Self-Insurer Aug 2012 by SIPC

August 2012

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AUGUST 2012 | Volume 46

August 2012 the Self-insurer (iSSN 10913815) is published monthly by Self-insurers’ publishing Corp. (SipC), postmaster: Send address changes to the Self-insurer p.o. Box 1237 Simpsonville, SC 29681

FEAturES

6 From the Bench

Editorial Staff puBliShiNG DireCtor James a. Kinder MaNaGiNG eDitor erica Massey

SeNior eDitor Gretchen Grote

art Gallery: thank You Mr. roberts

in Wake of Supreme Court Decision, the affordable Care act Creates New opportunities (and New obligations) for account Based plans

by Michael A. Schroeder

InduStry lEAdErShIp

CoNtriButiNG eDitor Mike Ferguson

DireCtor oF aDvertiSiNG Shane Byars

the Group captive looking Good

DeSiGN/GraphiCS indexx printing

DireCtor oF operatioNS Justin Miller

ArtIclES

Editorial and Advertising Office p.o. 1237, Simpsonville, SC 29681 (888) 394-5688

Siia Chairman Speaks

Regulatory Solvency Protections for a Stronger Group Self-Insurance Industry by Gary Cooper

2012 Self-Insurers’ Publishing Corp. Officers James a. Kinder, Ceo/Chairman erica M. Massey, president lynne Bolduc, esq. Secretary

Building your Employee Benefits Practice in the BrIcS Markets by Greg Arms and Jessica Fuller

The Self-Insurer

August 2012

The

Group Captive

Looking

Good by Michael A. Schroeder

August 2012

The Self-Insurer

ecent news highlighting court decisions, legislative action and market dynamics is providing a boost to the group captive insurance approach. Considering the financial implications of choosing another form of group or pooled insurance for your workers’ compensation or health benefits, group captives present a compelling and convincing alternative. See for example, the recent confirmation by the u.S. Supreme Court that they will not entertain a review of New York’s Workers Compensation Board authority to assess any remaining self- insured groups close to $1 billion of liabilities left by more than 50 failed self-insured groups or trusts.Yes, that’s $1 billion with a B and their definition of joint and several liability means you pay claim obligations of other employers outside of the group you joined.

Judicial Enforcement of Joint & Several liability The idea of joint and several liability beyond the insurance facility that you participate in is a very bad outcome for the self-insured group industry and a very good example of why the group captive approach is a superior insurance vehicle. There is no joint and several liability among separate captive entities and most captive insurance companies organizational documents remove joint and several liability beyond the captive participants contributed capital. in other words, if the New York employers considering how to fund their workers compensation risk chose to proceed under the group captive approach rather than the self- insured group or trust approach, they would have avoided the $1 billion assessment they are now confronting.

Legislative Attack on MEWAs State legislative bodies have a long history of making life difficult for health

plans known as multiple employer welfare arrangement or MeWas. Now, the federal government has picked up the lead and included dramatically increased criminal enforcement and reporting requirements in ppaCa (patient protection and affordable Care act also known as “obama Care”). Common sense indicates reserves for known and unknown claims are necessary for any viable insurance facility. The difficulty arises when an insurance facility does not know or anticipate who or how those reserves will be established. this is the environment that MeWas face with regulators throughout the states. While MeWa assessments have not to this writer’s knowledge reached the $1 billion mark like New York workers compensation groups, many an employer funding its health benefits through a MEWA have received a disturbing letter informing them their estimated health premium was not enough and they now must pay more. Adding insult to injury, the determination that the reserves are not enough often appears arbitrary, unfounded and even a veiled attempt by the state regulator to push the MeWa out of the health insurance business. Compare this uncertainty with a group captive program insuring health benefits where there is no such thing as an assessment. premiums, reserves and the process for establishing are determined upfront before an employer/participant joins the group captive. No ex-post facto surprise that the budgeted premium expense was not enough and more money is due.

It’s the Price *#X%!

insurance is doubling every five years. Double digit premium increases are the norm in many markets and workers compensation coverage is unavailable for many classes of business. Yet, all of our workers compensation and health benefits group captives returned distributions to their participants this year. this is especially impressive when you consider these programs compete with the standard market from an upfront premium expense perspective. the market dynamics that group all insureds together when doling out premium rate increases provide a fertile ground for employers to exit the standard market. employers are better served by joining with other like-minded employers in a group captive offering a lower overall cost through the return of underwriting and investment profits. Just make sure the insurance facility does not allow for surprises like regulator assessments. n Michael A. Schroeder is President of the Roundstone organization. Mike offers more than twenty years of insurance industry management experience with responsibilities in the captive market, self insurance pools and trusts, publicly held insurance companies and the regulatory environment. Roundstone Management, Ltd. based in Westlake, Ohio is an insurance organization focused on the development, underwriting and servicing of specialty insurance programs, including single parent, agency and group captives. Roundstone offers intermediaries and buyers an expertise in the captive and specialty insurance marketplace with an unbundled services approach.

If joint and several liability along with federal and state regulatory pressure on self-insured groups and MeWas is not enough to push an employer into a closer look at a group captive insurance program for its workers compensation or health benefits, then how about the ultimate cost. today’s market for health

The Self-Insurer

| August 2012

Bench From the

by Steve Polino

Supreme court upholds Individual Mandate; Rejects Medicaid Expansion

n 2010, Congress enacted the patient protection and affordable Care act (“affordable Care act” or “act”). the same day the president signed the act into law twenty Six States, several individuals, and the National Federation of independent Business brought suit in Florida challenging the constitutionality of the individual mandate and Medicaid expansion under the act. the Court of appeals for the eleventh Circuit upheld Medicaid expansion as a valid exercise of Congress’ power, but concluded that Congress lacked authority to enact the individual mandate. the eleventh Circuit left the rest of the act intact. the Sixth Circuit and D.C. Circuit upheld the individual mandate as constitutional.

August 2012

The Self-Insurer

the individual mandate requires most americans to either purchase “minimum essential” health insurance coverage or pay a penalty if they fail to do so. Medicaid expansion, on the other hand, would require the States to expand Medicaid coverage to childless adults under the age of 65 with incomes below 133 percent of the federal poverty level. Failure of the States to expand coverage to these individuals could mean the loss of all federal Medicaid funds. on June 28, 2012, the united States Supreme Court ruled in National Federation of independent Business, et al. v. Sebelius, Secretary of health and human Services, et al., that the affordable Care act was constitutional in part and unconstitutional in part. the individual mandate was upheld as constitutional but the Medicaid expansion provisions of the act were found to be unconstitutional. although the act itself describes the payment individuals must make to the federal government for failure to purchase insurance as a “penalty,” the Supreme Court found it to be constitutional as a “tax.” this article is not intended to be an exhaustive analysis if the court’s 193 page decision. Should the reader desire a closer examination of the legal arguments, the opinion is available at www.supremecourt.gov/opinions/11pdf/11-393c3a2.pdf.

Individual Mandate one of the primary purposes of the act was to increase the number of americans covered by insurance and decrease the cost of health care. Congress addressed the problem of those who cannot obtain insurance coverage because of preexisting conditions or other health issues through the act’s “guaranteed-issue” and “community rating” provisions. these reforms, however, did not address the separate issue of healthy individuals who choose not to purchase insurance to cover potential health care needs. the individual mandate was Congress’ solution to such problem. one of the ways the legislation is supposed to decrease the cost of health care is by reducing the cost– shifting that now takes place when healthy individuals cannot or do not pay for their own health care because they do not want to spend money on health insurance coverage. When individuals do not pay for treatment they receive, it results in a loss to the provider. providers pass these looses on to insurers through higher rates, and insurers, in turn, pass on the cost to policy holders in the form of higher premiums. the theory is that by requiring individuals to purchase health insurance, the mandate prevents cost-shifting on the front end, by forcing those who would otherwise go without insurance to either purchase insurance or make a “shared responsibility payment” to the federal government. the government argued in Sebelius that this “shared responsibility payment” could be considered either a “penalty” or a “tax” which was a valid exercise of Congress’ power under three separate clauses of the Constitution. these clauses are the Commerce Clause, the Necessary

and proper Clause and Congress’ power to “lay and collect taxes.” the Supreme ultimately held that while neither the Commerce Clause nor the Necessary and proper clause supported the constitutionality of the individual mandate, the mandate was constitutional under Congress’ power to “lay and collect taxes.”

required payment to the irS.” Sebelius, 567 u.S. , No. 11-393 at 32 (June 28, 2012). thus, the Court found that the individual mandate does not compel individuals to buy insurance. “rather, it makes going without insurance just another thing the Government taxes, like buying gasoline or earning income.” id.

the most straightforward reading of the mandate is that it commands individuals to purchase insurance. however, beginning in 2014, those who do not comply with the mandate to buy insurance will be required to make a “shared responsibility payment” to the federal government. of course, the affordable Care act itself describes the “shared responsibility payment” required by the act as a “penalty” not a “tax.”

This is not the first time the Supreme Court held that added costs to business or individuals created by Congress, but not labeled taxes, were nonetheless authorized by Congress’ power to tax. For example, the Court held that federal licenses to sell liquor and lottery tickets- for which the licensee had to pay a fee could be sustained as exercises of the taxing power. license tax Cases 5 Wall 462, 471 (1867). Similarly, taxes that seek to influence conduct are nothing new. today, federal and state taxes can compose more than half the retail price of cigarettes, not just to raise more money, but to encourage people to quit smoking.

the Supreme Court, however, is not bound by labels used by Congress in legislation. rather, the Court follows a functional approach, “[d]isregarding the designation of the exaction and viewing its substance and application.” united States v. Constantine, 296 u.S. 287, 294 (1935). in other words, under established precedent, the “penalty” label cannot control whether the Supreme Court construes the payment a “tax” for purposes of the Constitution. thus, the Supreme Court asked itself whether the Government’s alternative reading of the statute – that it only imposes a tax on those without insurance- was a reasonable construction of the statute. The majority of the Court adopted the view that under the mandate, if an individual did not purchase health insurance, the only consequence is that he must make an additional payment to the irS when he pays his taxes. the Supreme Court reasoned that “the mandate can be regarded as establishing a condition-not owning health insurance-that triggers a tax-the

in distinguishing penalties from taxes, the Court has explained that “if the concept of penalty means anything, it means punishment for an unlawful act or omission.” united States v. reorganized CF&i Fabrics of utah, inc., 518 u.S. 213, 224 (1996). While the individual mandate clearly aims to induce the purchase of health insurance, it need not be read to declare that failing to do so is unlawful. Sebelius, 567 u.S. ___, at 37. the Court concluded that the act authorizes Congress’ to require an individual to pay money into the Federal treasury as a consequence of the failure to buy health insurance, no more. if the tax is paid, the Government has no further power to compel or punish individuals subject to it. of course, the Court recognized in a footnote that individuals do not

The Self-Insurer

| August 2012

have a choice to refuse to pay the tax and could face prosecution for their failure to do so. Sebelius 567 u. S. ___ at 44, n. 11.

Medicaid Expansion the current Medicaid program only covers certain categories of needy individuals such as pregnant women, children, needy families, the blind, the elderly, and the disabled. 42 u. S. C. § 1396(a)(10). there is no mandatory coverage for most childless adults, and the States typically do not offer any such coverage. the States also enjoy considerable flexibility with respect to the coverage levels for parents of needy families. 42 u. S. C. § 1396a(a)(10)(a)(ii). on average States cover only those unemployed parents who make less than 37 percent of the federal poverty level, and only those employed parents who make less than 63 percent of the poverty line. Kaiser Comm’n on Medicaid and the uninsured, Performing Under Pressure 11, and fig. 11 (2012). the Medicaid provisions of the affordable Care act require States to expand their Medicaid programs by 2014 to cover all individuals under the age of 65 with incomes below 133 percent of the federal poverty line. 42 u.S.C. § 1396a(a)(10) (A)(i)(VIII). The Act also establishes a new “[e]ssential health benefits” package, which States must provide to all new Medicaid recipients- a level sufficient to satisfy a recipient’s obligations under the individual mandate. 42 u. S. C. §§ 1396a(k)(1), 1396u-7(b)(5), 18022(b). the Federal Government will pay 100 percent of the costs of covering these newly eligible individuals through 2016. in the following years, the federal payment gradually decreases, to a minimum of 90 percent. the Government in Sebelius argued that Medicaid expansion was a valid exercise of Congress’ power under the spending clause of the Constitution. the Spending Clause grants Congress the power “to pay the Debts and provide for the . . . general Welfare of the united States.” u. S. Const., art. i, §8, cl. 1. it is well established that Congress may use this power to grant federal funds to the States, and may condition such a grant upon the States’ “taking certain actions that Congress could not require them to take.” College Savings Bank v. Florida prepaid postsecondary ed. expense Bd., 527 u.S. 666, 686 (1999). at the same time, Supreme Court cases recognize limits on Congress’ power under the Spending Clause to secure state compliance with federal objectives. “We have repeatedly characterized . . . Spending Clause legislation as ‘much in the nature of a contact,” Barnes v. Gorman, 536 u.S. 181, 186 (2002). the legitimacy of Congress’s exercise of the spending power “thus rests on whether the State voluntarily and knowingly accepts the terms of the ‘contract.” pennhurst State School and hospital v. halderman, 451 u.S. 1, 17 (1981). under the act, the Secretary of health and human Services would have the authority to penalize States that choose not to participate in the Medicaid expansion by taking away their existing Medicaid funding. the threatened loss of over 10 percent of a State’s overall budget leaves the States with no real option but to acquiesce in the Medicaid expansion. the Government attempted to claim that the Medicaid expansion is properly viewed merely as a modification of the existing program because the States agreed that Congress could change the terms of Medicaid when they signed on in the first place. The Supreme Court rejected that argument. instead, the Court found “that the proposed Medicaid expansion accomplishes a shift in kind, not merely degree.” Sebelius 567 u. S. ___ at 53. unlike

August 2012

The Self-Insurer

the present legislation, previous amendments to Medicaid eligibility merely altered and expanded the boundaries of the four original categories of needy persons. the act attempts to transform Medicaid into a program to meet the health care needs of the entire nonelderly population with income below 133 percent of the poverty level. “it is no longer a program to care for the neediest among us, but rather an element of a comprehensive national plan to provide universal health insurance coverage.” id. While Congress may use its spending power to create incentives for States to act in accordance with federal policies, it may not force States to comply with a new program by taking away existing funding. Medicaid expansion under the Act does just that. A State that opts out of the act’s expansion in health care coverage thus stands to lose all existing Medicaid funding.

Conclusion Beginning in 2014, those who do not comply with the individual mandate by purchasing insurance, and who are not exempt from its provisions, must make a “shared responsibility payment” to the irS. the payment “shall be assessed and collected in the same manner” as tax penalties. the “tax penalty” will be calculated as a percentage of household income, subject to a floor based on specified dollar amount and a ceiling based on the average annual premium the individual would have to pay for qualifying private health insurance. in 2016, the “tax penalty” will be 2.5 percent of an individual’s household income, but no less than $695.00 and no more than the average yearly premium for insurance that covers 60 percent of the cost of 10 specified services.

as for Medicaid expansion, that portion of the affordable Care act violates the Constitution by threatening existing Medicaid funding. Congress has no authority to order the States to regulate according to its instructions. Congress may offer the States grants and require the States to comply with accompanying conditions, but the States must have a genuine choice whether to accept the offer. the States are given no such choice in this case. they must either accept a basic change in the nature of Medicaid, or risk losing all Medicaid funding. the remedy for that constitutional violation is to preclude the Federal Government from imposing such a sanction. that remedy, however, in the Supreme Court’s view, did not require striking down other portions of the affordable Care act. n

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regulatory Solvency Protections for a

Stronger Group Self-insurance industry by Gary Cooper

August 2012

The Self-Insurer

elf-insurance continues to be a very successful and positive mechanism to protect private businesses and public entities around the country against the risk of loss. the engine of self-insurance is a pragmatic and powerful tool that can help significantly reduce workers’ compensation costs and provide a safer workplace for private businesses and public entities. the selfinsurance group industry is not broken and need not, to borrow a common phrase, “reinvent the wheel” in order to stay successful. as long as regulators and the selfinsurance industry work together to maintain a strong and positive self-insurance environment, private businesses and public entities will have the best and most costeffective choices available to them to meet their insurance needs. Currently, there are many backstop solvency protections written into selfinsurance statutes and regulations available for regulators to use to maintain the financial solvency of self-insured groups. Not every state jurisdiction follows all of these protections and some jurisdictions underutilize the protections they have. The non-utilization and under-utilization of available solvency protections by regulators, and the failure of group administrators to follow best practices, are the main reasons for group insolvencies. 1. Regulatory claim audits are a great first step for regulators to gain oversight and understanding of group claim liabilities. a claim audit can help determine if claim liabilities are adequately reserved. Some states perform audit reviews of group claim files, but others do not allow for or underutilize that level of oversight in their group solvency rules and approaches. 2. in some states, the Commissioner is allowed ample discretion to establish the monetary amount for any surety bond, investment certificate, irrevocable and automatically renewable letter of credit, and certificate of deposit to assure adequate security requirements are met for group claim obligations. Some states underutilize this important solvency oversight protection, which is readily available to regulators. 3. Under the joint and several liability concept as it pertains to group selfinsurance, some states allow the Commissioner1 to only assess group members of a specific insolvent group in order to fund the claims of injured workers. in other states, such as Nevada, the Commissioner can assess all members of all groups whenever a group goes insolvent. in this case, both members of insolvent and solvent groups can be charged and required to make additional payments in Nevada. While this may create some self-policing between groups, it created some issues in other states. these types of rules need to be clearly understood by the groups to operate effectively. 4. Some states only require a specific limit excess insurance policy to protect groups. Specific excess insurance protects groups against an unusually large catastrophic claim. another type of group coverage is aggregate excess insurance. Not all states require groups to purchase a policy endorsement for aggregate limit excess insurance. aggregate insurance coverage protects the group against an unusually heavy year of many claims, and can provide additional claims payment protection for injured workers. When purchasing aggregate insurance, the attachment point is negotiated by the group with an excess carrier. the attachment point should represent a realistic, anticipated total of annual aggregate claims. this attachment point is called the aggregate retention or loss fund. the loss fund is the amount that the self-insured

group must pay in claims before the aggregate excess policy begins to pay. When groups are required by regulation to purchase aggregate insurance, the excess carrier operates as another set of eyes reviewing the group to ensure projected claim reserves are adequately set. When the aggregate retention is pierced, the excess carrier pays group claim losses up to a certain policy limit. For example, in Michigan, the aggregate loss fund is 100% funded by the group members. in essence, group members pay a premium to the group that equals the negotiated loss fund premium, plus additional premium, to cover the daily expenses. this approach gives the Michigan group members a satisfactory understanding that total premium payments made to the group will provide adequate funding to pay individual claims and group operating expenses. 1. 5. Some states have created guaranty funds specifically for self-insured groups and self-insured employers. a guaranty fund represents an added cost for group selfinsurance, but is beneficial for regulators when additional funding for claim payments is needed quickly. Nevada, for example, holds several million dollars in selfinsurance guaranty funds in the event of a group or single entity self-insured insolvency. a guaranty fund for self-insurance allows the state regulators additional and immediate funding to pay claims for injured workers, while administrating the joint and several liability requirements, or collecting money from a bond or other security held as collateral. Some states only provide a guaranty fund for single entity self-insureds and not group self-insureds. Missouri, for example, is a state that relies

The Self-Insurer

| August 2012

the group financial statements. States can also pre-approve members that join self-insurance groups. A state pre-approval protocol for new members requires groups to follow group underwriting guidelines and can prevent groups from becoming overzealous toward acquiring new membership and additional premium. Member pre-approval protocols assure that those members who do receive dividends belong in the group for the right reasons.

on the joint and several liability concept for groups and does not have a guaranty fund in case of a group insolvency. A group self-insured guaranty fund is not a required necessity, provided that regulators adhere to and implement joint and several liability protections in a timely fashion. Unfortunately, the joint and several solvency protection rules seem to be treated as an afterthought instead of being emphasized as a cornerstone of the group self-insurance system. 6. 1. Self-insurance groups are required to seek regulatory approval for the declaration of a dividend or return of surplus funds back to the group members. State regulators have the authority to modify the monetary amounts of those requests or deny the requests altogether depending upon the strength of

1. 7. States generally require financial examinations of self-insured groups. These examinations are usually performed on a threeyear basis. Groups can also be examined at the discretion of the Commissioner when it is determined that another examination is necessary to

protect the solvency of the group and maintain uninterrupted claim payments to injured workers. 8. States can pre-approve service 1. providers before the vendor contracts with a self- insured group only if the Commissioner has adequate regulatory discretion. This approach assures that only service providers with a full understanding of how self-insured groups operate and are regulated can participate in that state’s selfinsurance industry. A pre-approval protocol can also reduce conflicts of interest and any appearance of impropriety between the service providers and the group. State pre-approval protocols require service providers to operate within a full disclosure and transparent regulatory environment. Licensing group administrators is

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a concept that has been discussed at the regulatory level. it remains to be seen whether this requirement will take hold, but it would provide for another level of regulatory protection for employers who join groups. 9. another level of protection that can be monitored and evaluated by regulators 1. is the role assumed by the group’s Board of Directors. an active Board would have first-hand knowledge of group activities. An active Board would be in a better position to lead the group through challenges and seek the assistance of regulators, if necessary, in order to keep the group in a solid financial position. 10. 1. another area where state regulation of self-insurance groups differs occurs when there is an insolvency. Some states are very thorough and transparent when unwinding an insolvent group. For example, in Kentucky, the aiK Group Self-insurance Fund founded in 1979 went insolvent in 2006. this group had about 4000 members and around $3 billion in payroll. The first step taken by the regulators before a finding of insolvency was to have the group file a remedial plan that included cutting group costs of operation and increasing member premiums. this approach proved inadequate to pay down claim liabilities within a satisfactory time frame. From there, the group was placed into receivership. the regulators were able to learn a great deal about the group while assessing its viability. hearings were held and orders were issued. a schedule of assessments by year of operation and by member was established. incentives for early paybacks were also created. this regulatory effort was transparent – results were posted on the aiK website and helped to determine an orderly payback of claim liabilities. Members and the general public were not left in the dark, nor unsure of the next step to be taken by the regulators.

the aiK insolvency is a successful “textbook” game plan all self-insurance regulators can study should they be required to close down a poorly performing self-insurance group. We live in a free society and unfortunately bad outcomes occur. What we should expect from our insurance regulators is the capability to resolve bad outcomes when they do occur and have transparent game plans and strategies that guide the stakeholders involved toward the best possible results. n Gary Cooper is Association Manager at Safety National Casualty Corporation. He can be contacted at gary.cooper@safetynational.com. Safety National is the leading provider of excess workers’ compensation coverage to self-insured employers and groups nationwide, and has provided that type of coverage longer than any other company in the United States. Learn more at www.safetynational.com.

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August 2012

The Self-Insurer

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The Self-Insurer

| August 2012

Art GallerY by Dick Goff

thank you Mr. roberts

oining the ladies over on the left side of the bench, Chief Justice John roberts was the savior of illegitimacy when he joined the liberal coalition to uphold the affordable Care act and send the country further along a dark spiral of increasing costs and government substituting itself for our doctors. one wonders if Mr. roberts will sustain his new membership in the Court’s left wing over time and future judicial decisions. In an insideout scenario worthy of “alice in Wonderland,” he has attempted to prove he can take the politics out of jurisprudence by swapping one ideology for another. unknowingly, however, he and his Court majority have done self-insurance and alternative risk transfer a great service. Now we don’t have to sit around and wait to see what will happen, and we can boldly rally employers to put their benefit plans into the safekeeping of eriSa and art funding structures. Since the aCa was passed a couple of years ago i have chafed at the resulting environment of indecision as our industry and many employers have drifted along from one headline to another and one court action to another. at times it has seemed as though everyone in our country has resembled a giant herd of deer caught in the headlights of Obamacare, transfixed by the threat but unable to escape it.

August 2012

The Self-Insurer

in the time-honored tradition of plagiarism, we rip off the line everyone remembers from their typing lesson: Now is the time for all good men to come to the aid of their country. every tpa, MGu, stop-loss insurer and captive manager may now fearlessly work with employers of all sizes of companies to save them from the costs and dictates of the traditional health insurance industry. My Siia colleague andrew Cavenagh posted on linkedin: “i think the ruling is a positive thing from the perspective of benefits group captives…the worst outcome for this niche would have been if the entire bill had been thrown out, as many employers would revert back to the (habit) of sitting and watching.” But here’s the nub of the issue: No employer should change its benefit plan because of obamacare’s success or failure. they should do it because it’s the right thing for themselves and their employees and dependents. Now the realization that all elements of the aCa will take effect in 2014 can be a powerful stimulus to action. all evidence points to the fact that self-insurance costs less than traditional health insurance and provides more. It provides more flexibility in benefits when state mandates are taken out of the equation and it provides more control because self-insurers own their own claims data and are free to design preventive programs that will improve the health of their employees. obamacare will continue to be resisted by republicans and many independent voters. and i will go on record right now that the first wave of “taxes” on individuals penalizing them for not buying health insurance

will put the whole mess back into the courts and Mr. roberts will have another crack at it. people can’t sue for relief of a tax until it is collected. But once the coercive tax kicks in, watch the briefs fly! But we don’t have to worry about any of that. What we have to worry about is the attacks by state and federal government on self-insurance quite separate from obamacare. State insurance regulators as marshaled by the National association of insurance Commissioners are salivating at the prospect of issuing draconian new rules for benefits stop-loss policies. and the obama administration’s treasury Dept./irS is circling stop-loss insurance with the apparent intention of making it “health insurance” despite a dozen federal court rulings to the contrary. if that happens, conventional self-insurance will be mortally injured. That’s a good reason for every Siia member to support the organization’s government relations and legal defense funding efforts. art will play a greater role in the future, as new excess loss structures for employee benefit plans are required. I have written before that self-insurance combined with captives can maintain employers’ independent control quite beyond the capacity of government interference. Now the time is right to follow through on that promise. n Dick Goff is managing member of The Taft Companies LLC, a captive insurance management firm and Bermuda broker at dick@taftcos.com.

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The Self-Insurer

| August 2012

PPACA, HIPAA and Federal Health Benefit Mandates:

Practical

The Patent Protection and Affordable Care Act (PPACA), the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and other federal health benefit mandates (e.g., the Mental Health Parity Act, the Newborns and Mothers Health Protection Act, and the Women’s Health and Cancer Rights Act) dramatically impact the administration of self-insured health plans. This monthly column provides practical answers to administration questions and current guidance on PPACA, HIPAA and other federal benefit mandates.

Q&A

In Wake of Supreme Court Decision, the Affordable Care Act Creates New Opportunities (and New Obligations) for Account Based Plans

hile the rationale for the Supreme Court’s 5-4 decision came as a surprise to almost everyone, prudent health plan sponsors and administrators have been making contingency preparations for the potential outcome (i.e., that the affordable Care act is indeed Constitutional). as the reality of an aCa-laden health care delivery system takes grip, employers of all sizes will continue to turn to consumer directed account-based plans, specifically flexible spending arrangements (FSAs), health reimbursement arrangements (hras), and health savings accounts (hSas) to help address increasing health care costs. of primary concern to many employers is the specter of being squeezed between an employer coverage requirement (under the so-called “pay or play” requirement) and a new excise tax in the form of the so-called “Cadillac tax”. Starting in 2018, this 40% tax on excess health benefits will eventually exact its toll (to some degree) on almost every employer that offers health coverage; it’s a matter of when and how much, not whether the tax will apply. Moreover, employers cannot avoid the tax by merely shifting the cost of ever increasing

August 2012

The Self-Insurer

health coverage onto employees (e.g., through increased contributions). in an effort to defer and/or decrease this excise tax, employers will rely more heavily on two vehicles to better promote health care efficiency -wellness programs and consumerism through account based plans (i.e., FSas, hras, and hSas). ironically, the Supreme Court decision may provide a much-needed “shot in the arm” for FSas – the original account based product. in irS Notice 2012-40, the irS signaled a willingness to carefully re-examine its arcane “use or lose” policy for FSas in light of the aCa’s $2500 cap. the Supreme Court decision should now clear the way for the irS to allow employers to encourage consumerism through salary reduction funded FSas. allowing unused FSa funds to carryover to future years will provide a powerful new tool enabling employees to budget for future health care expenses, yet not be constrained by the somewhat restrictive hDhp requirements that apply to hSas. Moreover, unlike hras, the new rollover FSa may be funded by employee salary reductions (as opposed to employer funds). only time will tell how big a role such an employee-funded account based plan may play. it certainly will be a welcome improvement if and when approved by the irS.

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in the meantime, employer plan sponsors must redouble their efforts to comply with the aCa’s health plan mandates. looming obligations on the horizon include: • Immediate ensure systems are in place to capture and report the value of health coverage (regardless of whether employer or employee funded) on W-2s for 2012 (to be issued in January 2013);

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The Self-Insurer

| August 2012

and coverage (SBC) implementation for open enrollments commencing 9/23/2012; analyze the comparative effectiveness research (Cer) fee calculation methods (payable July 31, 2013 on average covered lives in 2012); amend plans to comply with mandatory preventive care requirements (including the women’s preventive health rules effective the first plan year on or after august 1, 2012); amend health FSa to limit salary reductions to $2500 (first plan year on or after 1/1/2013). • Late 2012/2013 For employers that provide retiree medical prescription drug coverage and receive the part D (rDS) subsidy, the favorable tax treatment that allowed a deduction for qualifying retiree prescription drug expenses as well as a tax free rDS subsidy based on those expenses ends.

August 2012

The Self-Insurer

in March 2013, employers will be required to send out notices to employees regarding the existence of the exchange and the criteria for enrollment. No guidance yet as to what these notices must include. • In 2013 (for 2014) a. implement remaining health insurance reforms effective 1/1/2014 (no excessive waiting periods, no annual limits on essential benefits, no pre-existing condition exclusions for anyone, restrictions on deductible/oop max limits, clinical care coverage requirements); b. prepare for employer shared responsibility reporting (report for 2014 in 2015 but need to analyze the data gathering requirements before 2014 begins); c. Determine the reinsurance pool assessment applicable to self-funded plans (including non-

exempt FSas and hras); d. analyze whether pay or play requirement will be satisfied—i.e., whether plan provides (i) minimum essential coverage (ii) if minimum essential coverage, is it affordable and (iii) if affordable, does it provide minimum value the aCa has made the administration of employer sponsored health coverage (including accountbased plans) more complex. But, employer interest in such arrangements will continue to increase, perhaps dramatically, as the true cost of providing no coverage (e.g., pay or play taxes, high cost of exchange coverage, etc) becomes more apparent. n Attorneys John R. Hickman, Ashley Gillihan, Johann Lee, and Carolyn Smith provide the answers in this column. Mr. Hickman is partner in charge of the Health Benefits Practice with Alston & Bird, LLP, an Atlanta, New York, Los Angeles, Charlotte and Washington, D.C. law firm. Ashley Gillihan, Carolyn Smith and Johann Lee are members of the Health Benefits Practice. Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner’s situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation. Readers are encouraged to send questions by E-MAIL to Mr. Hickman at john. hickman@alston.com.

800.851.7789

www.siia.org

The Self-Insurer

| August 2012

Building Your

Employee Benefits Practice

BRICS Markets in the

by Greg Arms and Jessica Fuller

August 2012

The Self-Insurer

ealth care reform in major industrialized markets, particularly the united States, has received considerable attention recently. But it may be overshadowing what could be the most significant health care-related business challenge in this decade and beyond. that challenge, and the associated opportunities, comes from the “BriCS” countries – Brazil, russia, india, China and South africa.

the term, coined by Goldman Sachs in 2001, refers to developing or newly-industrialized countries that are distinguished by their large, fastgrowing economies and significant influence on regional and global affairs.i The five BRICS countries have a total population of almost three billion people and a combined GDp of uS$13.7 trillion.ii While the BriCS differ in terms of location, history and culture, they share many of the same challenges: rapid population growth, intense infrastructure expansion, and a quickly evolving health care and benefit landscape. Employers in these countries struggle to keep pace with demographic changes that have rendered benefit packages increasingly important as recruiting and retention tools. there is also continued pressure on broker commissions under the “banner” of consumer protection. these countries represent a great opportunity for employers to effectively manage their benefits plans around the globe.

Why are the BrIcS Important? as the chart to the right illustrates, the scale of the economies and rate of growth in the BriCS markets are creating attention-grabbing opportunities for brokers and carriers. On average, the projected 20-year

Source: Goldman Sachs, 2010

Compound annual Growth rate (CaGr) for the BriCS is 7.05 percent, compared to just 1.50 percent for the major industrialized nations. among the factors driving this growth is expansion oppor tunities for international firms. Large multinational companies, especially in the pharmaceutical and energy sectors, are entering these markets at a rapid pace. amazingly, there is one thing growing even faster than the BriCS economies – insurance coverage in these markets. there has been a six-fold increase in premium volume over the past ten years, yet market penetration is still low.

Global Health Care Trends Underscore the BrIcS Opportunity there is a global movement towards mandatory health coverage and more individual responsibility around the financial risks associated with health and retirement. unlike some countries, however, the BriCS have varying resources available to fund quality health care – making employer-sponsored benefit solutions all the more impor tant in these markets. provider networks within the BriCS have also become more established, facilitating the compilation of accurate claims data that now make self-insurance in these markets an increasingly viable option. Multinational pooling, a form of self-insurance, is already present in these markets through global programs. lastly, the demand for “wellness” solutions is as apparent within the BriCS as it is in the rest of the world. these programs build awareness among employees about healthy lifestyles, and encourage conscious choices that help control direct (e.g., medical claims) and indirect (e.g., absenteeism) health care costs. increasingly, employers are viewing wellness solutions as an essential instrument for controlling employee benefit expenses and retaining staff in good times and bad.

Opportunities in the BrIcS Markets as a result of the fast-paced growth in these markets, corporations need to

The Self-Insurer

| August 2012

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August 2012

The Self-Insurer

develop competitive, cost-efficient benefit plans to attract and retain skilled talent. Many local multinational corporations are already capitalizing on this significant oppor tunity to enhance their benefits plans and explore self-insurance. in Brazil, employers are focusing on health care issues and potential solutions in spite of economic challenges. Wellness and prevention programs are becoming more common as employers seek to control rising health care costs. private medical insurance is the most common benefit offered by employers, followed by group life, pensions and dental. these are considered an effective tool for attracting and retaining employees. The cost of providing health benefits represents 10 to 12 percent of the payroll on average, yet companies avoid sharing medical insurance premiums with employees, due to the post-employment liability risks.iii on the other hand, companies generally apply copayments as a cost sharing scheme for office visits and simple exams to control unnecessary utilization and to create accountability.iv in russia, employer-provided medical insurance is compulsory. Ninety-six percent of multinational and local leading companies provide private benefits to employees that cover outpatient services, doctor home visits, dental, planned and emergency hospitalization, ambulance services, and maternity coverage. in addition, health care education and a few other services, such as vaccinations, second opinion services, and employee assistance programs are covered under regular health insurance. In India, benefit plan design is becoming more complicated due to cost containment measures and market competitiveness. Several

years ago, the national government removed tariffs from insurance pricing, which forced carriers to better justify their pricing with more detailed underwriting. there is a growing interest in offering flexible benefits and wellness programs to control costs over the long term.v In China, flexible benefits and high-end medical benefits have been among the most effective retention measures for employees and top management, respectively. employers are focusing more on providing an integrated health solution to their employees, with preventive care and health management programs. in addition, with the deepening of health care reform, better coverage is expected. the 2009 health care reform, which focuses on public health, medical services, medical insurance and medicine supply, is now being put into effect and is expected to provide all urban and rural citizens

with safe, effective, convenient and affordable health services by 2020.v in South africa, there is a continued trend toward medical plans that incorporate co-insurance mechanisms and deductibles for cost control. Disease management and prevention programs are also becoming more prevalent given the high incidence of communicable diseases, including hiv. in addition, major national health care reforms are under consideration. it is expected that legislation will be introduced during the next five years, providing for the introduction of a National health insurance Scheme (NHIS) that is likely to have a major impact on the current employee benefits practices.vi

Conclusion as the BriCS continue to grow and develop, there will be additional changes

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The Self-Insurer

| August 2012

in their health care industries and insurance sectors. Wellness programs and other strategies for managing medical costs will become increasingly commonplace and more companies may pursue self-insurance. Multinational corporations and employee benefit

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fail to focus some attention to this area may be closed out from one of the biggest employee benefits growth areas across the next twenty years. n i

Kowitt, Beth (June 17, 2009). “For Mr. BriC, nations meeting a milestone”. CNNMoney.com.

iMF, april 2012 data.

iii

recent data provided by Mercer Marsh research

pinto, ana Claudia (June 5-7, 2012). presentation given at Siia international Conference, Coral Gables, Fl. v

Mercer (March 2011) Introduction to Benefit Plans around the World.

Beira, Brad. (July/august 2012). South africa:the Concept of Wellness. Benefits & Compensation International.

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August 2012

The Self-Insurer

11th Annual

Conference

October 29-30, 2012

The Self-Insurer

| August 2012

Siia ChairMaN SpeaKS Alex Giordano

SIIA was prepared for Supreme Court ruling

n a classic case of hoping for the best and preparing for any contingency, Siia was ready to deal with the Supreme Court’s validation of the patient protection and affordable Care act (ppaCa). Siia’s Special Communication to members prior to the Court decision gave us insight into the implications on self-insurance of the three possible rulings. upholding the patient protection and affordable Care act (ppaCa) in its entirety was the first outcome to be analyzed in that paper. With the exception of the federal-state jockeying over Medicare, that is what the Court did. on a technicality of naming the mandate a “tax” we now must prepare for mandated universal health insurance purchases by 2014, with all the state exchanges that have been at the crux of the issue. the country will also continue to be embroiled in health care-centered political debates. the Democrats now claim validation for obamacare and the republicans continue to promise repeal if enough of them are elected (one president and a 60-seat majority in the Senate). in the meantime, as the Siia paper pointed out, the federal rule-making process continues to grind its sausage. even so, it is believed that most major regulatory announcements will likely be deferred until after the November elections so that the obama administration can minimize negative political attention related to health care reform (in a recent poll, health

August 2012

The Self-Insurer

care reform opponents outnumbered supporters by 45 percent to 35 percent, with 20 percent perhaps not understanding the question). unless ppaCa is repealed, our industry will continue to be attacked by health care “reformers” opposed to self-insurance who include many politicians and much of the traditional health insurance industry – oh, and don’t forget state insurance regulators as molded by the National association of insurance Commissioners. So the predicament of Siia members hasn’t changed during the two years since the reform act was passed. We’re still under pressure from our challengers, and we’re still (a pleasant surprise) doing some good business because we’re still the most efficient health insurance game in town. When all else is sifted out, selfinsurance is a better deal for employers and employees because self-insurers aren’t looking for a profit.

SIIA’s Educational Response We knew that health care reform would still be a burning issue by the time of our National Conference oct. 1-3 in indianapolis. that’s why four sessions are scheduled to help everyone make sense of the current situation and implications for the future: SIIA Connection Forum for Self-Insuring Employers – This is a confidential employers-only free-for-all discussion about employers’ expectations and experiences with their self-insured benefit plans in the context of healthcare reform and other issues. Health Care Reform and Other Hot Topics – the employers’ perspective – three leading employer executives will open up about their health plans, management challenges and vendor issues. Speakers are Dianne harrington of otto environmental Systems North america, inc.; Stephanie hearn of Butler health plans and hicks B. Morgan of Morgan Buildings & Spas. The Stop-Loss Insurer/MGU Perspective – presidents of four leading stop-loss carriers/MGus will discuss how the self-insured marketplace is working and how their underwriting practices have adapted to new regulatory realities. the panel will include Paul Fallisi of Munich Re; Heather Lavallee of ING Employee Benefits; Michael Meloch of tpaC underwriters, inc.; and Michael W. Sullivan of hM insurance Group. The TPA Perspective – Third-party administrators find themselves under pressure from new regulations and federal policies. Four chief executives of leading TPA firms will speak: Daniel Dugan of North America Administrators; Andrew Fujimoto of AmeriBen; Mark Schmidt of Meritain Health; and Dirk Visser of Allegiance Benefit plan Management, inc. there’s more to learn about the conference with its timely theme, “raising the Game,” at www.siia.org. Register today! n See you there,

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| August 2012

Siia would like to recognize our leadership and welcome new members Full Siia Committee listings can be found at www.siia.org

2012 Board of Directors ChAIrMAn oF The BoArD* alex Giordano, vice president of Marketing elite underwriting Services indianapolis, iN PreSIDenT* John t. Jones, partner Moulton Bellingham pC Billings, Mt VICe PreSIDenT oPerATIonS* les Boughner, executive vp & Managing Director Willis North american Captive + Consulting practice Burlington, vt VICe PreSIDenT FInAnCe/ChIeF FInAnCIAl oFFICer/ CorPorATe SeCreTAry* James e. Burkholder, president/Ceo health portal Solutions San antonio, tX

committee chairs ChAIrMAn, AlTernATIVe rISk TrAnSFer andrew Cavenagh, president pareto Captive Services, llC Conshohocken, pa ChAIrMAn, GoVernMenT relATIonS Horace Garfield, vice president Transamerica Employee Benefits louisville, KY

30 August | The Self-Insurer 30 August 2012 2012 | The Self-Insurer

regular Members company name/Voting representative todd hufford, vice president, Conner insurance, indianapolis, iN

ChAIrwoMAn, heAlTh CAre elizabeth Midtlien, Senior vice president, Sales Starline uSa, llC Minneapolis, MN

Carol Berry, health Care administrators association, Woodland hills, Ca

ChAIrMAn, InTernATIonAl Greg arms, Global Head, Employee Benefits practice Marsh, inc. New York, NY

Manuel Mantecon, Managing partner & Medical Director, int. healthcare adivsors/GhCS, Miami, Fl

ChAIrMAn, workerS’ CoMPenSATIon Skip Shewmaker, vice president Safety National St. louis, Mo

Kurt Fullmer, Director - aSo Business, Mvp health Care, Schenectady, NY Karen Wilson, Senior Manager, Self-insured plans, rehn & associates, Spokane, Wa

Directors ernie a. Clevenger, president Carehere, llC Brentwood, tN ronald K. Dewsnup, president & General Manager Allegiance Benefit Plan Management, inc.Missoula, Mt

Gina DiGirolamo, Senior vice president, Wells Fargo insurance Services uSa, inc., Cincinnati, oh

contributing Members Matthew Boray, Sr. account executive & partner, M3 insurance Solutions, inc., Waukesha, Wi

Donald K. Drelich, Chairman & Ceo D.W. van Dyke & Co. Wilton, Ct Steven J. link, executive vice president Midwest employers Casualty Company Chesterfield, MO elizabeth D. Mariner, executive vice president re-Solutions, llC Wellington, Fl

Siia New Members

Employer Members heather reimer, Marketing & Sales Manager, renown, reno, Nv Keith Stuckey, Ceo, resource partners, lancaster, pa

The Self-Insurer

| August 2012

August 2012

The Self-Insurer