Medical Funding Concepts


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There are many options available to employers to fund their benefits program. It can be challenging to assess which option will have the most benefit for your employees and balance sheet. It is imporant for employers to evaluate their options on a regular basis and choose a funding strategy that will pose the least amount of risk to their company's financial stability.

RJF/MMA Benefits Consultant John McDonough will discuss different options available to fund heath care benefts and things that should be considered as an organization grows and the market changes.

Key discussion points:

•Different funding mechanisms to fit your environment
•Risk vs. reward
•How to affect your total cost of risk
•Regular strategic evaluation of funding sources as your company grows

Published in: Economy & Finance
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Medical Funding Concepts

  1. 1. MEDICAL FUNDING CONCEPTSAPRIL 24, 2013John C. McDonoughBenefits Consultant7225 Northland Drive, Suite 300Minneapolis, MN 55428
  2. 2. MARSH & McLENNAN AGENCY LLC 2April 30, 2013Medical Funding ConceptsAgenda• Fully Insured• Health Reimbursement Arrangement (HRA)• Health Savings Accounts (HSA)• Stacked HRA/HSA• Partially Self-insured• Which type is best for you
  4. 4. MARSH & McLENNAN AGENCY LLC 4April 30, 2013Fully InsuredConcepts• Most widely used insurance type• Entire claim risk in transferred to the carrier• Guaranteed cost• Incurred contracts
  5. 5. MARSH & McLENNAN AGENCY LLC 5April 30, 2013Fully InsuredSample Plan DesignIn-Network Benefits Option 1In-networkOption 2In-networkCalendar Year Deductible None $750 single$1,500 familyCoinsurance 80% coinsurance 80% coinsuranceOut-of-pocket Maximum $1,600 single$3,200 family$2,000 single$4,000 familyPreventive Health Care Visits 100% CoverageDeductible does not apply100% CoverageDeductible does not applyOffice Visits/Urgent Care $35 copay $35 copayRetail Health/ Convenience Care $0 copay $0 copayLab/Pathology/ Diagnostic Imaging 80% 80% after deductibleIn/Out Patient Hospital Services 80% 80% after deductibleEmergency Room $75 copay $75 copayPrescription Drugs•Generic•Preferred Brand•Non-preferred Brand$9 copay$40 copay$90 copay$9 copay$40 copay$90 copay
  6. 6. MARSH & McLENNAN AGENCY LLC 6April 30, 2013Fully InsuredIncurred ContractsJan. 2012 Jan. 2013 Jan. 2014 Jan. 201512 monthFully-Insured ContractIncurred Claims24 monthFully-Insured ContractPaid Claims12 monthNext Contract YearIncurred Claims24 monthNext Contract YearPaid Claims
  7. 7. MARSH & McLENNAN AGENCY LLC 7April 30, 2013Fully InsuredAdvantages and Disadvantages• Advantages– Employers can effectively budget costs on an annual basis– Easy for employees to understand– Pre-determined premium is paid monthly irrespective of claim costs– Incurred claim basis makes changing carriers fairly simple• Disadvantages– Premiums include highest percentage of taxes and assessments- MN Premium Tax: 2.0%- MCHA (MN high risk pool): 3.0%- Conversion 1.0%Total 6.0%– Premium paid may exceed total cost of insurance
  9. 9. MARSH & McLENNAN AGENCY LLC 9April 30, 2013Health Reimbursement Arrangements (HRA)Concepts• Employer purchases a large deductible to reduce overall premium costs• Self-funded policy used to offset employee’s out of pocket costs• HRA Plans are strictly governed by the IRS• Solely employer-funded• Employer’s budget determines contribution amounts• HRAs are usually associated with high deductible health plans (HDHP)• A number of other features are available but not widely used– Rollovers– Ability to pay COBRA premiums– Etc…
  10. 10. MARSH & McLENNAN AGENCY LLC 10April 30, 2013Fully InsuredSample Plan Design where HRA funds 75% of DeductibleIn-Network Benefits Coverage purchasedIn-networkBenefits realized byEmployeesIn-networkCalendar Year Deductible $2,000 $0 single$0 familyCoinsurance 75% coinsurance 75% coinsuranceOut-of-pocket Maximum $3,000 single$6,000 family$1,500 single$3,000 familyPreventive Health Care Visits 100% CoverageDeductible does not apply100% CoverageDeductible does not applyOffice Visits/Urgent Care 75% coinsurance 75% coinsuranceRetail Health/ Convenience Care 75% coinsurance 75% coinsuranceLab/Pathology/ Diagnostic Imaging 75% coinsurance 75% coinsuranceIn/Out Patient Hospital Services 75% coinsurance 75% coinsuranceEmergency Room 75% coinsurance 75% coinsurancePrescription Drugs•Generic•Preferred Brand•Non-preferred Brand$9 copay$40 copay$90 copay$9 copay$40 copay$90 copay
  11. 11. MARSH & McLENNAN AGENCY LLC 11April 30, 2013Health Reimbursement Arrangements (HRA)Claim Process• Member incurs a claim• Provider submits claim to Insurance Carrier• Insurance Carrier processes the claim and applies to deductible• Insurance Carrier sends claim to HRA administrator• HRA administrator processes claim• Employer verifies HRA plan costs on a weekly basis and Administratorpays the claim from a shared account• Member receives an Explanation of Benefits from both the InsuranceCarrier and the HRA Administrator• Member is then billed from provider for the balance
  12. 12. MARSH & McLENNAN AGENCY LLC 12April 30, 2013Health Reimbursement Arrangements (HRA)Advantages and Disadvantages• Advantages– Lower guaranteed cost of insurance– Introduces employees to consumerism– Fairly easy to administer• Disadvantages– Employer assumes entire risk of the HRA account– Can be more confusing for employees– Requires another Summary Plan Description (SPD)– Currently, HRAs will pay two PCORI fees ($1 pmpy for 2014)
  14. 14. MARSH & McLENNAN AGENCY LLC 14April 30, 2013Health Savings Accounts (HSA)Concepts• Not a health plan• HSAs are accounts that can be established with a qualified high deductiblehealth plans (HDHP)• Individual tax preferred accounts that can be established to fundunreimbursed medical expenses• Combination of a flexible spending account (FSA) and a 401(k)– If pre-tax dollars are taken out of the account to pay for eligibleexpenses, there is no tax penalty paid (similar to FSA)– Unspent funds roll over year to year and earn interest (similar to a401(k))• Maximum Contributions for 2013 are $3,250/$6,450
  15. 15. MARSH & McLENNAN AGENCY LLC 15April 30, 2013Fully InsuredSample Plan DesignsIn-Network Benefits Option 1In-networkOption 2In-networkCalendar Year Deductible $1,500 single contract$3,000 family contract$2,500 single$5,000 familyCoinsurance 100% coinsurance 100% coinsuranceOut-of-pocket Maximum $1,500 single$3,000 family$2,500 single$5,000 familyPreventive Health Care Visits 100% CoverageDeductible does not apply100% CoverageDeductible does not applyOffice Visits/Urgent Care After deductible, 100% coverage After deductible, 100% coverageRetail Health/ Convenience Care After deductible, 100% coverage After deductible, 100% coverageLab/Pathology/ Diagnostic Imaging After deductible, 100% coverage After deductible, 100% coverageIn/Out Patient Hospital Services After deductible, 100% coverage After deductible, 100% coverageEmergency Room After deductible, 100% coverage After deductible, 100% coveragePrescription Drugs•Generic•Preferred Brand•Non-preferred BrandAfter deductible, 100% coverageAfter deductible, 100% coverageNo CoverageAfter deductible, 100% coverageAfter deductible, 100% coverageNo Coverage
  16. 16. MARSH & McLENNAN AGENCY LLCHealth Savings AccountsClaim Flow• Member incurs a claim• Provider submits the claim to Insurance Carrier• Insurance Carrier processes the claim and applies discounts• Insurance Carrier applies the claim amount to the deductible• Insurance Carrier sends EOB to member• Provider bills the member• Member pays the claim using HSA account16April 30, 2013
  17. 17. MARSH & McLENNAN AGENCY LLC 17April 30, 2013Health Savings Accounts (HSA)Unembedded vs Embedded Deductibles• Unembedded Deductible• For HDHPs (HSAs) with deductibles less than $2,500, the deductible isdetermined by contract type rather than individual• Family members have to hit the family deductible before benefits wouldbe eligible• One member could incur the entire family deductible• Once the family accumulates their deductible, benefits are payable• Embedded Deductible• For deductibles equal to or greater than $2,500, members coveredunder family contracts can maintain single level protection• In order to hit the family deductible maximum, more than one personmust have claims
  18. 18. MARSH & McLENNAN AGENCY LLC 18April 30, 2013Health Savings Accounts (HSA)Advantages and Disadvantages• Advantages– Introduces consumerism– Employees own the account; it’s portable– Unspent funds rollover year to year and earn interest– Contributions can be made by employee and/or employer– Contributions can be changed throughout the year• Disadvantages– Can create short term financial hardship– Mandated deductible levels are higher than most other plans– Pharmacy claims must apply to deductibles– Complex tax implications– Limitations on who is eligible to establish an account– Carrier pricing is conservative at this time
  20. 20. MARSH & McLENNAN AGENCY LLC 20April 30, 2013Stacked HSA/HRAConcepts• Employer buys a Qualified HDHP with a higher deductible (usually$5,000+) or a plan that provides 75% coinsurance after deductible• Employees maintain an HSA eligible plan which allows them to contributeto an HSA• Employer implements the HRA to help cover costs in excess of HSAdeductible
  21. 21. MARSH & McLENNAN AGENCY LLC 21April 30, 2013Stacked HSA/HRASample Plan Design• Single coverage:– $2,500 deductible­ Employer funds $500­ Member Funds $2,000– $5,000 out of pocket maximum­ Employer funds $2,000­ Member funds $500Total maximum out­of­pocket is $2,500Employeefunds$2,000Employeefunds5%to$500maxCarrier pays75%up to $7,500HSAFirst$2500Employerfunds$500HRANext$10,000Carrier pays 100% of eligibleexpenses over $12,500
  22. 22. MARSH & McLENNAN AGENCY LLC 22April 30, 2013Stacked HSA/HRAAdvantages and Disadvantages• Advantages– Lowest guaranteed cost– Encourages consumerism• Disadvantages– Higher administrative costs– Confusing for employees– Requires significant time for education
  24. 24. MARSH & McLENNAN AGENCY LLC 24April 30, 2013Partially Self­insuredConcepts• Employer takes on a greater risk by hiring a Claim Administrator to processtheir claims• Cost Components are broken into two groups– Fixed­ Administrative costs, re­insurance, network management, etc…– Variable­ Claims­ Under most plans, the employer assumes a 125% risk corridor for theirclaims• Employer actually funds the claims• Fixed costs are billed monthly• Claims are processed and paid weekly• Contracts are based on claims paid date in addition to incurred date
  25. 25. MARSH & McLENNAN AGENCY LLC 25April 30, 2013Partially Self-insuredSample Plan Design• Employer has the ability to create their own plan designs, but most closelymirror fully insured options
  26. 26. MARSH & McLENNAN AGENCY LLC 26April 30, 2013Partially Self-insuredIncurred and Paid TimelineJan. 2012 Jan. 2013 Jan. 2014 Jan. 2015Mar. 2013 Mar. 201412 monthsSelf-FundedContractsIncurred Claims15 monthsSelf-Funded ContractPaid Claims12 monthsNext Contract YearIncurred Claims24 monthsNext Contract YearPaid Claims
  27. 27. MARSH & McLENNAN AGENCY LLC 27April 30, 2013Partially Self-insuredStop Loss Insurance• Specific Stop Loss Insurance (Individual Stop Loss)– Protects employer when eligible claims during the policy year on anyone individual exceed a specific liability limit- When this occurs, you are reimbursed by the insurance company• Aggregate Stop Loss Insurance (Group Stop Loss)– Protects employer from eligible claims for the entire group that exceedthe annual aggregate liability limit• If eligible claims for entire group exceed the aggregate liability limit (the125% corridor), insurance company will reimburse for those claims
  28. 28. MARSH & McLENNAN AGENCY LLC 28April 30, 2013Partial Self InsuranceAdvantages and Disadvantages• Advantages– Greater flexibility with plan design– Employer pays actual claim costs– Approximately 5% reduction in fixed fees due to avoidance of sometaxes• Disadvantages– More administration for the employer– Cash flow can be an issue– Claims could exceed expected levels– Can be costly to convert back to a Fully Insured Contract
  30. 30. MARSH & McLENNAN AGENCY LLC 30April 30, 2013Which plan type is best?• There are a few examples where one type fits a specific group– Large, non-governmental employers with sophisticated HR teamsusually benefit from being Partially Self Insured– A healthier smaller clients (less than 200 employees) that is getting asignificant increase due to a high claimant may benefit from an HRA• At RJF/MMA, we think it is important that you are aware of the variousoptions and are able to select the plan type that best aligns with yourobjectives and your culture
  31. 31. Legal/regional regulatory statement to be added here if required.