Self-Insurer Jan 2013 by SIPC

January 2013

www.sipconline.net

Are You Ready?

Understanding – and Preparing for – the Impact of Healthcare Reform

January 2013

The Self-Insurer

www.sipconline.net

JAnuARY 2013 | Volume 51

January 2013 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

editorial staff

artIcles 10

From the Bench

PPACA, HIPAA and Federal Health Benefit Mandates: 2012: The Year In review (and then some)

ArT gallery: Actuarial work: no laughing matter

Is There a Place for Preferred Provider Organization (“PPO”) Networks In Today’s Health Benefits Marketplace?

PuBlIShINg DIreCTOr James A. Kinder MANAgINg eDITOr erica Massey

SeNIOr eDITOr gretchen grote DeSIgN/grAPhICS Indexx Printing

are You ready? understanding – and Preparing for – the Impact of Healthcare reform by Joseph Berardo Jr.

CONTrIBuTINg eDITOr Mike Ferguson

IndustrY leadersHIP

DIreCTOr OF OPerATIONS Justin Miller DIreCTOr OF ADverTISINg Shane Byars Editorial and Advertising Office P.O. 1237, Simpsonville, SC 29681 (888) 394-5688

2013 self-Insurers’ Publishing Corp. Officers

SIIA President’s Message

sIIa Government relations: the Year in review by Jay Fahrer

James A. Kinder, CeO/Chairman erica M. Massey, President lynne Bolduc, esq. Secretary

erIsa Preemption Battle takes shape in Michigan by Bruce Shutan

The Self-Insurer | January 2013

Are You Ready?

Understanding – and Preparing for – the Impact of Healthcare Reform by Joseph Berardo Jr., CEO and President, MagnaCare

January 2013

The Self-Insurer

ow that the Affordable Care Act (ACA) has become a fixture of the uS healthcare system, many experts have concluded that there will be more uninsured individuals in response to the administrative and financial demands placed on employers. The reason: employers, particularly middle market businesses, will find market exit and penalty payment more economical than compliance, while their employees will find they cannot afford the exchanges. Fortunately, self-insured healthcare provides a viable option against this consequence and, unlike the traditional, fully insured approach, self-insurance is cost-effective at a time when experts predict that insurance rates will continue to climb as a direct result of the ACA. Whether self-insured or considering this option, it’s important to understand the ACA’s key compliance dates and statutory obligations.

Preparing for aca Obligations Reporting the Cost or “Value” of Employer Provided Health Coverage Commencing January 1, 2013, employers must report the cost or “value” of employer provided healthcare coverage. Beginning with 2012 W-2 forms (required for calendar year 2012 given to employees by the end of January 2013), employers must report the aggregate cost of all applicable employer-provided coverage. IrS Notice 2012-9 provides 23 pages of guidance. This supplements a previous 19 pages of guidance on this topic issued in IrS Notice 2011-28. The IrS Notices provide a series of fact-specific applications and some exceptions to the reporting requirement. The Notices also include

instructions for calculating the cost of the coverage. employers should be taking the steps needed to conform to this provision of the ACA within the time required to avoid penalties for non-compliance.

New Limitation of Flexible Spending Accounts The ACA has reduced maximum employee contributions to Flexible Spending Accounts (FSA) from $5,000 to $2,500. Employers sponsoring an FSA benefit on a calendar year basis must meet this new requirement by January 1, 2013. Certain non-calendar year-based plans that begin before 2013 have a later effective date. The IrS has issued Bulletin 2012-26 and Notice 2012-40 outlining deadlines and other requirements. granting a small degree of slack, the ACA provides that any plan amendments required to establish the $2,500 cap may be made retroactively before the end of 2014.

Withholding and Reporting Increased Taxes for Highly Compensated Employees The ACA increases Medicare taxes for “highly compensated” employees. Wages, defined to include non-cash fringe benefits, in excess of $200,000 will be subject to an additional 0.9 percent tax (an increase from 1.45 percent to 2.35 percent) per year for taxable years commencing on or after January 1, 2013. employers are required under the ACA and the IrS regulations to identify the point at which an employee meets the reporting threshold, withhold the higher tax, and comply with the new reporting requirements. The IrS Form 941, employer’s Quarterly Federal Tax return and the W-2 will each have to set forth the amounts withheld. Again, this additional .9 percent tax is not a first-dollar tax, but imposed on amounts above $200,000.

Notification to Employees of Health Exchange Another rapidly approaching deadline with a dearth of federal guidance is the obligation to provide employees, with written notice no later than March 1, 2013, about the health insurance exchanges in their state. The notice is mandated to include information about how the exchanges operate and the circumstances under which an employee may obtain coverage through the exchange. The notice must have information on the eligibility for tax credits and the possible loss of the employer’s contribution toward coverage if an employee elects to obtain health insurance from the exchange.

The Self-Insurer

| January 2013

Play-or-Pay Mandate The ACA’s most significant impact on employers is the playor-pay mandate, which becomes effective January 1, 2014. As of that date, employers with more than 50 employees will face substantial penalties if health coverage is not offered to full-time employees or the coverage offered is “unaffordable” or “not comprehensive.” Where an employer with more than 50 employees does not offer any health benefits, the employer faces potential penalties of $2,000 per employee (with an exemption for the first 30 employees). If coverage is offered by the employer but is determined to be “unaffordable” or “not comprehensive,” the statutory penalty is $3,000 per employee receiving a subsidy for coverage obtained through an exchange. There are various components of the play-or-pay employer mandate.

January 2013

The Self-Insurer

An employer subject to play-or-pay should begin its analysis as soon as possible. Ramifications, including cost and employee retention, determining whether to keep, add or eliminate employer-sponsored group health coverage in light of this provision of the ACA, must be scrutinized. By way of example, a penalty of $100,000 (80 employees less the exception for the first 30 = 50 x $2,000) may be far less expensive then providing healthcare coverage to 80 employees. This situation will result in a financial disincentive to offer employersponsored health coverage. Once employers understand the cost and coverage of any current plan, they will be in a better position to decide how to proceed. A company may choose to leave an existing health plan in place if it meets the required “minimum essential coverage” and is affordable under the Act. . Or it could

decide to increase existing coverage to make it “qualified and affordable.” In some cases, based on the cost benefit analysis, a company may realize savings if it stops offering coverage and subjects itself to the tax penalties set forth in the federal law.

Key advantages of selfInsurance in today’s reform environment Self-insured plans are not specifically subject to a number of significant encumbrances and obligations imposed by the ACA on insurance-based plans. For instance, the healthcare law does not place self-insured health plans under the jurisdiction or authority of the states, while insurance-based plans must comply with the varying coverage mandates, insurance statutes and regulations of the 50 states. Furthermore, self-insured plans continue to be exempt from state

mandates and regulation by virtue of the employee retirement Income Security Act’s (erISA) preemption of state action in connection with self-insured health and welfare benefit plans. For the most part, self-insured plans are not subject to litigation in state courts or the appeal and complaint procedures of the insurance departments of each state. Self-insured plans are also exempt from these key provisions: • Essential Health Benefits Requirements - Self-insured plans are not required to provide the 10 mandated benefits set forth in Section 1302 of the healthcare law. Despite this, the majority of health plans will likely cover these benefits as part of basic coverage. Also, under other provisions of the ACA, self-insured plans will have to maintain certain levels of coverage in order to meet the threshold of a “qualified” health plan. The key advantage here is the flexibility it provides to self-insured plans in plan design. • Comprehensive Coverage for Health Benefits Package -- Insurance-based plans will be required to provide essential health benefits as defined by the Secretary of health and human Services (hhS), and provide either a “bronze, silver, gold, or platinum level of coverage” as defined in the ACA and established via the state exchanges. Self-insured plans are not included in this section of the ACA. hhS will develop an alternate means of determining benchmarks for measuring the benefits and values in self-insured plans based on prior data. This aspect also provides greater flexibility to employers providing coverage via a self-insured plan. • ensuring that Consumers get value for Their Dollars -- This provision authorizes the Secretary of hhS and state insurance departments to

investigate the reasonability of premiums of insurancebased plans. The statute does not empower the Secretary to investigate the value or reasonableness of the level of contribution required for self-insured plans. As state insurance commissioners have no jurisdiction over such plans, self-insured plans do not have to bear the costs and administrative burdens attendant to investigations and scrutiny by regulatory agencies. Self-insurance is a cost-effective alternative to the traditional, fully insured health plan approach that, when combined with Stop loss insurance to alleviate the risks associated with catastrophic claims, offers an effective solution for middlemarket employers striving to be in compliance with the new healthcare

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Stop Loss / Disability Income / Life / Limited Benefit Medical

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The Self-Insurer

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law while continuing to offer healthcare coverage. What’s more, self-insured health plans offer employers less complex administration and greater flexibility in plan design, which often translates into cost savings. In addition, self-insurance gives employers the ability to customize plan designs that encourage employees to use “Provider Preferred” physicians and services that enable patients to receive richer benefits and lower cost sharing when they go to an inner network provider. When partnered with a healthcare services company, this micro-network of physicians creates a competitive and unique product with a focus on service, care coordination and overall health improvement.

Maximizing the Benefits of Self-Insurance A health plan management firm that specializes in self-insurance can play an important role in helping employers get the most out of their self-insurance plan, walking them through the complexities and nuances of today’s healthcare environment. What’s more, some health plan management firms have forged longterm relationships with Stop loss carriers, allowing them to provide competitive rates. Generally, health plan management firms oversee the self-insured plan and assume responsibility for: • Maintaining eligibility • Customer service • Adjudicating and paying claims • Preparing claim reports • Negotiating, obtaining and renewing stop-loss placement • Conducting enrollment information meetings • Arranging managed care services, such as access to preferred provider networks, coverage for alternative treatment programs including acupuncture and chiropractic services, prescription drug card programs that offer costsaving opportunities and utilization review In particular, employers should partner with a health plan management firm that offers secure data analytics for both remote and real-time care, while providing an inexpensive vehicle for coordinating online tools that identify at-risk members, their patterns and treatments for various ailments – from diabetes to heart conditions. robust data analytics allow self-insured employers to evaluate employee information, including age, chronic illness, risk factors and gaps in care, and update medical conditions, compare previous costs to projected expenditures, and intervene with optimal prevention and wellness programs. This approach enables middle-market employers to align their focus with the ACA’s emphasis on accountability, evidence-based results, and provider integration, while providing current employees – and attracting new talent – with access to cost-effective, quality healthcare. n Joseph Berardo, Jr. currently serves as CEO and president of MagnaCare. In this capacity, Mr. Berardo is responsible for the management of all of MagnaCare’s day-to-day activities and the strategic initiatives of the company. Mr. Berardo originally joined the company as vice president of Sales and Marketing in January of 2003.

January 2013

The Self-Insurer

Stop Loss / Disability Income / Life / Limited Benefit Medical

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The Self-Insurer

| January 2013

Bench From the

by Thomas A. Croft, Esq.

court Finds stop loss Hanky-Panky; revokes Ohio Insurance license (Workman v. Ohio dept. of Ins., no. 2012-ca-21, Ohio court of appeals. Fifth district, October 17, 2012).

n Ohio insurance agent and TPA owner lost his bid in the Ohio Court of Appeals to overturn the Ohio Department of Insurance’s decision permanently revoking his agent’s license.

According to the facts set forth in the Court of Appeals’ opinion, Workman held an Ohio Agent’s license, and also owned 90% of the common stock of an Ohio-licensed TPA, Employer Benefit Services of Ohio, Inc. (“EBS”). Workman was the principal agent for EBS. Although EBS primarily administered benefits for employers with self-funded employee benefit plans, it sometimes acted as a broker for clients seeking new or replacement stop loss coverage. The DOI found that Workman and eBS convinced three Ohio clients to purchase a product that was not approved as stop loss insurance in Ohio and that did not adequately protect them from financial loss. It also found that Workman “modified” the rates quoted in insurers’ quotes before passing them on to the three clients, and likewise modified the accepted rates in the clients’ applications to the stop loss insurer. Workman/eBS originally placed all three clients with “coverage” from an entity named united re, operating in Texas. The trial court found that, despite its name,

January 2013

The Self-Insurer

united re was not an insurer, but rather a trust, functioning something like a TPA, accepting employer contributions, paying employee claims from employer funds, and, at year-end, either returning any excess employer funds or billing the employer for any shortfall. At some point, however, united re added a stop loss feature to its services, utilizing an entity called vADO. It was alleged that vADO was an insurer engaged in real estate investment in the grand Cayman islands and trading actively in Dubai. Neither united re nor vADO was licensed to sell insurance in Ohio. All three EBS clients had difficulty

getting their claims paid. Workman moved one of those clients, Brown Publishing, a newspaper publisher in Cincinnati with 600 employees, from united re/vADO to hCC life. During a conversation between an administrative employee of Brown and a representative of hCC life, the parties discovered that Workman had changed hCC life’s quoted rates to Brown in its proposal, and had likewise changed the rates in Brown’s application back to hCC life. hCC then terminated its relationship with Workman and eBS.

“While it is true the clients believed eBS would be compensated for its efforts, the mere act of tampering with the contracts in an obvious attempt to conceal how much of the quote was for the insurance premium and how much represented eBS’s commission speaks for itself.” The Court of Appeals thus affirmed this aspect of the trial court’s judgment as well. At this writing, the status of a possible appeal to the Ohio Supreme Court is unknown. n

The Ohio DOI then commenced an investigation of Workman, and concluded that he, on behalf of eBS, had taken low quotes from the insurer, added an additional amount as a commission to eBS, and passed on those higher rates to his clients. When his clients accepted the inflated rates and executed an application reflecting them, Workman then changed the inflated rates back to the originally quoted numbers before returning the application to the insurer. The inflation of actual quoted rates ranged from a low of 52 percent to a high of 213 percent, according to the Ohio DOI. The Court of Appeals concluded that Workman “had not used any diligence” in procuring “coverage” through united re/vADO, and affirmed the trial court’s conclusions in that regard. As for the concealing of commissions, Workman argued that he had no legal duty to disclose the amount of commissions he/eBS earned on the transactions – a proposition with which the Ohio DOI agreed. But the DOI insisted that Workman’s alteration of the quotes and applications demonstrated that “he was dishonest, incompetent, untrustworthy, or irresponsible.” The Court of Appeals concluded:

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The Self-Insurer

| January 2013

SIIA government relations:

Year in review

the

January 2013

The Self-Insurer

by Jay Fahrer

he end of each year gives me the opportunity to present to the membership the work of SIIA’s government relations operation. I am pleased to report that this has been one of the most successful and active years to date. There were challenges and opportunities that were addressed on both the legislative and regulatory arenas. SIIA was able to improve upon our recognition as sought after industry experts and “players” here in Washington, DC and throughout the country. The following is intended to provide an overview of the activities your government relations staff have been involved with and the key events that took place this year that have impacts on the self-insurance industry. One of the most significant areas that SIIA government relations were involved with this year was the continued implementation of the Affordable Care Act (ACA). As our industry is well aware, this is a highly complex law that is poised to affect the entire spectrum of our healthcare delivery system. As the law’s provisions are being set to be implemented, Federal agencies issue clarifying guidance to offer interpretations as to how specifically these requirements are to be complied with. Throughout the year, SIIA played a key-role in working with the regulators as they collaborated on their proposed rules and notices. SIIA members and staff had numerous meetings with key-officials where we were able to serve as a valued resource and advocate on behalf of the self-insurance industry. SIIA submitted numerous comment letters on areas relevant to our membership and supplied agency officials with a number SIIA published “White Papers” for their use. The Agencies have wide latitude to interpret statutory law, and as such, our workings with Federal regulators were a vital aspect of our advocacy efforts. This year saw an attack on stop-

loss insurance with a vigor as never seen before. Advocates of increased regulation centered their positions on the threat they believe stop-loss imposes on the health insurance exchanges. They raised the argument that there would be adverse selection in the small business exchanges should stop-loss carriers have the ability to recruit “healthy” groups by offering policies with “low” attachment points. Action was sought after by such individuals and groups to prohibit the sale of stop-loss insurance to small groups under certain levels. SIIA fought these efforts at a number of different arenas. Most significantly, SIIA was heavily involved in an effort to defeat legislation in the California legislature that attempted to enact such restrictions. In no small part resulting from SIIA’s direct advocacy efforts, including COO Mike Ferguson testifying before a Senate Committee, as well as an expansive grassroots effort by SIIA members, the bill was unable to attract sufficient legislator support and thus not approved during the legislative session. Secondly, SIIA has been intimately involved with the NAIC’s attempts to issue guidelines to their Model Stop-loss Act, which if agreed to, would triple their recommended minimum attachment points. SIIA staff has testified, submitted comments and serve as an interested party to the responsible working group. To date, this proposal has yet to garner enough regulator support. lastly, we saw the possibility for regulation of stop-loss at the Federal level. earlier this year, Federal Agencies put out a request for Information on stop-loss insurance which included in its preamble a not so subtle clue as to the concerns the Agencies share with the proponents for increased restrictions. SIIA quickly organized a member-based stop-loss “task force” which developed a detailed response to the request and which met with regulators to express SIIA’s view as to why it is both wrong and harmful for the Federal

government to enact policies on stoploss insurance. here too no action has been taken at this time. We continued to promote legislation to expand and modernize the liability risk retention Act. The bill is intended to permit risk retention groups (rrgs) the ability to offer commercial property insurance. It also would allow rrgs to seek Federal mediation in any questions of impermissible regulation under the spirit of the lrrA’s single state regulation provision. Momentum was seen in our ability to garner an increase in our coalition of industry groups in support of the bill. SIIA staff spent much time on Capitol hill meeting with key policy-makers on insurance issues and the staff of the Committees with jurisdiction over such matters. The work and progress we made this year makes us prime to see significant movement on the legislation in the upcoming Congressional term. SIIA’s Political Action Committee (PAC) saw a record level of utilization and growth. SIIA’s PAC enables our association with the ability to have intimate relationships with key policymakers. SIIA is able to become better acquainted with those legislators in leadership positions as-well-as assist those elected-officials supportive of our industry. This year we added a series of highly-successful golf fundraisers to help raise funds for our PAC. These events took place at some of our nation’s most prestigious private clubs and helped raised significant funds. These were fun outings that that were a significant benefit to our association’s political activities. In what I would characterize as our greatest success in this area, this year we had more members interested and participate in PAC activities than ever before. As we are far too aware, there is a serious lack of true understanding by elected-officials of the true nature of self-insurance and the benefits it offers. As such, our educational foundation,

The Self-Insurer

| January 2013

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the Self-Insurance educational Foundation (SIeF), hosted a number of information sessions at the u.S. Capitol for high-ranking Congressional staff. Topics included an explanation of self-insurance in the healthcare delivery system and the workings of the Alternative risk Transfer industry. These were widely-attended events where immediate benefits have already been seen. In one of our most significant efforts to defend the self-insurance industry, SIIA has continued our legal challenge to a law in Michigan which levies a claims tax on self-insured plans. Our case centers on the preemption statute of erISA which prohibits States from regulating self-insured plans, including the imposition of taxes and fees. While the legal process is ongoing, we believe the merits of our case are strong and we are cautiously optimistic that our fight will ultimately end in success. 2012 has brought many challenges and opportunities for SIIA and for the self-insurance industry as a whole. At no other time has there needed to be so much attention paid to regulatory agencies and there been so many issues before Congress of interest to SIIA membership. SIIA government relations staff has maintained a keen awareness to all happenings on these fronts; in many cases securing significant victories for the industry. SIIA, through the use of our PAC, is involved politically at our highest level. grassroots participation by members has gotten our industry involved in the advocacy process at never before seen levels. lastly, SIIA’s presence and notoriety on both Capitol hill and throughout the industry nationally has increased exponentially. With all of that said, there is plenty of more work on the horizon… and we are prepared for all that will come in 2013. n Jay Fahrer is the Director of Government Relations for SIIA and can be reached at jfahrer@siia.org.

January 2013

The Self-Insurer

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The Self-Insurer

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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

2012: the Year In review (and then some)

n this year in review article, we are not going to analyze each and every piece of guidance that was issued in 2012. That would not only be daunting to write but daunting to read – and thus ineffective. Instead we are going to use the rules to prepare a checklist to ensure that you have taken the major steps you should have taken in 2012 for rules that are effective in 2012 and 2013.

What are the action steps you should have completed in 2012? Many new rules either went into effect in 2012 or will have an immediate impact early in 2013. These new rules required employers to take the following actions in 2012:

distributing and using Mlr refunds in accordance with applicable guidance. Minimum loss ratio (Mlr) rebates were paid to group health plan policyholders in August 2012 for the 2011 plan year. In late 2011, the DOl issued guidance (DOl Technical release 2011-04) regarding the proper treatment of Mlr rebates by plans subject to ERISA. Similar to guidance issued by the DOL regarding demutualization proceeds, the portion of the rebate that could be retained by the

January 2013

The Self-Insurer

employer depended on the portion of the rebate attributable to plan assets. If the entire rebate was attributable to plan assets, then the employer could retain no portion of the rebate. In addition, hhS issued similar guidance for plans not subject to ERISA. Practice Pointer: The IRS also issued guidance regarding the tax impact on employees receiving MLR rebates. See http://www.irs.gov/uac/Medical-Loss-Ratio(MLR)-FAQs

Summary of Benefits and coverage (sBc) required to be Provided during annual and Open enrollments Final regulations and subsequent FAQs provided many clarifications regarding the SBC requirements imposed under PhSA Section 2715, including but not limited to the following: • The final regulations clarified the effective date. With respect to participants and beneficiaries enrolling during an annual enrollment period, the SBC rule is effective on the first day of the first annual enrollment period beginning on or after September 23, 2012. With respect to participants and beneficiaries enrolling other than during an annual enrollment period (e.g., newly eligible individuals and special enrollees), the SBC rule is effective for such enrollments that occur on or after the first day of the plan year beginning on or after September 23, 2012. • SBCs may be provided electronically to participants and beneficiaries if enrollment is conducted electronically.

revising nongrandfathered plans to comply with new women’s health preventive services guidelines Non-grandfathered plans and issuers are required to provide the new women’s health preventive coverage in the first plan year that begins on or after August 1, 2012. Thus, for nongrandfathered plans that operate on a calendar year, the guidelines are effective for the plan year beginning January 1, 2013. Plans should be amended accordingly prior to the effective date. The guidelines require most group health plans to cover the following preventive services for women: • Well-woman visits: group health plans and health insurance issuers must provide an annual well-woman health care visit for adult women to obtain the recommended services that are age and developmentally appropriate, including preconception and prenatal care. This well-woman visit should, where appropriate, include other preventive services listed in the guidelines, as well as other preventive care referenced in Section 2713 of the PhSA (such as some routine immunizations). • gestational diabetes screening: Women 24- to 28-weeks pregnant, and those identified to be at high risk of developing gestational diabetes, should be screened. • hPv DNA testing: Women who are 30 years of age or older must have access to high-risk human papillomavirus (hPv) DNA testing every three years, even if they have normal pap smear results. • STI counseling, and hIv screening

and counseling: Sexually-active women must have access to annual counseling on hIv and sexuallytransmitted infections (STIs). • Contraception and contraceptive counseling: Women must have access to all FDA-approved contraceptive methods, sterilization procedures and patient education and counseling. This recommendation excludes abortifacient drugs (i.e., drugs that induce abortion). Practice Pointer: The guidelines indicate that contraceptives must be provided “as prescribed” by the health care provider. The “as prescribed” language has sparked debate as to whether plans must cover over the counter drugs prescribed by a physician or whether coverage is only required for contraceptives that may be issued with a prescription. General consensus, including informal comments by HHS, is that plans are not required to cover over the counter drugs. • Breastfeeding support, supplies and counseling: Pregnant and post-partum women will have access to comprehensive lactation support and counseling from trained providers, as well as breastfeeding equipment, in conjunction with each birth. • Domestic violence screening: Screening and counseling for interpersonal and domestic violence should be provided for all women Permanent relief was provided to religious organizations that meet certain requirements. In addition, temporary relief was provided to certain non-profit organizations that do not meet the requirements for permanent relief but are nevertheless

The Self-Insurer

| January 2013

religious based organizations. See http://cciio.cms.gov/resources/files/prev-servicesguidance-08152012.pdf for more details regarding the temporary relief.

Prepare to report the value of applicable employer sponsored coverage on W-2s sent by January 31, 2013 Most employers are required to report the total value of applicable employer sponsored coverage (i.e. both the employer and employee cost) provided during 2012 on an individual’s W-2 that is provided on or before January 31, 2013. The value of coverage is reported in box 12 of the W-2 with a “DD” code. In 2012, the IrS issued Notice 2012-09 as well as a helpful chart (see http://www.irs.gov/ uac/Form-W-2-reporting-of-employer-Sponsored-health-Coverage) to clarify and explain many of the reporting requirements, including the following: • All employers that provide applicable employer sponsored coverage are required to comply except those exempt from any federal coverage continuation requirements, employers required to file less than 250 W-2s for the year, federally recognized tribal governments, and tribally chartered corporations wholly owned by federally recognized Indian tribal governments. • employers must report the value of coverage provided during the calendar year regardless of the plan year on which the plan operates. • The chart issued by the IRS identifies the types of coverage for which the value is not required to be reported. here are some highlights: – The value of hrA coverage provided in 2012 is not required to be reported. This is a transition rule – The value of hospital and fixed indemnity insurance that is paid with aftertax dollars is not required to be reported.

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January 2013

The Self-Insurer

• The value of employer provided coverage for a nontax dependent is required to be reported even though such amounts are imputed in income. • If an employee enrolls in, terminates or changes coverage during the year, then the amount reported must take into account the change in coverage for the period. For changes during the middle of a period, the employer can use any reasonable method to determine reportable cost for such period, including averaging or prorating the reportable costs, as long as the employer uses the same method for all employees it covers under the plan.

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– The value of health FSA coverage generally is not required to be reported unless the maximum health FSA reimbursement exceeds all pre-tax salary reductions made by the employee under the cafeteria plan (see Q-19 for formula to determine amount reported if health FSA coverage is reportable).

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– The value of employee assistance plans, wellness programs and onsite health clinics are not required to be reported if no COBrA premium is charged to qualified beneficiaries for such coverage.

12/3/2012 11:34:38 AM

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Group insurance policies are underwritten by Sun Life Assurance Company of Canada (Wellesley Hills, MA) in all states, except New York, under Policy Form Series 02-SL and 07-SL. In New York, group insurance policies are underwritten by Sun Life Insurance and Annuity Company of New York (New York, NY) under Policy Form Series 02-NYSL and 07-NYSL. Product offerings may not be available in all states and may vary depending on state laws and regulations. © 2012 Sun Life Assurance Company of Canada, Wellesley Hills, MA 02481. All rights reserved. Sun Life Financial and the globe symbol are registered trademarks of Sun Life Assurance Company of Canada. GGAD-2395 (exp. 5/14) SLPC 24191 5/12

The Self-Insurer

| January 2013

• A specified health insurance policy and an applicable self-insured plan do not include certain excepted benefits under Section 9832(c), such as disability benefits, general liability policies, automobile liability coverage, workers’ compensation coverage, limited scope dental or vision coverage, long-term care coverage, specified disease or illness coverage, hospital indemnity or fixed indemnity insurance and on-site medical clinics. In addition, eAP, disease management and wellness programs are not considered to be applicable selfinsured plans if the programs do not provide significant benefits in the nature of medical care or treatment. On the other hand, retiree only health plans and FSAs and hrAs (even an integrated hrA) that fail to qualify as hIPAA excepted benefits are not exempt.

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A special rule applies when two or more self-funded plans overlap. This will serve to exempt hrA (and some FSA) reporting when an hrA overlaps with other self-funded coverage. • The fee is $1 multiplied by the average number of lives covered under the policy or self-insured plan for policy years ending before October 1, 2013. Thereafter, the fee is $2 multiplied by the average number of lives covered. Thus, for calendar year plans, the Cer Fee is $1 in 2012 and $2 in 2013. For policy years ending after October 1, 2014, the $2 fee is increased based on increases in the projected per capita amount of National Health Expenditures. • The health insurer is responsible for paying the fee with respect to the average number of lives (i.e. employees and dependents) covered under a specified health insurance policy; the plan sponsor is responsible for paying the fee with respect to the average lives covered under an applicable self-insured plan. • The PCOrI Fee is calculated for each calendar year, even if the policy or plan operates under a fiscal year. The fee is paid by filing IRS Form 720 on an annual basis. The filing is due by the July 31 immediately following the end of the applicable policy/plan year. For example, the PCOrI Fee for the 2013 calendar year would be due no later than July 31, 2014. Practice Pointer: The final regulations from the IRS indicate in a footnote that the DOL has indicated that the PCORI fee is NOT payable with plan assets (e.g. from a trust) because the payment is an obligation of the plan sponsor – not the plan.

• The regulations identify the specific methods from which insurers and plan sponsors may choose to calculate the average number of covered lives.

communicate to Participants the new $2,500 limit to Health Fsa salary reductions Section 9005 of the Patient Protection and Affordable Care Act (“PPACA”) amends Internal revenue Code (“Code”) Section 125 to cap health FSA salary reduction elections for the taxable year beginning January 1, 2013 at $2500. The IrS subsequently issued Notice 2012-40, which clarified the application of Section 9005, including the following: • Notice 2012-40 clarifies that the rule is effective for plan years beginning on or after January 1, 2013. • The $2,500 limit only applies to salary reductions, including cashable employer credits. The limit does not apply to nonelective employer contributions that are not cashable (e.g. matching contributions). • The limit applies to All salary reductions made during the plan year – even if the employee ceased to participate and later becomes eligible again. likewise, the rule limits the participant’s health FSA salary reduction under all plans of employers in a controlled group to $2,500 in the aggregate. • If the plan has a short plan year, the $2,500 limit must be prorated; however, employees who enroll after the plan year has begun are not required to prorate the $2500 (but see above regarding subsequent elections).

Notwithstanding the retroactive amendment rule, plan sponsors should communicate these rules to participants as part of the annual enrollment for 2013 and all new hire enrollment materials should also be revised accordingly. Plan sponsors and administrators should also update systems to ensure elections during the year do not exceed $2,500.

a look into the Future . . . One of the reasons 2012 stands out is the issuance of guidance in 2012 that relates to laws that go into effect in 2014 – laws and guidance that must be analyzed sooner rather than later. These will be addressed in more detail in subsequent articles; however, the following is a brief overview of a few of the pieces of 2014-related guidance issued in 2012: • Proposed rule on the new Transitional reinsurance Contribution due from health insurers and health plans in 2014 through 2016. The contribution, which is calculated in a manner similar to the PCOrI fee, is $63 times the average number of covered lives. If the plan is self-insured, the contribution is payable by the plan; if fully insured, the contribution is payable by the carrier. unlike the PCOrI fee, the contribution may be payable with plan assets since it is a plan obligation. Also, the reinsurance fee seems to apply only to major medical type coverage, and FSAs under Section 125 as well as hrAs integrated with primary major medical coverage (whether insured or self-funded) should be exempt. IrS Notice 2012-58, which prescribes a safe harbor for identifying full-time employees for purposes of compliance with Code Section 4980h. • Proposed rules calculating minimum value, which plans must provide to avoid one of the Code Section 4980h pay or play penalties. • Proposed rules regarding new wellness program rules under PhSA Section 2705. • Proposed rule regarding the fair health insurance premium rules in PhSA section 2701. • IrS Notice 2012-59, which requests comments regarding the 90 day waiting period in PhSA Section 2708 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 email to Mr. Hickman at john.hickman@alston.com.

• The plan may be amended as late as December 31, 2014.

The Self-Insurer

| January 2013

art gAllerY by Dick Goff

actuarial work: no laughing matter

nsurance is at the heart of all human commerce and experience, enabling people to conduct business, practice professions and invest in property with some confidence that the attendant risks won’t wipe them out. If that’s true, then the core of that is the actuarial projection that makes insurance possible. Actuaries help organizations define their possible future risks, put a price tag on those, and plan cash reserves to cover potential losses. All of their projections must pass muster with both relevant insurance regulators and the American Academy of Actuaries that governs the profession and admits practitioners to certification through a rigorous series of examinations. You don’t just wake up one day and decide to be an actuary. So, actuarial projections are the mortar that binds the bricks of insurance coverage. every traditional insurance company has a squadron of actuaries pounding the numbers. Organizations forming captive insurance companies typically engage the services of consulting actuaries whose projections enable captive domicile regulators to issue a license. Domiciles also hire consulting actuaries to analyze the financial condition of captives during routine audits or scrutiny for specific causes. Despite their vital importance to the process, actuaries to my mind aren’t getting their fair share of respect. In some circles they have surpassed even accountants as the brunt of jokes because it’s easy to portray them as humorless cubicle drudges ogling Statistics Illustrated. Wherever a few trade show refugees gather around a hotel bar late in the evening, the setup lines come out: “How many actuaries does it take to…?” “Why can’t you tell an actuary that…?” “What’s the difference between an actuary and…?” But in reality, consulting actuaries of the ArT world are engaging, friendly people whose brains work on both sides of their heads: their quantitative abilities to crunch massive statistical data is balanced by their creative abilities to know what to do with it. The best of them have deep experience in realworld business organizations. I have always viewed actuarial service somewhat in the light of medical care – a blend of knowledge and intuition that is an art form of sorts. But my actuary friend Bill Bartlett doesn’t go quite that far. “I wouldn’t call it science,” he said. “Of course we have access to a great deal of experience data and statistical projections, but at heart we are business people who bring real-world experience to help organizations plan to avoid financial difficulties in the future.” “More specifically we list potential future liabilities and try to estimate how they would play out realistically, project the possible costs and plan how

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to create reserves – often through insurance premiums – to cover those costs.” You probably wouldn’t spot Bill as a numbers cruncher if you encountered him along the South Carolina coastline where he enjoys saltwater fishing. But he often uses numbers games to amuse himself and others. Once he sketched out to me through a series of indisputable algebraic equations that two equals one. Go figure. Many of the small to midsized organizations in my corner of the ArT world form captive insurance companies to cover infrequent – even unique – risks that traditional insurance companies won’t cover, or would only cover at exorbitant rates. I’m familiar with, as examples, captives who cover risks such as a manufacturer’s possible loss of distribution outlets, a medical practice that could be damaged by national health care reform or other regulatory intervention, or a government contractor who could lose revenue if contracts are vacated without recourse. So, the question is how can actuaries assist individuals and organizations to protect themselves from financial losses arising from unforeseen events? “We have access to varied sources of information about specific risks and their probable occurrences,” Bill says. “To quantify the financial impacts caused by such risks, we often combine data along with our own experience to create a model based on the projected number of claims and the size of those

claims in a given year, and then we can suggest realistic premiums.” The Bartlett Actuarial group, ltd. that Bill and his wife, Andrea, established in Charleston in 2002, recently celebrated the expansion of its office in Burlington, vermont, on Captives row, officially known as Main Street. Their firm is active in many domestic and offshore captive domiciles. While I had him on the line I asked Bill if he had seen any new actuary jokes lately. “I have,” he said,“but I won’t repeat them.”

Would you climb a mountain without a guide?

Who said actuaries don’t have a sense of humor? n Dick Goff is managing member of The Taft Companies LLC, a captive insurance management firm and Bermuda broker at dick@taftcos.com. Bill Bartlett is president of the Bartlett Actuarial Group, Ltd. at billb@bartlettactuarialgroup.com.

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The Self-Insurer

| January 2013

Is there a Place for Preferred Provider Organization (“PPO”) Networks In Today’s Health Benefits Marketplace? by Ron E. Peck, Esq., Shauna Mackey, Esq., The Phia Group

odern employee benefit plans are exploring alternatives to Preferred Provider Organizations (“PPOs”). To understand why, we must understand the history of PPOs. Only by identifying the value once created by PPOs can we subsequently identify when and why this money-saving resource for benefit plans has apparently ceased to be so. We must then explore the alternatives with an open mind, understanding that alternatives – while resulting in cost savings for the benefit plan – are not cost free. Indeed, the cost may be more than some benefit plan sponsors are willing to bear.

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a Brief History of PPOs PPO’s were originally developed so that select providers of healthcare services (“providers”) could offer services at discounted rates to benefit plans in exchange for steerage. early PPO networks were effective because the discounts were significant and were applied to charges generally deemed to be usual, customary, reasonable, and appropriate; (fair market pricing). Providers were willing to offer these real savings in exchange for in-network status, which at the time was truly exclusive. In other words, it was worth a lot to be “preferred” and providers took it on the chin (on a claim by claim basis)

in order to achieve in-network steerage. volume more than compensated for a per-claim loss on profitability. Over time, as the networks expanded, exclusivity of in-network status became significantly lessened. This loss of exclusivity resulted in less value attached to in-network status for providers, a subsequent loss in network negotiation power, and resultant diminished discounts applied to resultant higher prices.

What’s in a name? Some individuals have suggested that the solution to this issue resides in the use of ePOs (exclusive Provider Organizations) in lieu of PPOs. Please

note, however, that ePOs and PPOs may suffer from the same weakness. PPOs consist of a network of “preferred” providers. PPO plan participants who visit an in-network provider will enjoy lower deductibles, and will not worry about balance billing (payment of billed amounts in excess of plan payments). PPO participants are incentivized to visit in-network providers, but they may choose to visit an out-of-network provider. If they do so, their benefit plan will pay a usual and customary rate to the participant or to the provider (if benefits were assigned via an assignment of benefits). The participant will then be balance billed for the difference between the charged amount and the paid amount. Participants are thus incentivized to utilize in-network providers, since – by so doing – they avoid balance billing, and frequently enjoy lower deductibles. With an ePO, however, participants must visit exclusive, in-network providers, or the benefit plan will not provide coverage at all. Some ePOs may offer some partial-payment to the patient when the patient visits an out of out-of-network provider, (particularly when treatment occurs due to an emergency situation) but in general, benefits are much more limited (or non-existent) when an ePO participant visits an out-of-network provider; (when compared to a PPO). Thus, ePOs incentivize participants to remain in-network better than PPOs. If the ePO gets too large, however, such that in-network status is not exclusive and no steerage results for participating providers, even an ePO will suffer from the same inflated rates and lack of negotiation power described above. ePOs and PPOs... In either case, payors need to limit the size of their network, and offer the provider real value in exchange for real discounts off of fair rates. Otherwise, the same doomsday scenario described below will be set into motion.

the status Quo If PPOs no longer offer substantial discounts on fair market prices, why do benefit plans continue to utilize PPOs? The answer is simply that discounts are not the only reason to use a PPO. Currently, many benefit plans, including The Phia Group’s own benefit plan, utilize a PPO for reasons other than a reduced cost of care. While PPOs may no longer be as valuable as they once were, and they are certainly not the solution for skyrocketing costs of care, they do represent peace and harmony for the plan and plan member. PPO agreements represent pre-negotiated terms (allowing users to avoid case by case disputes), and usually include a contractual prohibition on “balance billing” (providers contractually agree not to charge patients for the difference between their charge amount and amount paid by the benefit plan, so long as the plan pays the amount set forth in the network’s fee schedule, and do so within a certain period of time).

Forced change If benefit plans are willing to apply minimal discounts to inflated charges, in exchange for prohibitions on balance billing, why is there suddenly a noticeable market shift away from PPOs? For some time, stop-loss carriers have reimbursed benefit plans for claims paid in excess of that plan’s specific deductible, when those claims are paid in accordance with applicable PPO network arrangements. In other words, a benefit plan would receive claims from an in-network facility, the PPO network would apply the network’s fee schedule to the claims, the benefit plan would pay that amount, and amounts in excess of the plan’s specific deductible would be submitted to stop-loss for reimbursement. A trend has developed, however, which has forced benefit plans to reconsider this methodology. Stop-loss policies protect the benefit plan; they insure the plan document. It is important to understand that terms negotiated by the benefit plan (or by the PPO on the plan’s behalf) with providers, that do not appear in the applicable benefit plan document, are not binding upon the stop-loss carrier. Benefit plan documents regularly include language limiting how much the benefit plan will pay for a given service or supply. Terms such as “usual,” “customary,” “reasonable,” and “maximum allowable,” should come to mind. If a benefit plan pays in accordance with a PPO network fee schedule, rather than independently audit claims to confirm that the charges fall within the parameters set by these types of plan document provisions, they run the risk of paying claims in excess of the amounts allowed by the applicable benefit plan document. Presently, stop-loss carriers are being more judicious in their review of claims payments made by benefit plans, and are stringently enforcing such limiting plan language. Some stop-loss carriers include in their stop-loss policies independent definitions of maximum payable amounts (their own definition of usual and customary, for instance), while others reserve the right to interpret the terms of the plan document independent of the plan administrator’s interpretation of the same terms. Regardless of the methodology, however, more benefit plans are finding themselves between this rock (stop-loss carrier enforcement of plan document language and price limitations set forth therein) and hard-place (PPO network contractual obligations to pay network rates, or suffer the hardships of balance billing and accusations of contractual breach). Forced to choose a side, many benefit plan administrators are choosing to shed their PPO and administer claims solely in accordance with the terms of their plan document.

The Self-Insurer

| January 2013

The Conflict The information presented thus far begs the question, “why can’t benefit plans administer claims in accordance with the terms of their plan documents and apply network discounts?” PPO network agreements make it difficult, if not impossible, to audit claims submitted by in-network providers. Some network agreements openly prohibit the application of plan-based limitations, such as usual and customary rates, even if the benefit plan document places a ceiling on payable rates. Other network agreements prohibit the review of provider bills by the plan administrator, limit or eliminate the plan’s ability to obtain invoices, disallow audits by the plan or its representatives, and apply ambitious deadlines after which discounts are lost and balance billing commences. Administration of claims in strict adherence to the benefit plan document often takes more time than the network agreement allows. This deadline, along with the aforementioned prohibitions on in-depth claims review, often forces benefit plans to pay claims blindly. In the meantime, the provider holds the discounts – and much more importantly – the plan participants, hostage. If the plan fails to meet the provider’s demands, the provider will “pull the trigger,” and begin submitting bills to the patient. These bills, often exceeding six-figures, as well as threats to ruin credit, result in upheaval at the employer’s office, and eventually results in the plan caving in. Providers do not expect their patients to cut a check to the hospital for $250,000.00. They expect the patient to retain legal counsel, pursue claims against their employer and their benefit plan, and force those entities to pay the provider.

In their scramble to avoid balance billing, employers and benefit plans have shielded their participants from any and all exposure to the actual cost of their healthcare. This separation between consumption and payment has lead to an egregious lack of transparency in pricing. The market is perfect for providers to inflate rates, many times in excess of reasonable profitability, as the consumer has no skin in the game (the patient does not care how much the care costs, as long as they aren’t balance billed), and benefit plans will not push back for fear of balance billing and black balling of their members; (providers refusal to treat members of the given benefit plan). Whether it is a benefit plan seeking details to confirm that claims are covered by the plan, and inadvertently exceeding the deadline set by the PPO agreement, or a benefit plan attempting to apply a plan-based cap on payable

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amounts for a given procedure, any behavior that strays from the network terms is met with balance billing, as well as accusations of contractual breach, promissory estoppel, and bad faith.

Mercury rising Providers are not always to be blamed for these inherent conflicts. Benefit plan sponsors execute agreements with their PPO assigning what is in essence a power of attorney to the PPO to negotiate on the plan’s behalf with providers. Providers, in turn, execute contracts with the PPO (negotiating on the plan’s behalf) that they – the providers – presume will control the payor / payee relationship. These contracts cover everything, from delivery of services to payment terms. Providers proceed in reliance upon the (reasonable) belief that the network contract is in place and will control the entire procedure. If the payor agrees to a contractual arrangement whereby the provider charges many hundreds of times what they receive from other payors, what of it? Why shouldn’t the provider accept this contractual windfall, adopted – willingly – by the benefit plan? Some providers, however, take this advantage to the next level. Most PPOs assert that their discounts are confidential. In fact, they argue that the agreement they negotiate with the providers (in the name of the payor) are confidential; so much so that the payor – in whose name the contract was signed – cannot see its terms. In other words, the benefit plan is expected to comply with a contract they cannot see, but which was signed in their name. In addition to this unseen agreement, the terms of both the agreement with the provider, and agreement between the network and payor limit the plan’s right to review the provider bills, analyze claims, audit charges, view invoices, etc. As a result, benefit plan payors must give providers

the benefit of the doubt, and “hope” that the provider makes no mistakes. In the State of California, the State’s insurance commissioner identified multiple instances where – it is alleged – facilities belonging to a particular hospital system charged benefit plans for services they didn’t provide, in excess of industry standards, and committed other billing fraud related to anesthesia claims. The State, furthermore, asserted that the hospital system knowingly committed these acts of fraud, confident that they would not be caught thanks to the shield their network agreement provided. In other words, the terms of their network agreements concealed their fraudulent billing practices, by limiting the payors’ rights to review the claims. As a result, the State included the applicable PPO as a defendant as well, for – in essence – aiding and abetting the fraud.

In addition to this case, most people have heard other cautionary tales, from the $75 aspirin to the $300,000.00 appendectomy.Yet, because consumers (the patients) did not feel the sting of the charge (at least, not until their premiums increased a year later), there was no impetus to address this issue – the unconscionable cost of care. That was the case, at least, until PPACA resulted in new expenses to benefit plans. Now, facing the real threat of plans no longer being financially viable, plan sponsors must address the cost of care, or cease offering benefits entirely.

cost Plus is a real Plus The industry at large is now contemplating new pricing methodologies, whereby the benefit plan identifies a fixed rate (a benchmark) upon which it bases what it deems to be a fair market value. The benefit plan issues payment equivalent

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The Self-Insurer

| January 2013

to that allowable amount to providers. The benchmark can be based upon some percentage of Medicare, or any other number of parameters. Providers that charge more than the allowable amount receive less than their billed amount from the Plan. What happens next is up to the Provider.

Fair and Balanced Billing In response to this trend, some providers (primarily those associated and/or sharing ownership with PPO networks) have advised that implementation of such fixed-cost systems may (and likely will) result in balance billing of the patients. The process is similar to any benefit plans’ out of network procedure. The benefit plan pays the amount set forth within the plan document, and the provider bills the patient for the difference. Many benefit plan sponsors and claims administrators have shied away from fixed-cost methodologies for fear of balance billing.Yet, many of these entities are the same entities clamoring for “price transparency” and patient “skin in the game.” Providers that threaten to react to fair, profitable, fixed-cost pricing are – in many ways – shooting themselves in the foot. If balance billing occurs, then the veil will be lifted. Patients will see how much their healthcare really costs, and will feel the sting of excessive charges in their wallet. Over time, individuals faced with a need for care will take the cost of that care into consideration as well. Unfortunately, many benefit plan sponsors falsely believe that there exists a “silver bullet;” that they can limit how much their benefit plan will pay for a given claim and can prohibit the provider from balance billing. The only way to stop balance billing is to have the provider agree – in writing – not to balance bill. That, in turn, will only happen if and when the provider receives something valuable

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The Self-Insurer

in exchange for sacrificing the right to balance bill. Take note, however, that providers don’t actually expect patients to whip out a checkbook and cut a check for a quartermillion dollars to the hospital. They balance bill hoping to receive pennies on the dollar via a convoluted payment plan, or better yet, upset the patient such that the patient protests the plan’s limited payment and forces their employer to pay additional amounts to the provider. As such, the amount balance billed reflects a number much larger than the actual value of the right to balance bill. In other words, the right to balance bill is worth less to the provider than the amount balance billed. Identifying the value of that right, and compensating providers in exchange for prohibiting balance billing, is the key to success.

How Much is that transplant in the Window? Despite its name, health “insurance” is not “insurance” as that product is known in other industries. Insurance is a safety net, purchased by insureds, so that if and when they suffer a loss, they are provided with monetary compensation equal in value to that loss. In health care, payment is made (more often than not) to the service provider (not the insured), and the amount paid is not based upon the value of the loss, and rather, is based upon the amount the service provider charges. An immediate conversion to standard-insurance practices like the one described above is not possible. This is because, in health care, nobody knows what the fair market value of a particular loss (i.e. a hospital bill) even is. “hospital A” in a city can charge double for the same service as “hospital B” in the same city. Perhaps this is the reason why the cost of health insurance has sky-rocketed compared to other types of insurance: the actual cost of health care is not a part of the conversation.

contract to Kill Contracts are enforceable unless and until proven to be otherwise. Contracts executed by minors, people lacking capacity, and people under duress, for instance, are unenforceable. likewise, contracts requiring one or all parties to commit a crime are void for illegality. Health plan administrators have a fiduciary duty, under ERISA, to prudently manage plan assets and to uphold the terms of the applicable plan document. In an effort to contain costs, many self funded plans draft plan language stating that the plan will only pay what is usual, customary, and reasonable. upon adoption of said document, it becomes the administrator’s fiduciary duty to cap payments at those rates. If a provider’s bill calls for payment in excess of a usual, customary, and reasonable amount (as defined by the plan in its document), the plan administrator is required – by their fiduciary duty and applicable Federal law – to pay no more than the maximum allowable amount, in accordance with the terms of the plan. If the health plan pays the bill in excess of that allowable amount, that would be in violation of the terms of the plan document, and constitute a breach of the administrator’s fiduciary duty. If the plan pays the claim pursuant to the terms of the plan document and pays only what is reasonable, it will be violating the terms of the PPO agreement. If paying claims that are in excess of what the plan document allows forces a health plan to breach its fiduciary duty to its plan participants, it can be fairly said that the network agreement requires the plan to breach its fiduciary duty.This paradox between the terms of the PPO contract and the terms of the plan document puts the

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The Self-Insurer

| January 2013

benefit plan in a very difficult position. Certainly, given this scenario, an argument can be made that the PPO contact is void for illegality because it conflicts with the benefit plan’s terms, and requires a breach of the administrator’s duty created by erISA.

plus a percentage, they will receive only Medicare rates, or a percentage less than Medicare. If the hospitals and the PPOs resist the current trends towards innovative cost containment, the hospitals will face a fate much worse than Medicare-plus pricing.

agreeing on the Options

the Once and Future law

Providers and PPO networks are justified in their outrage. Benefit plans have for decades taken advantage of discounts, and much more importantly, have stifled providers’ rights to balance bill. They executed agreements and triggered activities taken by providers in detrimental reliance upon the benefit plan’s representations. It is not the providers’ responsibility to review the applicable plan document and warn the benefit plan sponsor that the network may run afoul of the plan terms. Providers, justifiably so, presumed that plan sponsors executing network agreements had the legal authority to do so. Providers and networks stewing in their angst, however, must come to terms with the facts that face us today. Benefit plans cannot be chastised back into the classic PPO arrangements that have, for many years, been the status quo. For decades, benefit plans could deal with excessive charges minus discounts, if it also meant harmony for patients. Now, the election is behind us and Obamacare is the law of the land. In the coming years, the combined rising cost of doing business within the traditional PPO structure and complying with the new law will drive employers away from private plans and to the exchanges. The individuals presently included in PPO plans, which the providers and networks desperately want to preserve, will instead be uninsured, members of the exchange, Medicaid or Medicare recipients. rather than receive Medicare

January 2013

The Self-Insurer

For the past six years in Massachusetts, the Commonwealth Care Plan has been in effect. This program, also known as romney Care, is essentially the predecessor of Obamacare. Interestingly, the Commonwealth Care Plan offers its members rich benefits and yet many providers refuse to see patients. The uptick in covered individuals resulted in more unnecessary visits, frivolous use of medical resources, and a shortage of available appointments and caregivers. In addition to this influx of unnecessary (and time consuming) care (resulting in a shortage of resources), “Massachusetts exchange” patients are refused appointments because these plans pay less than other private payors, and payment takes a lengthy time to achieve. There is no network agreement based deadlines, and navigating the bureaucratic red tape is time consuming indeed. In the face of this looming possibility, Medicare-plus pricing is something area providers are actually keen to accept, so long as payment occurs quickly and conflicts are kept to a minimum.

Making the Pie larger Too often, the parties (payor, patient, provider, and PPO) enter the negotiations prepared to fight over the pie. Whoever gets the biggest slice wins. unfortunately, PPACA will soon feed upon the pie, and what will remain is not large enough to feed any of the players. Soon, if the industry sticks

to the status quo, they will all starve. Instead, these entities need to make the pie larger. Benefit plans need to work, hand in hand, with the most important providers in their applicable areas, and/or their PPOs, to develop new programs that offer true value to providers in exchange for cost-effective care. Identifying one or two select caregivers to receive all steerage, agreeing to cover the cost of co-pays and deductibles for providers that agree to accept the plan maximum allowable payment as payment in full, agreeing to initiate electronic claims submission and electronic payment, sticking to prompt-payment deadlines, and agreeing upon an equitable fixedpayment rate prior to the provision of medical care are all carrots benefit plans can offer to providers. likewise, prohibiting assignment of benefits to providers that refuse to coordinate with the benefit plan, such that payment is made to the participant and providers are forced to pursue the patient for payment, is the stick. If all of the beneficiaries of private health insurance do not innovate together, and improve upon the expensive and unsustainable status quo, traditional health insurance will lose out to the exchanges, or benefit plans will become nothing more than auto insurance policies and homeowner’s insurance... prohibiting assignment of benefits entirely. If plans eliminate assignment, patients will obtain care, receive the bill, submit the claim to their insurance, receive fair market value, and haggle over payment with the provider, like so many used car dealers. either scenario – socialized medicine or the end of assignment – would be devastating to providers, and the entire industry. The time has come to stop resisting change, and embrace the innovative options that

are becoming available; the options that exist today, compared to those that belong to yesterday, may be the industry’s only hope for tomorrow. n Shauna Mackey started her career at The Phia Group, LLC in 2006 as a Claim Recovery Specialist. In this role, Shauna investigated potential subrogation opportunities, and pursued reimbursement from Plan members, insurance carriers, and their attorneys. Shauna joined The Phia Group’s Legal Team as Legal Administrator in 2010 while attending law school at night. In that position, she handled complex subrogation matters as well as health care consulting and compliance projects. Shauna graduated from Suffolk University with a bachelor’s degree in Political Science and received her J.D. from Suffolk University Law School. She was recently admitted to the Bar of the Commonwealth of Massachusetts and currently serves as legal counsel. In this role, she handles various consulting matters including the review and revision of stop loss contracts, ASA agreements and PPO contracts. She also assists clients in complying with HIPAA, PPACA and the various other regulations affecting our industry. Ron Peck, Sr. Vice President and General Counsel, has been a member of The Phia Group’s team since 2006. As an attorney with The Phia Group, Ron has been an innovative force in the drafting of improved benefit plan provisions, handled complex subrogation and third party recovery disputes, and spearheaded efforts to combat the steadily increasing costs of healthcare. In addition to his duties as counsel for The Phia Group, Ron leads the company’s consulting, marketing, and legal departments.

administration and healthcare have been published in many industry periodicals, and have received much acclaim. Prior to joining The Phia Group, Ron was a member of a major pharmaceutical company’s in-house legal team, a general practitioner’s law office, and served as a judicial clerk. Ron is also currently of-counsel with The Law Offices of Russo & Minchoff. Ron obtained his Juris Doctorate from Rutgers University School of Law and earned his Bachelor of Science degree in Policy Analysis and Management from Cornell University. Ron is also a Certified Subrogation Recovery Professional (“CSRP”).

Ron is also frequently called upon to educate plan administrators and stop-loss carriers regarding changing laws and strategies. Ron’s theories regarding benefit plan

The Self-Insurer

| January 2013

erIsa

Preemption Battle Takes Shape in MIcHIGan Legal battle to exempt self-insured ERISA plans from 1% state provider tax enters new phase, suggests national significance

by Bruce Shutan

January 2013

The Self-Insurer

he federal employee retirement Income Security Act (erISA) is supposed to trump state insurance laws, but it’s under siege in Michigan where a unique and controversial tax to help fund Medicaid is seen as setting a dangerous regulatory precedent on the national stage. The health Insurance Claims Assessment Act of 2011 (hICA) imposed a 1% tax on all health care services performed in the state on behalf of Michigan residents beginning January 1, 2012 to finance state health care initiatives. It also has sparked a fierce legal battle to exempt selfinsured group health plans from the tax on erISA pre-emption grounds. Delaney McKinley, director of human resource policy for the Michigan Manufacturers Association (MMA), anticipates an administrative nightmare associated with “trying to tease out all of the different claims and other requirements” under hICA. With 91% of MMA members voluntarily offering health insurance for competitive reasons, she says the tax serves as a disincentive to sponsor health care plans or do business in Michigan.

In pursuit of more revenue As many as 47 states have some type of Medicaid group-related provider tax or assessment, reports Dick Cauchi, program director, health for the National Conference of State legislatures. “In almost all cases, the state and providers or those who are paying the tax have a prior understanding that the practical purpose of the tax or assessment is to obtain extra revenue that can be submitted to the federal government as a Medicaid expenditure that is subject to federal matching funds,” he says. This enables states to provide a higher reimbursement to providers for those expenses.

What’s different in Michigan is the impact on self-insured employers, which Cauchi labels an unusual approach in terms of helping fund Medicaid. “I do think it is an issue of interest beyond the boundaries of Michigan,” he says, but the impact remains to be seen. higher Medicaid reimbursements allowed under the Affordable Care Act (ACA) have forced states to consider a longer financial time horizon, which will likely trigger more aggressive collection of revenues to pay for program expansion, according to an industry observer who asked not to be identified. “One of the interesting things about these provider taxes and fees, given the general mood about taxation, is that each year more states have taken action,” the source says, adding that “it cuts through good times and bad times, conservative states and liberal states.” With all 50 states considering whether to pursue Medicaid expansion under the ACA, McKinley wonders what such action could mean for state funding formulas, which include the hICA claims tax. “Some have said that there’s a potential for savings through efficiencies that are created by Medicaid expansion,” she adds. Scott Macy, president and CeO of the erISA Industry Committee (erIC) in Washington, D.C., says hICA undermines the ACA’s mission to encourage employers to continue providing health care coverage. he also notes that the ACA left the erISA pre-emption provision intact. Michigan’s action was seen as a hostile shot across the bow that could seriously erode erISA pre-emption, prompting the Self-Insurance Institute of America, Inc. (SIIA) to file an injunction in December 2011 to block implementation and enforcement of hICA for self-insured group health plans. SIIA recently appealed an August 2012 decision by the u.S. District Court for the eastern District of Michigan that upheld this tax. In Self-Insurance Institute of America v. Snyder, the district court ruled that statespecific burdens created by HICA did not pose significant interference with uniform plan administration. “The cornerstone of the self insured’s marketplace is erISA preemption,” says Mike Ferguson, chief operating officer of the Simpsonville, S.C.-based SIIA. “Michigan’s tax scheme is an attempt to compromise national uniformity in the administration of self-funded plans.” erISA pre-emption has been challenged in recent years, with some courts allowing for an indirect economic impact on self-funded plans that’s deemed insignificant. One such example is a 5% surcharge on hospital bills in New York where the U.S. Supreme Court affirmed that ERISA welfare benefit plans could be taxed. But unlike hICA, New York State Conference of Blue Cross & Blue Shield Plan v. Travelers Ins. Co. did not impose state-specific record-keeping and reporting requirements on erISA plans, nor did it create an enforcement mechanism allowing erISA plans to be audited and sanctioned. The tricky part of hICA is that it has generated considerably less revenue than projected. Michigan was $226.8 million short of the $300 million mark projected for fiscal year 2012 based on collections of $49.2 million in the first quarter, $60 million in the second quarter and $64 million in the third quarter that state officials reported. The fourth quarter payment is due April 15, 2013. The larger hope is to collect about $400 million from HICA’s first full year – an amount needed to leverage the state’s federal Medicaid matching funds. But at this rate, Michigan still would be about $120 million away from its goal after another round of collections. Kurt Weiss, communications director for Michigan’s State Budget Office, explains that “while the revenue generated from hICA will fall short of expectation, the

The Self-Insurer

| January 2013

good news is that revenue collections in other areas (e.g., the state’s general fund and school-aid fund) came in ahead of projections.” The shortfall, therefore, “does not create a huge problem for closing the books on 2012,” he adds. Still, legislation to significantly hike the hICA claims tax was introduced in November. under SB 1359, the current 1% tax would be converted into an unlimited and variable floating rate to ensure that $400 million is collected each year. The proposal also would end a proportional credit/refund provision in the event that the state’s annual revenue target is met. A state analysis examining why hICA failed to generate more revenue is expected prior to the executive budget for 2014 being released in February. Once that occurs, Weiss says a long-term strategy will be developed to address ways to respond to the shortfall. For all the consternation about hICA’s effect on businesses, it’s worth noting that a sunset provision will phase out the hICA tax after two years, forcing state lawmakers to re-evaluate this solution. rick Murdock, executive director of the Michigan Association of health Plans, predicts that the state legislature “will likely take up legislation to remove the sunset provision, but we see no appetite to increase the overall rate beyond 1%.” hICA replaced an hMO use tax “that was presumed to be not acceptable to the federal government,” according to Murdock. “Without a replacement tax, there would be no state general fund commitment and cuts would take place – further jeopardizing the overall health system in Michigan and clearly pushing costs into the hospital er and higher cost settings.”

devil in the details Allowing states to impose taxes on benefit payments eliminates one of

January 2013

The Self-Insurer

the major advantages of self-funding health insurance claims and significantly changes the way plans are administered, argues Ann Arbor, Mich., attorney John h. eggertsen, who represents SIIA in its lawsuit against the State of Michigan alongside royal Oak, Mich., attorney Stephen F. Wasinger. As a multimilliondollar funding vehicle for Medicaid and Medicare, he says hICA is the only state tax on erISA plans of its kind with which he’s familiar. Another point to consider is that “once each state gets to start demanding 1% here or an audit capability there,” eggertsen explains, “multistate self-funded plans suddenly have to be like an insurance company in complying with all the [relevant] laws states choose to pass.” he says the devil is clearly in the details: “It has a substantial and intrusive impact on the way in which self-funded plans are administered because the plans would have to figure out their own tax bill, who their residents are and where the services were rendered. They also can be subject to an audit, and if they don’t send in an assessment, then the state gets to assess them based on what the state thinks their tax liability is.”

is troubling is the way in which the state of Michigan is theoretically telling nationwide erISA plans how they have to administer work claims at least with respect to the Michigan people.” Oral argument before the u.S. Court of Appeals for the Sixth Circuit will likely commence in February or March, with a ruling expected anywhere from one to six months thereafter, surmises eggertsen. But “if the Sixth Circuit sees this as a big issue for the State of Michigan,” then he says there’s a chance that a decision may come sooner rather than later.

How HIca earned support Several Taft-hartley plans recently filed amicus briefs supporting SIIA’s legal appeal. They include the Iron Workers health Fund of eastern Michigan, Plumbers local No. 98 Insurance Fund, roofers local No. 149 Security Benefit Trust Fund, Pipefitters local No. 636 Insurance Fund and Pipefitters Local No. 636 Retiree Insurance Fund.

The task at hand can be further complicated by the fact that some employees may or may not live at the same address as their spouse or dependents. verifying one’s residence can involve detailed and everchanging factual determinations that are not easily made. eggertsen says it’s possible that a self-insured plan with an employee living in Michigan whose family moved to Florida could be assessed 1% on, say, a $100,000 hospital bill.

It’s easy to see why: Self-insured Taft-hartley plans were hit particularly hard on compliance with a myriad of administrative determinations under hICA that they generally do not make. Such tasks include documentation of payments made to Michigan health care providers and whether they were made under an incentive compensation arrangement. The also must determine whether these payments were “reimbursements” to individuals under a flexible spending arrangement, health savings account, Archer medical savings account, Medicare Advantage medical savings account, or other arrangement.

“I think it is fair to say that burdens are falling much more on the multiemployer plans than singleemployer plans,” he says. “What really

Self-insured employers of all shades, no doubt, will look for compliance assistance from third-party administrators, which McKinley says are

“entirely expected and allowed” to pass along the hICA tax to their customers. Beyond organized labor, there was no immediate outpouring of support for SIIA’s legal action. One possible explanation is major employers across the state realized that Michigan would find a way to collect $400 million “one way or another,” as eggertsen points out, “and if they didn’t get it this way, they would get it by increasing taxes on businesses.” McKinley reports that MMA “vociferously” fought the hICA tax when it was still in the discussion stage. But she says it was ultimately seen as a tradeoff for avoiding a rebuilt business tax structure that would have been more detrimental. ERIC would consider filing an amicus brief on behalf of SIIA’s appeal if asked, according to. Macy “If a state can assess a direct tax with the adverse economic impact and administrative requirements that go with it, then I’m not sure what they can’t do,” he fears. One segment of Michigan’s business community strongly opposes SIIA’s litigation. “We’re not all that enthusiastic about the self-insured’s trying to get out of paying” hICA, says rob Fowler, president and CeO of the Small Business Association of Michigan, none of whose members self-insure their health care claims. his larger point is that mindful of the state’s need for additional revenue sources to maximize Medicaid dollars, all stakeholders need to pay their fare share and that a tax was coming either through higher hospital bills or premiums, or business tax reform. n Bruce Shutan is a Los Angeles freelance writer who has closely covered the employee benefits industry for 25 years.

upcomingeVents self-Insured Health Plan executive Forum March 20-21, 2013 • JW Marriott Desert Springs Resort & Spa • Palm Desert, CA The Self-Insured health Plan executive Forum (formerly known as the TPA/ Mgu excess Insurer executive Forum) will be held March 20-22, 2013 at the beautiful J.W. Marriott Desert Springs resort in Palm Springs, CA. The educational focus for this event will be expanded to address the interests of plan sponsors, in addition to third party administrators and stop-loss entities.

27th annual legislative/regulatory conference April 17-18, 2013 • Washington Marriott at Metro Center • Washington, DC SIIA’s Annual legislative and regulatory Conference is your opportunity to hear directly from the policy-makers who will shape the health policy agenda in 2013 and beyond. Experience the political process first hand by participating in SIIA’s popular “Walk on Capitol hill.” Meet with your federal legislators in their Capitol Hill offices and let your voice be heard. SIIA staff will set up your appointments, provide you with “talking points” and lobbying materials in advance of your meetings.

self-Insured Workers’ comp executive Forum May 29-30, 2013 • Chase Park Plaza Hotel • St. Louis, MO SIIA’s Annual Self-Insured Workers’ Compensation executive Forum is the country’s premier association sponsored conference dedicated exclusively to self-insured Workers’ Compensation funds. In addition to a strong educational program focusing on such topics as excess insurance and risk management strategies, this event will offer tremendous networking opportunities that are specifically designed to help you strengthen your business relationships within the self-insured/alternative risk transfer industry.

33rd annual national educational conference & expo October 21-23, 2013 • Sheraton Chicago Hotel & Towers • Chicago, IL SIIA’s National educational Conference & expo is the world’s largest event dedicated exclusively to the self-insurance/alternative risk transfer industry. Registrants will enjoy a cutting-edge educational program combined with unique networking opportunities, and a world-class tradeshow of industry product and service providers guaranteed to provide exceptional value in four fastpaced, activity-packed days.

The Self-Insurer

| January 2013

SIIA PreSIDeNT’S MeSSAge Les Boughner

t is a great honor being elected president of SIIA, and I will do my best to uphold the tradition of the great leaders that have preceded me. I view this position as an opportunity to give back some of the benefits that SIIA membership has given me through the years.

We work in an enormous industry. In 2009 A.M. Best estimated that the self-insured property casualty market was $ 169.9 Billion and that does not include health Care. This is SIIA’s franchise. We start off 2013 with several important SIIA events. First up is the SelfInsured health Plan executive Forum (formerly known as the TPA/Mgu excess Insurer executive Forum) March 20-22, 2013 at the beautiful J.W. Marriott Desert Springs resort in Palm Springs, CA. The educational focus for this event will be expanded to address the interests of plan sponsors, in addition to third party administrators and stop-loss entities. Following the executive Forum is the 27th Annual legislative and regulatory Conference April 17-18 in Washington, DC. This is an unprecedented opportunity to hear directly from the policy-makers who will be in the process of shaping the health policy agenda in 2013 and beyond. One of the highlights of the legislative and regulatory Conference is experiencing the political process first hand by participating in the “Walk on Capitol hill.” This is a unique opportunity to meet with your federal legislators in their Capitol Hill offices. SIIA staff sets up your appointments and provide you with “talking points” and lobbying materials in advance of your meetings. This is an important opportunity for SIIA members to get involved at a crucial time. Whether you are involved in health care, workers’ compensation, risk retention groups or other forms of self-insurance, the federal government will be playing an increasing role your business. As we see challenges ahead, new opportunities will arise and educating members will be an important part of SIIA’s agenda this year. I look forward to serving as your President in 2013 and seeing you at SIIA events! n

January 2013

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The Self-Insurer

| January 2013

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

2013 Board of directors

committee chairs

ChAIrMAN OF The BOArD* John T. Jones, Partner Moulton Bellingham PC Billings, MT

ChAIrMAN, AlTerNATIve rISK TrANSFer COMMITTee Andrew Cavenagh President Pareto Captive Services, llC Conshohocken, PA

PreSIDeNT* les Boughner executive vP & Managing Director Willis North American Captive + Consulting Practice Burlington, vT vICe PreSIDeNT OPerATIONS* Donald K. Drelich, Chairman & CeO D.W. van Dyke & Co. Wilton, CT vICe PreSIDeNT FINANCe/ChIeF FINANCIAl OFFICer/COrPOrATe SeCreTArY* Steven J. link executive vice President Midwest employers Casualty Company Chesterfield, MO

directors ernie A. Clevenger, President Carehere, llC Brentwood, TN ronald K. Dewsnup President & general Manager Allegiance Benefit Plan Management, Inc. Missoula, MT

ChAIrMAN, gOverNMeNT relATIONS COMMITTee Horace Garfield vice President Transamerica Employee Benefits louisville, KY ChAIrWOMAN, heAlTh CAre COMMITTee elizabeth Midtlien Senior vice President, Sales Starline uSA, llC Minneapolis, MN ChAIrMAN, INTerNATIONAl COMMITTee greg Arms Co-Leader Mercer Marsh Benefits global leader, employee health & Benefits Practice Marsh, Inc. New York, NY

SIIA New Members regular Members company name/ Voting representative Jeffrey Simpson, Attorney, gordon, Fournaris & Mammarella, PA, Wilmington, De gail Doran, Chief Operating Officer, Physicians health Plan of Northern Indiana, Inc., Fort Wayne, IN Doug Truax, President, veritas risk Services, Oak Brook, Il

employer Members larry hightower, CeO, erlink, Inc., Atlanta, gA

ChAIrMAN, WOrKerS’ COMPeNSATION COMMITTee Duke Niedringhaus vice President J.W. Terrill, Inc. St louis, MO

elizabeth D. Mariner executive vice President re-Solutions, llC Wellington, Fl Jay ritchie Senior vice President hCC life Insurance Company Kennesaw, gA

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The Self-Insurer

| January 2013

January 2013

The Self-Insurer