L.L.L. Inc. Employee Benefits Consulting & Insurance Brokerage 

Servicing New York , New Jersey & Pennsylvania

Introduction to:Introduction to:

SELF FUNDEDSELF FUNDED PLANSPLANS

Over the past 20 years, health care costs provided by employer have risen dramatically with no end in sight. To an employer faced with large health plan premium increases, self-funding could be an attractive method of paying for these benefits at significantly lower rates.

Introduction:

 Employee Benefits Consulting & Insurance Brokerage Servicing New York , New Jersey & Pennsylvania

Fully Insured

A Fully insured health plan is one wherethe employer pays a premium to an insurance company for employee health coverage. The insurance premium isdue in advance of the coverage and is actuarially projected to cover anticipated claim costs and the insurance company’s overhead, commissions, reserves, various risks charges and taxes. In exchange for thepremium, the insurance company assumes the risk of providing health coverage and performs various taskssuch as the printing of employeebooklet.

A self-funded (or self-insured) healthplan is one in which the employerassumes some or all of the risk forproviding health care benefits to hisemployees. He takes control of theassets of his plan, invests them to his advantage, and eliminates the insurance company charges.

Self – Funded

Health PlansFully Insured Vs. Self Funded:

 Employee Benefits Consulting & Insurance Brokerage Servicing New York , New Jersey & Pennsylvania

Why do employers self-fund their plans?• An employer does not pay state premium taxes, which usually range from 2 percent to 3

percent of the monthly insurance premium.

• In a self-funded plan, you do not pay insurance company risk charges; the commissions are reduced as well as the retention charges.

• The employer retains control over the health plan reserves, enabling maximization of interest income.

• Insurance companies are subject to state regulations; self-funded plans only to federal regulation, thereby giving an employer almost total control of the plan design.

• An employer does not have to pre-pay coverage, thereby improving his cash flow.

• An employer only pays benefits based on his employees’ histories, not someoneelse’s employees.

Employer can authorize payment in full for problem claim situations.

• All plan designs are PPO (Preferred Provider Organization) which provides the highest reimbursement level in the industry. The only requirement for payment is medical necessity.

 Employee Benefits Consulting & Insurance Brokerage Servicing New York , New Jersey & Pennsylvania

$

AdministrativeExpenses:

printing booklets and ID Cards

Printing Booklets and ID Cards

Profit to Carrier

for unusedclaim dollars

$500,000

Taxes

Actual ClaimsPaid

$500,000

Processing claims

$

AdministrativeExpenses:

printing booklets and ID Cards

Printing Booklets and ID Cards

Profit to Clientfor unused

claim dollars$500,000

*No Taxes

Actual ClaimsPaid

$500,000

Processing claims

Self Funded

 Employee Benefits Consulting & Insurance Brokerage Servicing New York , New Jersey & Pennsylvania

Fully Insured

16.90%

11.50%

15.80%

14.50%

15.60%

12.30%

14.90%

11.10%

15.60%

12.40%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Coventional HMO PPO POS ALL PLANS

FULLY INSURED

SELF-FUNDED

Kaiser Survey

Premium Increases, by Plan Type and Funding Arrangement, 2003

Premiums for fully insured plans rose by 15.60% in 2003, while self-funded plan premium equivalents rose by 12.40%

 Employee Benefits Consulting & Insurance Brokerage Servicing New York , New Jersey & Pennsylvania

Kaiser Survey

Premium increases for fully insured plans have historically outpaced self-funded plan premium equivalent increases

9.40%

4.50%

6.10%

4.50%

9.70%

6.70%

12.40%

9.30%

13.50%

12.30%

15.60%

12.40%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1998 1999 2000 2001 2002 2003

FULLY INSURED

SELF-FUNDED

Premium Increases, by Funding Arrangement, 1998-2003

 Employee Benefits Consulting & Insurance Brokerage Servicing New York , New Jersey & Pennsylvania

Is self-funding for everybody?

The major difference between an insured plan and a self-funded one is that in self-funding the employer assumes the risk for the claims and these claims should be somewhat predictable.

Therefore, self-funding is not recommended for companies with 50 employees or less.

 Employee Benefits Consulting & Insurance Brokerage Servicing New York , New Jersey & Pennsylvania

Do I have to redesign my existing health plan?

No, not at all.

Self-funding does not require a change in the existing group coverages you offer, unless of course you want to change them.

 Employee Benefits Consulting & Insurance Brokerage Servicing New York , New Jersey & Pennsylvania

Who will take the place of the insurance company to administer the plan?

A self-funded employer can either administer the plan himself or have a third-party administer (TPA) administer the plan.

 Employee Benefits Consulting & Insurance Brokerage Servicing New York , New Jersey & Pennsylvania

What are the advantages in using a TPA?

The only business of a TPA is administration of

self-funded benefit plans. Insurance companies

mainly insure (that’s their business). TPAs don’t

insure – they only deal with self-funding. They

are the experts.

 Employee Benefits Consulting & Insurance Brokerage Servicing New York , New Jersey & Pennsylvania

Why should I self-fund my health plan?

Many employers faced with the same question have decided to implement a self-funded health plan. Their reason include:

• Self-funding will show a large first-year savings through the lack of premium taxes and various insurance company charges.

• Employers can save considerable money through new plan design that take advantage of the most up-to-date cost containment strategies.

• Self-funding does not affect the plan from the employees’ standpoint. There doesn’t have to be any noticeable change in the plan unless the employer so wishes.

• The employer receives increased interest from his reserves.

• Every aspect of the plan administration becomes subject to competitive market pricing, thereby saving money on such items as claims administration, printing of summary plan descriptions etc.

• Excess risk-coverage is available to insure the employer against unforeseen adverse claims experience.

 Employee Benefits Consulting & Insurance Brokerage Servicing New York , New Jersey & Pennsylvania

Glossary of Terminology

Aggregate Stop Loss:Level at which employer is no longer responsible for total paid

claims, inclusive of all participants.

Incurred Claim:A claim or expense incurred by claimant but not yet funded by

employer of processed by administrator.

Mature Year:A renewal contract year that will pay claims that were incurred in

prior contract period.

Paid ClaimA claim funded by employer and paid by the TPA

 Employee Benefits Consulting & Insurance Brokerage Servicing New York , New Jersey & Pennsylvania

Reimbursement Contract:Stop Loss contracts are typically written that both individual and aggregate claims must first be paid by employer and then will be reimbursed by reinsurance carrier.

Run-In (Claim Lag):Early months at inception of self-insured program when claims are first beginning to be incurred, submitted for payment and then paid by TPA. This period of time allows a cash flow advantage.

Run-Out:After contract termination, claims incurred prior to termination but submitted after termination date and yet to be paid.

 Employee Benefits Consulting & Insurance Brokerage Servicing New York , New Jersey & Pennsylvania

Shock Loss:Any claim or claims that penetrate specific or aggregate reinsurance.

Specific Stop Loss:Individual protection level at which claims are insured, limiting employer responsibility.

TPA:Third Party Administrator; independent claim paying organization

Zero Account Balance:Funding method to allow maximum employer control of claim funds. Funding only requested upon completion claim adjudication.

 Employee Benefits Consulting & Insurance Brokerage Servicing New York , New Jersey & Pennsylvania

Contract Types:

12/12 – Benefits must be incurred and paid within the contract period. This is the least expensive of all plans and has the maximum exposure at the end of the plan year.

12/15 - Is becoming increasingly popular. Claims incurred during the 12 months period and PAID in the 15th month period are covered. This gives the employer 3 months of coverage beyond the plan year to pick up incurred but not yet paid claims.

12/24 – An enhancement of the above 12/15, comes closest to duplicating the run out responsibility of a fully insured program.

15/12 – Provides three month run-in coverage when taking over a previously self-insured 12/12 contract. Coverage for claims incurred and paid within the contract year and 90 days prior to the effective date.

Paid – No stipulation for incurred date of claim. Consideration is when claim is processed and employer funded. Available only upon renewal of first contract year.

Incurred – The broadcast contract with coverage similar to a fully insured contract. Claims that have taken place during contract year are covered regardless of submission date.

 Employee Benefits Consulting & Insurance Brokerage Servicing New York , New Jersey & Pennsylvania