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  1. 1. PUBLIC EMPLOYEES’ BENEFIT BOARD Self-Funding Models - Revised November 16, 2004 BD attach. 3
  2. 2. Agenda <ul><li>Background – History of PEBB Self-funding Task Force and Legislation </li></ul><ul><li>Review Self-funding concepts </li></ul><ul><li>Self-funding Preliminary Projections for Current PEBB Medical Plans (RBCBS only) –2006 & 2007 </li></ul><ul><li>Recommended Next Steps </li></ul><ul><li>Questions/Comments </li></ul>
  3. 3. PEBB – Self-funding History <ul><li>Board appoints Self-funding Task Force - 2002 </li></ul><ul><ul><li>Complete research ( AG, industry, regulations) </li></ul></ul><ul><ul><li>Analyze and make recommendations </li></ul></ul><ul><li>Board adopts Task Force Recommendations – June 2002 </li></ul><ul><ul><li>Recommend draft legislation to clarify administrative language </li></ul></ul><ul><li>PEBB sponsored Legislation passes 2003 session </li></ul>
  4. 4. Review Self-funding Concepts
  5. 5. Self-Funding Continuum <ul><li>Fully insured contract – (PEBB’s current arrangement with Kaiser and RBCBS) </li></ul><ul><ul><li>Carrier assumes 100% of risk </li></ul></ul><ul><li>Self-funded arrangement </li></ul><ul><ul><li>Employer funds all benefits provided under plan </li></ul></ul><ul><li>Hybrids e.g., Refunding, Minimum Premium, etc. </li></ul><ul><ul><li>Fully insured contract with elements of self-funding </li></ul></ul>
  6. 6. Fully Insured Contracts <ul><li>Carrier has 100% liability for plan benefits </li></ul><ul><li>Carrier develops premium annually to fund liability </li></ul><ul><li>Components of premium </li></ul><ul><ul><li>Paid claims </li></ul></ul><ul><ul><li>Reserves </li></ul></ul><ul><ul><li>Pooling charges </li></ul></ul><ul><ul><li>Retention (including charge for administrative services & “pure risk” charge) </li></ul></ul>
  7. 7. Fully Insured Contracts <ul><li>Paid claims </li></ul><ul><ul><li>Benefit dollars allocated to reimburse providers for covered expenses </li></ul></ul><ul><li>Reserves </li></ul><ul><ul><li>Carrier liability for incurred but not reported claims </li></ul></ul><ul><li>Pooling charges </li></ul><ul><ul><li>Cost to assume risk over pre-determined amount for individual claims (i.e., specific stop loss) </li></ul></ul><ul><li>Retention </li></ul><ul><ul><li>Administrative expenses </li></ul></ul><ul><ul><li>Pure risk charge </li></ul></ul><ul><ul><li>Carrier profit (if any) </li></ul></ul>
  8. 8. Fully Insured Contracts <ul><li>What does carrier look at when pricing large groups such as PEBB? </li></ul><ul><ul><li>Prior claims experience </li></ul></ul><ul><ul><li>Trend </li></ul></ul><ul><ul><li>Changes in benefit program that could affect claims utilization assumptions e.g., </li></ul></ul><ul><ul><ul><li>Changes in benefit design </li></ul></ul></ul><ul><ul><ul><li>Changes in employee contribution requirements/cash back </li></ul></ul></ul><ul><ul><ul><li>Changes in provider networks </li></ul></ul></ul><ul><ul><ul><li>Other innovations e.g., member/provider incentives </li></ul></ul></ul>
  9. 9. Self-Funding <ul><li>The plan sponsor assumes liability for plan benefits </li></ul><ul><li>Benefits claims are (typically) funded as they are paid </li></ul><ul><li>Financial components of self-funding </li></ul><ul><ul><li>Claims costs </li></ul></ul><ul><ul><li>Reserves for IBNR and pending claims </li></ul></ul><ul><ul><li>Administrative costs </li></ul></ul><ul><ul><li>Reinsurance premiums (specific/aggregate stop loss) </li></ul></ul>
  10. 10. Self-Funding <ul><li>Claims costs </li></ul><ul><ul><li>The plan sponsor funds all benefits </li></ul></ul><ul><ul><li>Claims can be funded at: </li></ul></ul><ul><ul><ul><li>Expected claims costs levels; </li></ul></ul></ul><ul><ul><ul><li>Maximum claims liability i.e., expected claims + additional claims up to aggregate stop loss attachment point (e.g., 120% of expected); or </li></ul></ul></ul><ul><ul><ul><li>Somewhere in between (e.g., actuarially determined contingency reserve requirement) </li></ul></ul></ul><ul><ul><li>Fund through trust or general assets </li></ul></ul>
  11. 11. Self-Funding <ul><li>Reserves </li></ul><ul><ul><li>Plan sponsor’s contractual obligation to pay claims incurred within given liability period </li></ul></ul><ul><ul><li>Reserves provide for Incurred But Not Reported (IBNR) claims </li></ul></ul><ul><ul><ul><li>Industry rule of thumb: @ 25% of expected claims </li></ul></ul></ul><ul><ul><ul><li>PEBB claims lag currently less than 10% </li></ul></ul></ul><ul><ul><li>Determined each plan year by actuarial consultant </li></ul></ul>
  12. 12. Self-Funding <ul><li>Administrative expenses </li></ul><ul><ul><li>Administrator’s fees to process claims </li></ul></ul><ul><ul><li>Provider network access fees </li></ul></ul><ul><ul><li>Cost containment programs </li></ul></ul><ul><ul><ul><li>Utilization review </li></ul></ul></ul><ul><ul><ul><li>Acute case management </li></ul></ul></ul><ul><ul><ul><li>Chronic disease management </li></ul></ul></ul><ul><ul><li>Plan document/SPD drafting and printing </li></ul></ul><ul><ul><li>Regulatory compliance e.g., HIPAA administration </li></ul></ul>
  13. 13. Self-Funding <ul><li>Reinsurance & other insurance premiums </li></ul><ul><ul><li>Specific stop loss premium </li></ul></ul><ul><ul><li>Aggregate stop loss premium </li></ul></ul><ul><ul><li>Fiduciary liability policy </li></ul></ul><ul><ul><li>Fidelity bond </li></ul></ul>
  14. 14. Self-Funding <ul><li>Funding mechanisms </li></ul><ul><ul><li>General asset plan </li></ul></ul><ul><ul><ul><li>Advance funding not permitted </li></ul></ul></ul><ul><ul><ul><li>Pay as you go </li></ul></ul></ul><ul><ul><ul><li>No trust required </li></ul></ul></ul><ul><ul><li>Qualified trust </li></ul></ul><ul><ul><ul><li>501(c)(9) trust </li></ul></ul></ul><ul><ul><ul><li>Advance funding permitted </li></ul></ul></ul><ul><ul><ul><li>Requires regulatory binders, audit agreements and special filings </li></ul></ul></ul><ul><ul><ul><li>Interest income is tax free </li></ul></ul></ul>
  15. 15. Fully Insured Contracts <ul><li>Advantages </li></ul><ul><ul><li>Benefit of carrier’s volume discounts from providers and pharmaceutical manufacturers </li></ul></ul><ul><ul><li>Carrier assumes fiduciary responsibility </li></ul></ul><ul><ul><li>Cash outlay is predictable month-to-month </li></ul></ul><ul><ul><li>Plan documents & SPDs produced by carrier </li></ul></ul><ul><ul><li>Administrative ease due to “bundling” of services </li></ul></ul><ul><ul><li>May be less expensive for public sector employers required to fund to the maximum claims liability (i.e., expected claims + 20%) </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Limited flexibility and control in plan design & provider contracting </li></ul></ul><ul><ul><li>May have increased retention costs (i.e., carrier profit in good years when claims are less than expected) </li></ul></ul><ul><ul><li>No cash flow savings, interest earnings potential </li></ul></ul>
  16. 16. Self-Funding <ul><li>Advantages </li></ul><ul><ul><li>Greater flexibility and control in plan design (Vision implementation), provider contracting, financing and plan operations </li></ul></ul><ul><ul><li>Cash flow advantages available through funding of claims as they occur </li></ul></ul><ul><ul><li>Interest earnings on reserves </li></ul></ul><ul><ul><li>Elimination of carrier risk charge & potential profit margin </li></ul></ul><ul><ul><li>ERISA exemption on state benefit mandates gives employer flexibility to cover some mandated benefits (PEBB has previously stated it will follow all mandates) </li></ul></ul><ul><ul><li>Tailored administration and reporting </li></ul></ul>
  17. 17. Self-Funding <ul><li>Disadvantages </li></ul><ul><ul><li>May not be able to match carrier volume discounts on provider contracting and Rx purchasing arrangements </li></ul></ul><ul><ul><li>Plan sponsor has legal and fiduciary responsibility </li></ul></ul><ul><ul><li>Increased administrative involvement for plan sponsor </li></ul></ul><ul><ul><li>May be more expensive for public sector employers if required to fund to the maximum claims liability (i.e., expected claims + 20%) </li></ul></ul>
  18. 18. Stop Loss Overview <ul><li>Stop loss coverage is a form of reinsurance that plan sponsors purchase to limit liability when self-funding health care benefits </li></ul><ul><ul><li>Specific stop loss </li></ul></ul><ul><ul><ul><li>Insures against single catastrophic claims that exceeds a specified dollar limit for a plan year </li></ul></ul></ul><ul><ul><li>Aggregate stop loss </li></ul></ul><ul><ul><ul><li>Insures against total claims exceeding an estimated expected dollar amount during a plan year </li></ul></ul></ul>
  19. 19. Specific Stop Loss <ul><li>Level of Specific Stop Loss driven by cost vs. risk factors: What is plan sponsor’s- </li></ul><ul><ul><li>Risk tolerance </li></ul></ul><ul><ul><li>Reserve position </li></ul></ul><ul><ul><li>Claims history </li></ul></ul><ul><li>General Rule of Thumb </li></ul><ul><ul><li>< 500 participants $50,000 </li></ul></ul><ul><ul><li>500 - 2,000 $100,000 </li></ul></ul><ul><ul><li>2,000+ $200,000+ </li></ul></ul><ul><ul><li>PEBB eliminated specific stop loss in 2004 due to poor ROI </li></ul></ul>
  20. 20. Specific Stop Loss <ul><li>What makes a difference? </li></ul><ul><ul><li>Diagnosis/prognosis of large claims </li></ul></ul><ul><ul><li>Employer’s industry </li></ul></ul><ul><ul><li>COBRA and retiree participation </li></ul></ul><ul><ul><li>Disease management programs </li></ul></ul><ul><ul><li>Managed care platform </li></ul></ul><ul><ul><li>Demographics of group </li></ul></ul><ul><ul><li>Geographic locations of group </li></ul></ul>
  21. 21. Aggregate Stop Loss <ul><li>Generally cannot be purchased without specific stop loss </li></ul><ul><li>Claims over attachment point usually reimbursed at year end </li></ul><ul><li>Typical attachment point: 125% of expected claims, Aon illustration assumes 120% to minimize funding requirement for maximum claims liability </li></ul>
  22. 22. Aggregate Stop Loss <ul><li>What makes a difference? </li></ul><ul><ul><li>Employer’s industry </li></ul></ul><ul><ul><li>Demographics of group </li></ul></ul><ul><ul><li>Geographic locations of group </li></ul></ul><ul><ul><li>Plan design (including degree of innovation and predictability of risk) </li></ul></ul><ul><ul><li>Enrollment </li></ul></ul><ul><ul><li>Utilization </li></ul></ul><ul><ul><li>Participant contributions </li></ul></ul>
  23. 23. State of the Current Reinsurance Market <ul><li>Consolidation of markets </li></ul><ul><ul><li>Third-party stop loss carriers </li></ul></ul><ul><ul><li>Third-party administrators </li></ul></ul><ul><li>Increased disclosure requirements on new and renewal business (more difficult to bind coverage) </li></ul><ul><ul><li>HIPAA presents unresolved issues </li></ul></ul><ul><li>Not all stop loss policies are created equal </li></ul><ul><li>Carriers limiting risk with tighter contract provisions and claim procedures </li></ul>
  24. 24. State of the Current Reinsurance Market <ul><li>Development of preferred relationships among market partners promotes: </li></ul><ul><ul><li>Strategic partnerships </li></ul></ul><ul><ul><li>Seamless solution for buyer </li></ul></ul><ul><ul><li>Best in practice contracts and processes </li></ul></ul><ul><ul><li>Turn-key operation </li></ul></ul><ul><li>Market partners include: </li></ul><ul><ul><li>Third-party administrators and stop loss carriers </li></ul></ul><ul><ul><li>Stop loss carriers and consulting firms </li></ul></ul>
  25. 25. Revised Self-Funding Projections (Current Regence Medical/Rx) <ul><li>Preliminary projections presented 9/21/04 were based on experience through July 2004 </li></ul><ul><li>Updated financial projections are based on experience through September 2004 </li></ul><ul><li>Additional actuarial modeling was performed to determine required contingency reserve level </li></ul><ul><li>Projected 2006 PEPM budget cost varies based on legal interpretation of contingency reserve requirement: </li></ul><ul><ul><li>Option #1 – Full funding to reinsurance attachment point (i.e., expected claims + 20%) = $69,190,423 </li></ul></ul><ul><ul><li>Option #2 – Partial Funding based on actuarial analysis of historical claims fluctuation @ 99% confidence level = $45,380,439 </li></ul></ul>
  26. 26. Recommended Next Steps <ul><li>Board discussion of summary findings – Nov. 16 </li></ul><ul><li>Provide AG with update on Vision planning and self funding summary – Nov./Dec. </li></ul><ul><li>Request AG advice regarding funding of contingency reserve </li></ul><ul><li>Develop summary of administrative requirements e.g., accounting infrastructure needed to administer a self-funded program – Dec. 2004 </li></ul><ul><li>Issue RFP to marketplace requesting vendor proposals for 2006 with option to quote on either a fully-insured or self-funded basis – January 10, 2005 </li></ul><ul><ul><li>Fully-insured proposals quote fixed costs PEPM (insurance premium or fully capitated rate) </li></ul></ul><ul><ul><li>Self-funded proposals quote expected claims costs (with or without administrative services and reinsurance) </li></ul></ul><ul><li>Conduct analysis of RFP responses – March-May 2005 </li></ul><ul><li>Board makes final RFP and funding decisions – June 2005 </li></ul>26