PUBLIC EMPLOYEES BENEFIT BOARD SelfFunding Models

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PUBLIC EMPLOYEES BENEFIT BOARDSelf-Funding
Models
BD attach. 10

• September 21, 2004

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Agenda

• Background History of PEBB Self-funding Task
  Force and Legislation
• Review Self-funding concepts
• Self-funding Preliminary Projections for Current
  PEBB Medical Plans (RBCBS only) 2006 2007
• Recommended Next Steps
• Questions/Comments

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PEBB Self-funding History

• Board appoints Self-funding Task Force - 2002
• Complete research ( AG, industry, regulations)
• Analyze and make recommendations
• Board adopts Task Force Recommendations June
  2002
• Recommend draft legislation to clarify
  administrative language
• PEBB sponsored Legislation passes 2003 session

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Review Self-funding Concepts
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Self-Funding Continuum

• Fully insured contract (PEBBs current
  arrangement with Kaiser and RBCBS)
• Carrier assumes 100 of risk
• Self-funded arrangement
• Employer funds all benefits provided under plan
• Hybrids e.g., Refunding, Minimum Premium, etc.
• Fully insured contract with elements of
  self-funding

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Fully Insured Contracts

• Carrier has 100 liability for plan benefits
• Carrier develops premium annually to fund
  liability
• Components of premium
• Paid claims
• Reserves
• Pooling charges
• Retention (including charge for administrative
  services pure risk charge)

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Fully Insured Contracts

• Paid claims
• Benefit dollars allocated to reimburse providers
  for covered expenses
• Reserves
• Carrier liability for incurred but not reported
  claims
• Pooling charges
• Cost to assume risk over pre-determined amount
  for individual claims (i.e., specific stop loss)
• Retention
• Administrative expenses
• Pure risk charge
• Carrier profit (if any)

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Fully Insured Contracts

• What does carrier look at when pricing large
  groups such as PEBB?
• Prior claims experience
• Trend
• Changes in benefit program that could affect
  claims utilization assumptions e.g.,
• Changes in benefit design
• Changes in employee contribution
  requirements/cash back
• Changes in provider networks
• Other innovations e.g., member/provider incentives

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Self-Funding

• The plan sponsor assumes liability for plan
  benefits
• Benefits claims are (typically) funded as they
  are paid
• Financial components of self-funding
• Claims costs
• Reserves for IBNR and pending claims
• Administrative costs
• Reinsurance premiums (specific/aggregate stop
  loss)

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Self-Funding

• Claims costs
• The plan sponsor funds all benefits
• Claims can be funded at
• Expected claims costs levels
• Maximum claims liability i.e., expected claims
  additional claims up to aggregate stop loss
  attachment point (e.g., 120 of expected) or
• Somewhere in between
• Fund through trust or general assets

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Self-Funding

• Reserves
• Plan sponsors contractual obligation to pay
  claims incurred within given liability period
• Reserves provide for Incurred But Not Reported
  (IBNR) claims
• Industry rule of thumb _at_ 25 of expected claims
  
• PEBB claims lag currently less than 10
• Determined each plan year by actuarial consultant

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Self-Funding

• Administrative expenses
• Administrators fees to process claims
• Provider network access fees
• Cost containment programs
• Utilization review
• Acute case management
• Chronic disease management
• Plan document/SPD drafting and printing
• Regulatory compliance e.g., HIPAA administration

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Self-Funding

• Reinsurance other insurance premiums
• Specific stop loss premium
• Aggregate stop loss premium
• Fiduciary liability policy
• Fidelity bond

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Self-Funding

• Funding mechanisms
• General asset plan
• Advance funding not permitted
• Pay as you go
• No trust required
• Qualified trust
• 501(c)(9) trust
• Advance funding permitted
• Requires regulatory binders, audit agreements and
  special filings
• Interest income is tax free

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Fully Insured Contracts

• Advantages
• Benefit of carriers volume discounts from
  providers and pharmaceutical manufacturers
• Carrier assumes fiduciary responsibility
• Cash outlay is predictable month-to-month
• Plan documents SPDs produced by carrier
• Administrative ease due to bundling of services
• May be less expensive for public sector employers
  required to fund to the maximum claims liability
  (i.e., expected claims 20)
• Disadvantages
• Limited flexibility and control in plan design
  provider contracting
• May have increased retention costs (i.e., carrier
  profit in good years when claims are less than
  expected)
• No cash flow savings, interest earnings potential

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Self-Funding

• Advantages
• Greater flexibility and control in plan design
  (Vision implementation), provider contracting,
  financing and plan operations
• Cash flow advantages available through funding of
  claims as they occur
• Interest earnings on reserves
• Elimination of carrier risk charge potential
  profit margin
• ERISA exemption on state benefit mandates gives
  employer flexibility to cover some mandated
  benefits (PEBB has previously stated it will
  follow all mandates)
• Tailored administration and reporting

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Self-Funding

• Disadvantages
• May not be able to match carrier volume discounts
  on provider contracting and Rx purchasing
  arrangements
• Plan sponsor has legal and fiduciary
  responsibility
• Increased administrative involvement for plan
  sponsor
• May be more expensive for public sector employers
  required to fund to the maximum claims liability
  (i.e., expected claims 20)

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Stop Loss Overview

• Stop loss coverage is a form of reinsurance that
  plan sponsors purchase to limit liability when
  self-funding health care benefits
• Specific stop loss
• Insures against single catastrophic claims that
  exceeds a specified dollar limit for a plan year
• Aggregate stop loss
• Insures against total claims exceeding an
  estimated expected dollar amount during a plan
  year

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Specific Stop Loss

• Level of Specific Stop Loss driven by cost vs.
  risk factors What is plan sponsors-
• Risk tolerance
• Reserve position
• Claims history
• General Rule of Thumb
• lt 500 participants 50,000
• 500 - 2,000 100,000
• 2,000 200,000
• PEBB eliminated specific stop loss in 2004 due to
  poor ROI

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Specific Stop Loss

• What makes a difference?
• Diagnosis/prognosis of large claims
• Employers industry
• COBRA and retiree participation
• Disease management programs
• Managed care platform
• Demographics of group
• Geographic locations of group

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Aggregate Stop Loss

• Generally cannot be purchased without specific
  stop loss
• Claims over attachment point usually reimbursed
  at year end
• Typical attachment point 125 of expected
  claims, Aon illustration assumes 120 to minimize
  funding requirement for maximum claims liability

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Aggregate Stop Loss

• What makes a difference?
• Employers industry
• Demographics of group
• Geographic locations of group
• Plan design (including degree of innovation and
  predictability of risk)
• Enrollment
• Utilization
• Participant contributions

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State of the Current Reinsurance Market

• Consolidation of markets
• Third-party stop loss carriers
• Third-party administrators
• Increased disclosure requirements on new and
  renewal business (more difficult to bind
  coverage)
• HIPAA presents unresolved issues
• Not all stop loss policies are created equal
• Carriers limiting risk with tighter contract
  provisions and claim procedures

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State of the Current Reinsurance Market

• Development of preferred relationships among
  market partners promotes
• Strategic partnerships
• Seamless solution for buyer
• Best in practice contracts and processes
• Turn-key operation
• Market partners include
• Third-party administrators and stop loss carriers
• Stop loss carriers and consulting firms

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Self-Funding Preliminary Projections (Current
Regence Medical/Rx)

• See attached spreadsheets

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Recommended Next Steps

• Fine tune actuarial projections
• Current Medical/Rx
• Rx carve-out
• Other pilots
• Research administrative requirements
• Legal requirement to fund maximum claims
  liability
• Accounting structures needed to administer a
  self-funded program (e.g., agency remittance of
  premium to central fund, estimate for interest
  earnings on cash flow and reserves, etc.)
• Other ?