• Reduction in fees if not met.
• Discounts
• Negotiable risk-free corridor.
• Typically available for customers gt1,000
  employees.
• Reduction in ASC fees if not met.

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Questions Answers
Thank You!!!