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Developing the Operational Strategy of Managing Medical Stop Loss in Your Captive

Jesse Crary, Lawyer, Primmer Piper Eggleston & Cramer PC; Stephen Hannabury, President, Educators Health Insurance Exchange of NE;

John Cassell, Sr. Partner, Spring Consulting Group

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Background Growth in Employee Benefits Captives Funding Medical Stop Loss through a Captive Development of Group Medical Stop Loss Programs The Impact of the ACA

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Group Medical Stop Loss Captive Structure

Members can access a wider range of health plans at reduced rates

Members can jointly purchase centralized services and more efficient benefit integration and health management

Group Stop Loss

Captive Program

Member

Member

Member

Pharmacy Benefit

Manager

DataWarehouse

Employee Assistant Program Provider

Wellness Health

Management

TPA

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Managing Risk

The cell captive provides a secure way to self insure health risks for members

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The Benefits The participating group owns the program Members save money Member risk is controlled Costs are transparent Program design is tailored and controlled by the

members

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The Benefits (continued) Clean data is available to:

Benchmark performance Focus Health management Manage Providers

Administration and program management can be centralized efficiently

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Critical Issues (do not try this at home) The Group:

Education and commitment Homogenous v Heterogynous Stickiness

The team, the structure, the domicile Managing the risk-the bad years Taking on new members Exit strategy What can go wrong……

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Efficient Legal Structures for Group Medical Stop Loss Captives

Jesse Crary, AttorneyPrimmer, Piper, Eggleston & Cramer PC

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To Rent or Own? Rental Captive vs. Group Owned Captive

Advantages of Joining an Existing Rental Facility (Sponsored Captive) Reduces up-front capital required to establish program Can be used as incubator for groups that initially lack the

size (number of covered lives) and/or surplus capital needed to establish an owned captive

Some large sponsored captives owned/operated by brokers/carriers offer full suite of services for administering self-insured health plans and group medical stop loss reinsurance (attractive to those interested in streamlining entry).

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To Rent or Own? Rental Captive vs. Group Owned Captive (continued)

Disadvantages of Joining an Existing Rental Facility (Sponsored Captive) Rental fees and conservative funding requirements reduce

opportunity for savings Oftentimes limited in choice of commercial stop loss carrier

and service providers Reduced or non-existent control over governance and

operations Less advantageous for nonprofit groups from tax

perspective (until Vermont recently adopted law permitting cells to be formed as reciprocals)

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To Rent or Own? Rental Captive vs. Group Owned Captive (continued)

Advantages of Group Owned Captive Control over decision making regarding structure,

governance and operations No rental fees Opportunity to select own team of service providers and to

design program best suited to individual group’s needs

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To Rent or Own? Rental Captive vs. Group Owned Captive (continued)

Disadvantages of Group Owned Captive Pulling together initial members to establish a group with

sufficient size and funding Not for everyone – requires commitment and cooperation

of employers with common group-oriented philosophy and long-term view of how collective effort can control escalating costs of funding employee health

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Common Captive Types and Legal Structures Available to Group Owned Captives

Common Captive Types Association Captive – not ordinarily used for medical stop

loss captives as employers making up group are generally large enough to qualify for industrial insured status

Industrial Insured – favored over association captive as it generally features lower initial capital requirement and has less restrictions on investments; common for medical stop loss captives

Sponsored Captive – group could potentially form its own sponsored captive structure if it desired to segregate risks of captive by line of business or by employer type

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Common Captive Types and Legal Structures Available to Group Owned Captives (continued)

Common Legal Structures Association/Industrial Insured Captive can be formed

as:― Stock Corporation― Mutual/nonstock corporations― LLC― Reciprocal (advantageous structure for groups made up of not-for-

profit employers)

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Captive Domicile Considerationsfor Group Medical Stop Loss Captives

Choosing the Right Domicile While important consideration for any captive – crucially so

for Group MSL Captive

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Choosing the Right Domicile (continued)

What to Look for In a Domicile― Experience – Not the time to give a new domicile or regulatory team

a try― Knowledge – Regulatory team that understands added legal and

regulatory complexity of these programs – if the regulator is not asking questions they probably do not understand relevant issues!

― Support of MSL – Ensure domicile has history of supporting successful group MSL programs Respected, knowledgeable regulator can be a powerful ally if program

comes under scrutiny by DOL or foreign state

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Regulatory Concerns Employee Retirement Income Security Act (ERISA)

Federal law governing self-insured employee benefits plans Generally MSL Captives are not regulated under ERISA as stop

loss coverage is not an employee benefit However, following precautions should be taken as greater

scrutiny of self-funded structures is occurring― Stop loss insurance must attach at high enough level that it cannot be argued it is

taking a portion of the primary risk that should be covered by health insurance― Stop loss premium must be paid from employer funds and not those contributed by

employees to self-insured plan― Stop loss insurance proceeds must be payable only to employer listed as named

insured― Employer must have all rights of ownership under policy― Neither the self-insured plan nor any participant in the plan can have any preferential

claim against or beneficial interest in the policy

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Regulatory Concerns (continued)

Avoiding “MEWA” status MEWA = Multiple Employer Welfare Arrangement (regulated by

ERISA and state insurance laws) Each individual employer must separately contract with stop loss

carrier and pay all stop loss premiums from its own funds. Employer MUST NOT use contributions made by employees towards the cost of their health insurance to pay for stop loss coverage

Captive must be segregated from arm of program responsible for administering self-insured plans in order to ensure clear distinction between flow of self-insured plan funds and separate employer monies used to fund risk-bearing entity

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Regulatory Concerns (continued)

Avoiding “MEWA” status (continued)

Each employer must enter into direct contracts with third-parties providing services to its self-insured plan. Program must not be party to employer’s contracts in order to avoid being treated as “plan fiduciary” under ERISA

Those establishing new group medical stop loss captives should hire an ERISA attorney to review the program structure and provide an opinion clarifying captive does not constitute MEWA or fall under ERISA regulation

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Regulatory Concerns (continued)

Call for Heightened Stop-Loss Regulation Great deal of attention by Federal and State Government

― Concern that viability of public health exchanges is threatened if small employers with younger, healthier employees opt to self-fund in large numbers (resulting in adverse selection where exchanges are over-populated with unhealthy, high-cost lives)

Calls for more stringent regulation of stop loss to prevent/discourage small employers from self-insuring― November 2014 DOL Technical Release – Opining that ERISA does not

preempt states from adopting laws prohibiting insurers from issuing stop-loss contracts with attachment points below certain levels

― December 2014 NAIC White Paper – Encourages state regulators to take active role in regulating terms of stop loss insurance policies and to adopt minimum attachment points to ensure employers retain enough risk that they remain truly self-insured

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Regulatory Concerns (continued)

Legislative/Regulatory Update New York stop loss ban for groups of 50 or fewer to be extended to

groups of up to 100 when the definition of “small group” changes in 2016 (preventative legislation introduced Jan. 2015)

DC passed law requiring minimum specific attachment point of $40,000 CA passed law requiring minimum specific attachment point of $35,000

for groups under 100 employees) ($40,000 as of Jan. 1, 2016) 8-10 states have adopted more modest laws generally consistent with

NAIC model regulation ($20,000 specific, 120% of expected claims aggregate)(CO and RI among the most recent)

In order to fund public exchanges, some states are considering stop loss insurance assessments and other measures that could impact self-insured employers

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Management and Governance Common Traits Among Successful Group MSL Captives

Shared culture and values among participants Helpful if participants already have a history of working together (trust) Long-term view towards effecting control over costs of employee health

Management and Governance Structure should Promote These Traits

Board members/Officers consisting primarily of participant representatives Use of committees to permit involvement by participant representatives from

different areas of expertise (finance, HR) High level of communication promoted by regular board and committee

meetings (in person at least once annually) and hiring hands on service providers that understand captive concept and that actively educate and engage participants

Shared wellness initiative/targets to enhance trust by ensuring all participants are working equally towards lowering claims and improving health

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Running an Efficient Group Medical Stop Loss Captive

EdHealth, year 1

Stephen Hannabury, Chairman & PresidentEducators Health Insurance Exchange of New England

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Why Was EdHealth Started?

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Why Was EdHealth Started?

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Why Was EdHealth Started? In late 2006, The Boston Consortium for Higher

Education (TBC) Board and the Chief HR Officers of the members began discussing ways to slow the rise of medical insurance costs.

They developed a two-pronged approach In early 2007, work began on a Health Management and

Disease Management Initiative – a program to help lower the level of claims. Healthy You was launched in early 2011.

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Why Was EdHealth Started? In mid-2009, work began to develop a program to

more efficiently and cost effectively provide medical insurance to participating institutions. Components included: Create savings for participants through a more efficient financial

structure and group purchasing power. Multi-institution participation to take advantage of large numbers of

employees to minimize risk volatility and costs, while allowing for renegotiation of administrative, network and other external charges.

Making the Healthy You program available to EdHealth members to encourage employees to be more involved in their own wellness and disease management.

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Launch July 1, 2013 – EdHealth launched operations with six

initial members. January 1, 2014 – Three additional members joined.

Approx. 7,000 employee lives covered and $100 mil. of annual “premiums”

January 1, 2015 – Two additional members joined. approx. 8,500 employee lives covered and $135 mil. of annual “premiums”.

Many other schools are targeting January 1, 2016.

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What are the Benefits to Members? Lower cost than a fully insured plan

Negotiated lower fees with TPAsNo hidden broker paymentsLarger group = better pricing, less volatilityNot paying “profits” on base level of claims

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What are the Benefits to Members? (continued)

Early indications of savings and successThe average 2015 increase in rates for EdHealth members is

0.5%One member realized 20% savings in first year vs. fully

insuredOne member has had two years of flat rates for employees

and was also able to skip one month of contributions to self-insured account

One CHRO received a standing ovation from faculty/staff when introducing the 2015 rates and plans. Subsequently, 25% of the employees enrolled in the high-deductible plan.

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What are the Benefits to Members? (continued)

Pooled experienceThe concept of insurance is predicated on the law of

large numbers – a larger group means the claims are more predictable or “credible” for rate pricing purposes.

Claims are “transparent” in setting rates, so clear information available for plan design and incentives program decision-making, at an affordable scale.

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What are the Benefits to Members? (continued)

Captive“Non-profit” insurance company – a clear mission!Direct access to reinsurers – transparency, lower costs Group manages services, control, and sets reservesPotential for future dividends

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How Does EdHealth Work? Collaborative Educational Ventures of New England,

LLC (CEVoNE) was created as the sponsoring organization.

CEVoNE was launched in March 2011 to bring together institutions from around New England to develop new programs.

The first initiative was to sponsor the creation of EdHealth.

CEVoNE members provided nearly $1.5 million to fund the initial development of EdHealth.

EdHealth is now financially independent of CEVoNE.

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How Does EdHealth Work? (continued)

Massachusetts LLC, formed on July 12, 2012 Purpose: To implement an integrated program to

design and coordinate the management of each participating institution’s self-funded health care plan.

EdHealth LLC is the “parent” company that oversees the overall program, consisting of:

A group of self-insured plans with individually set self-insured retention attachment points,

A pooled stop-loss insurance program administered by a licensed Vermont Reciprocal Captive.

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How Does EdHealth Work? (continued)

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How Does EdHealth Work? (continued)

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How Does EdHealth Work? (continued)

A common set of plan designs – “evolvable” Two Third Party Administrators – so far… Self-insured Plan and Captive administrators Actuarial and underwriting consultant Stop loss insurer Volunteer Board – working board Searching for first employee – Executive Director

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How Does EdHealth Work? (continued)

Most risk is maintained by individual members in the self-insured layer

Each member is individually underwritten Some sharing of risk at the captive layer Allocation of surplus/loss to members based on how

well each member did and how well the captive did

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How Does EdHealth Work? (continued)

Communications Open dialog between Board and members Formal quarterly reports to each member Newsletters, website, special topic messages, etc. Assistance to members with ACA and other legal

requirements Plan Design Committee – Representatives from all members Annual member meeting

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Leveraging the Captive

John CassellSpring Consulting Group

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Financial Efficiency Volume Spread of risk Control of overheads Carve outs

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Population Health Management Plan design Focused health management Direct contracting- risk sharing

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Centralized services Benefits administration Data analysis Legislative tracking

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Adding additional risks Life and Disability Voluntary benefits Retiree Medical and Pensions Benefit Integration

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Questions?