Actuary Role in Self-Insurance

Question 1

Actuary Role in Self-Insurance

ERISA (Definition, Purpose)

Answer 1

• Definition = Federal law that establishes minimum standards for pension/health plans
• Purpose = Protect EE benefit plan participants and their beneficiaries

Question 2

Actuary Role in Self-Insurance

ERISA Key Provisions

Answer 2

• Reporting and Disclosure Requirements (SPD, Annual Summary Report)
• Requires every plan to have named fiduciary
• Admin and Enforcement Provision
  
  • Claims Review
  • Savings Clause = state regulates health insurers
• Nondiscrimination (Cannot favor highly-compensated EEs)

Question 3

Actuary Role in Self-Insurance

COBRA

Answer 3

Allows health plan participants to continue coverage they might otherwise lose

Question 4

Actuary Role in Self-Insurance

HIPAA

Answer 4

• Improve portability and continuity of group/individual health insurance
• Combat fraud, waste, and abuse
• Promote use of medical savings account
• Improved access to LTC coverage
• Simplify administration of health insurance

Question 5

Actuary Role in Self-Insurance

Post-ERISA Regulations (List)

Answer 5

• COBRA
• HIPAA
• Newborns and Mothers Health Protection Act
• Women’s Health and Cancer Rights Act
• Mental Health Parity and Addiction Equity Act
• ACA

Question 6

Actuary Role in Self-Insurance

ACA Regulations

Answer 6

• ER Coverage Mandates
• Cadillac Tax
• Coverage Minimums
  
  • Essential Health Benefits
  • Minimum Actuarial Value (60%)
• Annual member cost-sharing limits
• Dependent coverage up to age 26
• Prohibits lifetime and annual limits
• Maximum waiting period = 90 days
• Preexisting condition exclusions prohibited
• Standard disclosure tools
• Limits rescissions (only with fraud or intentional misrepresentation)
• Value limits to wellness programs
• No cost-sharing for preventive services
• Emergency service - No PA needed, equal copays
• Appeals notice and disclosure requirements
• Extend Mental Health Parity and Addiction Equity Act
• Guaranteed issue and renewability
• Extend nondiscrimination rules
• Rating variations
  
  • 3:1 on age
  • Premium rating area
  • Family composition
  • 1.5:1 on tobacco use
• Medical Loss Ratio Standards
  
  • 85% for large group
  • 80% for small group/individual

Question 7

Actuary Role in Self-Insurance

Advantages of Self-Insurance

Answer 7

• Cost Savings
  
  • Lower premium taxes
  • Elimination of state-mandated benefits
  • Avoidance of health insurer fee
  • Removal of insurer risk charges
• Capture favorable claims experience
• Flexibility to design benefit plans that meet their needs
• Immediately reap benefits of wellness/dx programs

Question 8

Actuary Role in Self-Insurance

Disadvantages of Self-Insurance

Answer 8

• Unpredictability of claims (amount, timing)
• Budgeting (hard to predict cost/utilization)
• Unfavorable experience can stress ER cash flow
• Exposed to other risks
  
  • Fiduciary
  • Legal
  • Reputational
  • Operational
• Fully insured plans are easier to understand and have known expense

Question 9

Actuary Role in Self-Insurance

Regulation of Non-ERISA Plans

Answer 9

Mostly consist of church employee plans

• Non-ERISA Fully Insured = subject to state insurance regulations
• Non-ERISA Self-Insured = regulated by CMS
• Not subject to COBRA
• Subject to parts of ERISA

Question 10

Actuary Role in Self-Insurance

Regulation of Stop Loss Insurance

Answer 10

State regulators have authority over SLI, but not over self-insured plans

Question 11

Actuary Role in Self-Insurance

Causes of Variability in Lag Between Incurred and Paid Claims

Answer 11

• Type of Claim (Med vs. Rx)
• Complexity of Claim
  
  • Complex = review
  • Lag may cause claim not to be covered by SLI

Question 12

Actuary Role in Self-Insurance

Steps to Establish Self-Insured Rates

Answer 12

1. Request data from TPA
2. Review data
3. Develop projections with projections for: plan changes, large claims, admin fees, SLI

Question 13

Actuary Role in Self-Insurance

Typical Projection Methodology

Answer 13

1. Determine how many years of historical experience to use
2. Make credibility adjustments
3. Dampen effect of particularly large claims on the projection (pooling, SLI)
4. Complete paid claims
5. Convert to PMPM basis
6. Adjust for plan changes
7. Adjust for in=network/OON shifts
8. Apply trend
9. Convert PMPM to PEPM
10. Add fixed fees (admin, SLI)
11. Compare new rates to current rates

Question 14

Actuary Role in Self-Insurance

Reserving Considerations

Answer 14

ER needs actuarial assistance when developing IBNR estimates and reserves

Question 15

Actuary Role in Self-Insurance

Financial Risks that Plan Sponsors Need to Manage

Answer 15

• Natural Claim Volatility
• Catastrophic Events
• Drivers of Cash Flow Volatility
  
  • Benefit plan design
  • Dx
  • Hospital contracts
  • Third party liability
• Newly Self-Insured Plans = claim payments start small and ramp up, build reserve

Question 16

Actuary Role in Self-Insurance

Potential Gaps in Stop-Loss Coverage

Answer 16

• SL Carrier can terminate policy at renewal
• Gap may occur due to claim lag
• Timing gaps due to reporting requirements for proof of loss
• Policy terms with respect to known losses

Question 17

Actuary Role in Self-Insurance

Actuarial Support For Self-Insured Plan

Answer 17

• Advise plan sponsors on whether to self-insure
• Projecting claims/reserving
• Risk mitigation/transfer
• Determining COBRA premiums for members who lose ER coverage
• Determining ACA Minimum Value
• Establishment of Creditable Coverage for Retiree Prescription Drug Plans
• Effect of Other ACA-Related Actuarial Issues
  
  • Taxes and Penalties
  • MEC plan cost estimates
  • Affordable EE contributions
  • Balancing budget and benefits
  • Defined Contribution plans