Group medical stop loss captives 2015

Proprietary and Confidential
©Copyright 2015 Spring Consulting Group, LLC. All rights reserved
LinkedIn: spring-consulting-group-llc
Twitter: @SpringsInsight
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

2
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

3
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
Pharmacy
Benefit
Manager
Data
Warehouse
Employee
Assistant
Program
Provider
Wellness
Health
Managemen
t
TPA

4
Managing Risk
The cell captive provides a secure way to self insure
health risks for members

5
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

6
The Benefits (continued)
 Clean data is available to:
 Benchmark performance
 Focus Health management
 Manage Providers
 Administration and program management can be
centralized efficiently

7
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……

8
Efficient Legal Structures for Group Medical Stop
Loss Captives
Jesse Crary, Attorney
Primmer, Piper, Eggleston & Cramer PC

9
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).

10
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)

11
To Rent or Own?
 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

12
To Rent or Own?
 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

13
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

14
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)

15
Captive Domicile Considerations
for Group Medical Stop Loss Captives
 Choosing the Right Domicile
 While important consideration for any captive – crucially so
for Group MSL Captive

16
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

17
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

18
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

19
 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

20
 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

21
 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

22
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

23
Running an Efficient
Group Medical Stop Loss Captive
EdHealth, year 1
Stephen Hannabury, Chairman & President
Educators Health Insurance Exchange of New England

26
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.

27
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.

28
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.

29
What are the Benefits to Members?
 Lower cost than a fully insured plan
 Negotiated lower fees with TPAs
 No hidden broker payments
 Larger group = better pricing, less volatility
 Not paying “profits” on base level of claims

30
What are the Benefits to Members? (continued)
 Early indications of savings and success
 The average 2015 increase in rates for EdHealth members is
0.5%
 One member realized 20% savings in first year vs. fully
insured
 One 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.

31
 Pooled experience
 The 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.

32
 Captive
 “Non-profit” insurance company – a clear mission!
 Direct access to reinsurers – transparency, lower costs
 Group manages services, control, and sets reserves
 Potential for future dividends

33
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.

34
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.

35

36

37
 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

38
 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

39
 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

40
Leveraging the Captive
John Cassell
Spring Consulting Group

41
Financial Efficiency
 Volume
 Spread of risk
 Control of overheads
 Carve outs

42
Population Health Management
 Plan design
 Focused health management
 Direct contracting- risk sharing

43
Centralized services
 Benefits administration
 Data analysis
 Legislative tracking

44
Adding additional risks
 Life and Disability
 Voluntary benefits
 Retiree Medical and Pensions
 Benefit Integration

Group medical stop loss captives 2015

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