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Taking Another Look at Self-Funding: Reducing the Risk

Matthew WarnerSenior Vice President

Aon HewittMiami, Florida

Arthur JonokuchiCEO

Salus FinanceGreenwich, Connecticut

5C-1

Agenda Market Overview

ACA Impact

Future of Health Care: The Road Ahead

A Creative Approach To Self-Funding

Pros and Cons of Self-Funding

Q&A

5C-2

Market Overview:Challenges, Opportunities, Evolutionary Shift

5C-3

The Health Insurance Experience

1 Organizational Shift (Employer): pulling the right lever

Benefit Team: deliver experience vs. benefits

Employer Shift: agreement between employer and employee changing

Employee Shift: moves to the role of consumer of health care vs. employee health insurance

Provider Shift: directly accountable to the employee/consumer

Health System Shift: changing the role of the employer

Government Shift: moves from heavy employer compliance to personal accountability

2

3

4

5

6

7

5C-4

Unsustainable medical costs

Health and Benefit Issues: Challenges

ACA driving major changes Insurance mandate

for employers Excise tax will minimize

differentiation in health

Health care system rapidly increasing in complexity ACOs, delivery system

transformation

Population health concerns Obesity Aging workers

Growing competition for key talent

U.S. health care system undergoing a seismic shift

5C-5

Health and Benefit Issues: Opportunities

New models like Exchanges (corporate and public) provide an opportunity to rethink the employer role and resources

Changes in the way we pay for medical services to reward providers who help people get and stay well

Data is easier to access and intelligently usedi

Absence, productivity, wellness and safety are increasingly important to employers

New and better approaches for connecting with employees to engage them in health

Demand for global benefit solutions is increasing

5C-6

Levers To Pull

What levers will be most effective for your organization?

Optimize Designand Funding

Reduce Unnecessary

Expense

Engage Participants

Improve Health and Workforce Performance

Coinsurance Only

Full Replacement CDHP

Reduce Dependent Subsidy

High Performance Networks

Results-Based Vendor Contracts

Claim and Clinical Audits

Value-Based Insurance Design

Population Segmentation

Worksite Wellness

Onsite Coaching and Care Delivery

Culture of Health

Targeted Complex Care Management

5C-7

ACA Impact

5C-8

Health Care Reform—Market Impact

Employer

Government Programs Exchanges

Health PlansProviders

PPACA Employees

Increasingly Complex System:

5C-9

High Cost Plan Excise Tax

2010PPACA Signed

Into Law

2011Compliance

Begins

2013Implementation of 2014 Requirements Individual Mandate Employer provides

affordable Minimum Essential Coverage (MEC) Employer Shared

Responsibility Payments Transitional reinsurance

contributions

2012Supreme

Court Upholds Individual Mandate

2018–2025 Your cost?

Excise Tax2015–2018

5C-10

Future of Health Care: The Road Ahead

5C-11

Healthy & High-Performing Workforce

The Road Ahead

Employer Responsibilities: Program Selection Program Management Trend Mitigation Strategies

House Money, House Rules

“Play by New Rules”

Employer Responsibilities: Provide Subsidy Provide Access Provide Choice

Leverage/Subsidize Exchanges

“Play on a New Field”

2018201720162015

Where do you want to go? How do you want to get there?

Defined Benefit Defined Contribution

5C-12

Self-Funding

5C-13

Traditional Self-Funding Pros and Cons

Cash flow Monthly claims fluctuation

What Are the Main Differences?

Elimination of state premium tax Risk of paying more than projected

Elimination of profit on risk

Reduced ACA taxes

Improved access to claims data

Non-discrimination testing

Filing own ACA fees

Purchase stop loss protection

Advantages Disadvantages

5C-14

Self-Funding: Volatility

Risk of Higher Annual Costs• There is a risk that in any given year claims costs will exceed

projections.

• Aggregate Stop-Loss reinsurance can limit the maximum annual claims cost to 120%-125% of projected, but there is the possibility that self-funded costs in any given plan year may exceed fully-insured costs by 20%+.

Claims Cost Fluctuation• In a typical Self-Funded medical plan, claims expense can fluctuate

significantly month-to-month for the same population. This is unlike a Fully-Insured plan which maintains the same premium per employee for the entire plan year.

• Some organizations fund higher than anticipated monthly claims costs through operating capital while others establish a reserve account to pay for unexpected claims spikes.

5C-15

Health Care Reform and Funding Implications

Fully Insured• Subject to Health Insurance Industry Fee

• PCORI and Transitional Reinsurance Fees are included in monthly premium

• Eligible for Medical Loss Ratio Rebates

• Responsible only for Section 6056 Employer Reporting

• Subject to new Non-Discrimination Testing Rules for Fully-Insured plans (penalty against the employer)

Self-Funded• Not subject to Health Insurance Industry

Fee

• Must pay directly to the IRS the PCORI Fee and register through Pay.gov and pay directly to the IRS the Transitional Reinsurance Fee

• Not eligible for Medical Loss Ratio Rebates

• Responsible for both Sections 6055 and 6056 Employer Reporting requirements

• Subject to existing non-discrimination testing requirements for self-funded plans (individual receiving benefit is taxed based on imputed income)

• Must file for Health Plan Identifier

5C-16

IBNR Reserve and Administrative Oversight

In addition to developing reserves to fund monthly claims fluctuations, there is another reserve requirement for Incurred But Not Reported (IBNR) or terminal liability claims.

Self-Funded employers must at a minimum:• Conduct annual non-discrimination testing

• Establish and manage banking accounts to fund claims payments

• Establish and manage IBNR and claims stabilization reserve accounts

• Accrue and pay PPACA fees annually

• Review claims activity monthly and project future claims expenses

5C-17

There Has To Be A Better Way!

So Now What…

5C-18

Health Expense Management

5C-19

A New Funding Alternative—H.E.M

• Provides a bridge for fully insured clients to become self-insured• Combines higher deductible stop-loss insurance and intra-year

liquidity funding• 3-year stable funding program• Carrier agnostic

Cost Risk

Self-FundedWithout

Stop-Loss Protection

Self-FundedWith

Stop-Loss ProtectionFully Insured

Health Expense

Management Solution

5C-20

Expected Client Savings—H.E.M.

Expected Client SavingsElimination of state mandated benefits will further increase the expected savingsNote: Savings shown based on a 500 employee client

5-6%

Health Plan Costs Risk charges, reserves, profit, etc. less HEM fees0-1%

ACA Industry Fee3%

Premium Tax2%

XYZ Inc.

5C-21

Actual Client Savings—H.E.M.

XYZ Inc.

Client Information

Industry Medical devices/computer software

Market Segment Middle market

Number ofEmployees

800

Wesavedthisclientmorethan$2mperyear

5C-22

In Closing. . .

What is my company’s tolerance for risk?

What would 5-6% savings mean to my company’s bottom line?

Could there be a better way?

5C-23

5C-24