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November 2012 | volume 49

November 2012 The Self-Insurer (ISSN 10913815) is published monthly by Self-Insurers’ Publishing Corp. (SIPC), Postmaster: Send address changes to The Self-Insurer P.O. Box 1237 Simpsonville, SC 29681

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From the Bench

ArT gallery: The Next Big Thing

New guidance regarding employer Shared responsibility (i.e., “Pay or Play”) rules and 90-day Waiting Period limitation

the three legged Stool by Andrew Cavenagh

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SIIA Chairman Speaks

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2012 Self-Insurers’ Publishing Corp. Officers James A. Kinder, CeO/Chairman erica M. Massey, President lynne Bolduc, esq. Secretary

The Self-Insurer | November 2012

The

Three Legged Stool by Andrew Cavenagh

November 2012

The Self-Insurer

three-legged stool is a wonder of physics. It is more stable than a fourlegged stool and can sit stably on an uneven surface, as the ends of the three legs are always in the same geometric plane.

Most stools have legs that are angled slightly outward. This creates friction in three opposing directions, which adds to the stability. A well-designed threelegged stool also positions each of the legs equidistant from each of the other two legs, creating a ‘perfect triangle’.

The stool will become increasingly less stable if one leg is pulled closer to another, as it changes the weight distribution and the inherent balance and tension amongst the legs that created the stability. In many ways a group captive is similar to a three-legged stool. There are three principle entities in the structure: the employers, the stop loss company, and the group captive itself. each one of these ‘legs’ has a contractual relationship with the other two legs, as shown in the following diagram:

Employers

Group

Stop Loss Company

Captive

each of the legs in this relationship needs to be independent and have a competent entity representing its interests. The employers are represented by their brokers/consultants and the stop loss carrier is typically quite adept at looking out for its own interests. The piece that is often over looked is the group captive itself. This leads to “lyall’s Fundamental Observation”: “The most important leg of a three-legged stool is the one that’s missing.” There are many group captives up where either the broker or the stop loss Stop Lset oss carrier is responsible for setting up and managing the group captive. This equates to Company pulling one of the stool’s three legs closer to another. At a minimum, it decreases the stability and if pulled far enough, the stool topples over.

There are three contracts that make up the group captive program. If any of these contracts is not negotiated at arm’s length, the structure is weakened. It is difficult to have an arm’s length transaction if the same entity is negotiating two sides of an agreement.

There are programs where the captive is owned and controlled by the stop loss carrier. This means that the stop loss carrier is negotiating both sides of the reinsurance agreement, which is a conflict of interest as every dollar not ceded to the captive is an extra dollar of premium for the stop loss carrier. These programs are often set up to maximize the returns for the carrier on the backs of the group captive. An independent manager can ensure competitive terms initially and in future years, creating a more stable program. There are also programs where the captive is ostensibly independent but is actually controlled by the broker (there is only one broker permitted and the broker chose and can remove the manager). This puts the broker in a very tough position and potentially exposes them to a conflict of interest claim. At some point, they will need to make a decision in favor of the group captive that is to the detriment of one of their clients, to whom they have legal and fiduciary responsibilities. An independent company, not owned or controlled by any stop loss carrier or broker, is best suited to be a manager of a group captive. This independence allows the manager to focus our efforts purely to the benefit of the group captive, creating long-term stability and maximizing performance. n Andrew Cavenagh is Chairman of SIIA’s Alternative Risk Transfer Committee. He is the founder and Managing Director of Pareto Captive Services, LLC and can be reached at Cavenagh@paretocaptive.com.

Group

Captive

The Self-Insurer

| November 2012

bench From the

by Thomas A. Croft, Esq.

A Stroll down Memory lane

udicial decisions in the stop loss arena arrive in fits and starts, but column deadlines don’t. Thus, in some fallow months over the years, I have had the luxury of pretermitting a sometimes tedious examination of recently decided cases in favor of a more relaxed and freewheeling discussion of a variety of industry topics from a legal perspective. Sometimes, I have even resorted to attempting humor. This is such a month, though I don’t promise any laughs. rather, I thought it might be of interest to see where we’ve come over time on several issues I wrote about way back in 2004, and others. let’s take a short stroll down Memory lane… The Self-Insurer, April 2004: “If We Pay, Will You?” We took a hard look at the risks of stop loss carrier/Mgu

November 2012

The Self-Insurer

meddling in the affairs of a Plan, and explored the legal dangers of answering the ubiquitous question framed in the title. We also took serious note of the eighth Circuit u.S. Court of Appeals’ affirmance of the case that first rejected the right of a stop loss carrier to “second guess” the decision of a Plan Administrator, Computer Aided Design Systems, Inc. v. SAFeCO life Ins. Co. (“CADSI”). Where are we now with these issues? If my anecdotal experience is any measure, Mgus and carriers have wised up to the fact that telling the TPA (and thus the group) how they are likely to adjudicate an upcoming stop loss claim or advance funding request is something to be avoided. I haven’t heard of that particular fact pattern being repeated in any reported case

since CADSI itself. So that’s progress. But the larger issue, concerning Mgu/ carrier intrusion into the operations of a Plan, is alive and well. I see it arise today most commonly in the context of “pro-activism” by Mgus and carriers in an effort to control costs of claims, as I am often consulted about the risks of a particular proposed program of cost control at the Mgu level. For example, most everyone understands that an Mgu/carrier can’t take over negotiations with medical providers directly, or tell a TPA what vendors it must use for claim review. On the other hand, most everyone believes that there is nothing wrong with an Mgu making suggestions or recommendations to its TPAs about vendors. It’s the gray area in between where some careful thought and advice is often needed. For example, does it

cross the line to incentivize Plans with carrier/Mgu negotiated discounts with third-party vendors? In other words, would strong economic incentives offered by the carrier/Mgu for using its “preferred” vendors amount to de facto control – or at least impermissible influence--over Plan decisions? unfortunately, there have been no court decisions delineating the limits of appropriate Mgu/carrier involvement in the cost containment process, and thus we are left to walk the tightrope between pro-action and impermissible interference at our peril. Stay tuned. As to the other issue addressed in the article – a stop loss carrier’s right to “second guess” a Plan’s claims decision – we have witnessed a good deal of litigation and uncertainty since 2004. Some cases have relied on CADSI to, in effect, eviscerate a carrier’s ability to make an independent determination about whether a given claim was properly paid under the terms of the Plan, most notably in eligibility situations. Others have reached opposite results, expressly noting certain policy language reserving the carrier’s right to do so, despite incorporation by reference of the Plan document into the stop loss contract. These “tug-of-war” scenarios between the power of a Plan Administrator and a stop loss carrier/Mgu over who has the last word on whether claims have been paid consistent with the terms of the Plan are likely to continue. As more federal Courts of Appeal weigh in on the issue, we may see increasing clarity on this score with time. In the meantime, again anecdotally, I am witnessing an escalation of words from both sides. Plans seem to be beefing-up their language giving “sole and absolute discretion” to the Plan Administrator to interpret the Plan, make decisions concerning eligibility, and claims, while certain stop loss carriers have amended their policy forms (and sometimes their Proposals as well) to clarify and underscore their right to make an independent judgment

on these issues for purposes of adjudicating claims under the stop loss contract. Both sides are being creative. The advent of the “mirroring” phenomenon (where stop loss carriers eliminate policy exclusions and rely solely on Plan language to protect themselves) has upped the stakes considerably. On the stop loss side, there has yet to be developed any judicially foolproof policy language that will make sure the carrier hasn’t effectively handed over its checkbook to its insured when it comes to benefits decisions under the Plan, although efforts at drafting it have continuously evolved ever since the decision in CADSI. Where this war of words will ultimately end remains to be seen. In any event, both Plans and carriers are paying careful attention to judicial developments in this area, with good economic reason. So am I. The Self-Insurer, September 2004: “let’s get Back to Basics: The Dangers of role Confusion” We took a look at several problem areas in industry structure and practice, including stop loss carrier ownership of TPAs, the proper loyalties of the Mgu, and the meaning of “paid” in stop loss contracts, among other things. We noted that current industry practice in these areas was inconsistent and often oblivious to the appropriate legal roles that should be played by the various entities involved, resulting in confusion, conflicts of interest and harm to the industry generally. Has there been any significant improvement since then? I sense that the “paid” requirement in stop loss contracts is becoming increasingly understood in the marketplace by self-insured groups, brokers, and their TPAs. less frequently do groups and their brokers mistakenly assume that, if the group funds a claim by transferring money to its TPA to pay it, then “payment” of the claim has occurred under their stop loss contract. In other words, the “role confusion” between the TPA as agent of the group versus agent of the insurer (as is the case in the fully insured world) is abating. Also, TPAs are becoming less likely to insist that their mere printing of checks, without delivery or mailing within the stop loss contract period, amounts to payment. Nevertheless, missed payment deadlines will continue to occur, of course, which may lead to creative after-the-fact legal efforts to circumvent the “paid” requirement by novel construction of various policy language. See the discussion of the Claire’s Stores case in The Self-Insurer, May 2012, issue for a recent example of this. Stop loss carrier ownership of TPAs (and lately, Mgu ownership of TPAs) continues to be a problem in my opinion. The trouble is either widely unrecognized or, more likely, widely ignored, as these arrangements are becoming increasingly prevalent in the marketplace. The issue remains one of inherently divided loyalties. In the self-insured world, the TPA is the agent of the group, and therefore owes the utmost good faith to the group and must act soley in the best interests of the group. This is basic agency law. The economic interests of a stop loss carrier are, of course, aligned adversely to those of the group, and therein lies the rub. Some carriers have “solved” this problem by setting up their TPAs as wholly or partially owned subsidiaries of the carrier, or created a structure whereby both the TPA entity and the stop loss carrier entity are sister corporations, ultimately owned by a common parent. But no matter how the arrangement is structured, the truth is that the TPA’s loyalties are inalterably conflicted – does it act solely in the best interest of the group at all times, or does it take into account the economic interests of its owner? Conflicts can certainly arise in the claims context, where an independent TPA is usually the group’s best advocate with a carrier questioning the payability of a given claim, often threatening to move its client’s business elsewhere if the claim is not paid. Does a TPA owned by an entity that loses money if the TPA’s advocacy is effective have the same incentive? Is the threat to move the business remotely credible? Of course not. The conflicts can manifest more subtly, too. The TPA is the repository of extraordinarily valuable information about the group from an underwriting perspective. This information is usually freely shared with

The Self-Insurer

| November 2012

the “sister” stop loss carrier, and that carrier often waives any rights to contest disclosure when making a stop loss bid as a result. Yet, when the group’s broker wants to “shop” her client’s stop loss business, the TPA often charges exorbitant fees to run critical reports, if it will provide the desired information at all. The group is thus handicapped in its efforts to locate the best stop loss coverage at the best price. Whether these kinds of issues will ever be litigated and decided by the courts is unclear. But in the meantime, structural purists like me will continue to be concerned for the integrity of the industry. MGUs representing multiple stop loss carriers still have their share of conflicts of interest too, though since these tend to impact sophisticated carriers with the ability to monitor and correct the situation themselves, and not insured groups, they are far less troubling from an industry perspective. An Mgu representing more than one carrier owes fiduciary duties to each. Most of the tensions relate to an Mgu’s favoring one of its carriers at the expense of another, or in making claim “exceptions” to preserve business relationships with brokers/TPAs. The cost of the claims exception is borne by one carrier, but the future business it preserves may well redound to the benefit of one of the other carriers the MGU represents.

the Self-Insurer, July 2008: “So, What’s the Big deal?” We focused on the near-universal practice of issuing stop loss policies months into the contract term. We noted the legal problems that this can cause when a 50% notice or a claim comes in before the policy is issued, such as waiver of otherwise valid disclosure issue defenses. We also discussed the practical problem of “surprise,” i.e., the flavor of unfairness that can permeate what would otherwise be a clear, written deal between the carrier and the group when many of the specific

terms of that deal are revealed only after a purchase decision has been made by the insured, when it may be too late to obtain different coverage because claims have occurred since contract inception. The terms of a Proposal may reveal much, but certainly not all. Are these things still a problem? Progress has been made in the last several years, as far as I can tell. Mgus and carriers have increasingly put controls in place to prevent automatic policy issuance once a 50% notice or a claim has come in the door. This guarantees some knowing human involvement in the decision to issue a policy or not in light of the pre-issuance claim or notice. Some progress has been made as well to address the problem that all the specifics of the stop loss contract agreement aren’t out on the table in plain view before a deal is done. More carriers are posting their policy forms on their websites, which I think is an admirable and beneficial practice. Brokers or TPAs then have ready access to them, and can be fairly criticized if they fail to investigate the terms of the prospective stop loss contract before recommending that their client accept a particular stop loss proposal. In this way, brokers and TPAs can help their clients avoid the “pig-in-a-poke” syndrome when buying stop loss coverage, and carriers can insist on compliance with contractual terms down the road without the scent of unfairness in doing so. So concludes our brief look back. Where will we be on these and the many other issues bound to arise five or ten years from now? here’s to hoping we’ll all be around to find out. n All of the author’s previous fifty-two “From the Bench” articles are available at www. stoplosslaw.com, free of charge.

November 2012

The Self-Insurer

| November 2012

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Educational confErEncE & Expo OCTOber 1-3 • 2012

recap

JW MArriott indiAnApolis, in

32ND ANNuAl NAtioNAl

“powerful Message, Forceful Actions:” SIIA raises the Game at Conference

IIA President John Jones stepped to the podium to open the 32nd Annual educational Conference & expo following a stirring newsreel-type video documenting the organization’s opposition to various federal and state government encroachments of selfinsurance that included a stare down of a California legislative committee by Chief Operating Officer Mike Ferguson.

have become educated about self-insurance through the efforts of SIIA and other organizations. “When we talk now on Capitol hill the members of Congress understand our issues and pay close attention.” Keynote speaker John Sculley, a near-legendary American business leader who formerly led Pepsi-Cola and then Apple Computers, said, “The self-insured employee health care industry is now at a pivotal point.” he cited cultural, legislative and technical advances that are helping self-insurance present “a big-game brand that can change the game.” The conference was tightly organized into 45 sessions in four tracks, many of them presenting panels of industry leaders. In all, more than 100 executives and industry experts spoke. A series of seminars addressed the projected effects of health reform from the perspectives of employers, TPAs and insurers/Mgus. highlights of those sessions are summarized below along with example programs from other educational tracks.

“This is a powerful message about SIIA’s forceful actions against the political challenges to self-insurance,” Jones said, leading a round of cheering applause for the video that opened the conference on a tone of combative defense of self-insurance. Thus began SIIA’s most politicallypointed conference built on the theme, “raising the game.” The video provided sound bites and graphics that demonstrated SIIA’s reach into federal and state governmental actions including committee hearings of the California bill that would set stop-loss attachment points damagingly high. At that hearing Ferguson was shown promising that the state would be challenged in federal court for a violation of erISA if the bill were enacted. Subsequently the bill was withdrawn from consideration in the current session. As part of the opening ceremonies, Jay ritchie, chair of SIIA’s Political Action Committee said, “We’re feisty and we fight. When we get in front of legislators our arguments usually sell them.” ritchie noted that unlike in previous years, members of Congress

Liz Midtlien, Andrew Fujimoto, Dirk Visser, Daniel Dugan and Mark Schmidt health Care reform and Other hot Topics – The employer Perspective – Panelists: Diane harrington, human resources Director, Otto environmental Systems North America, Inc.; hicks B. Morgan, Treasurer and general Counsel, Morgan Building & Spas, Inc.; Stephanie hearn, executive Director, Butler health Plan comprised of 14 Ohio school districts. Moderator: Michael Wozny, lifeWise Assurance Company. The gist: • health reform effects including a large increase in adult children of insured employees represent a two percent increase in premium for a plan. • Birth control coverage will cost $250,000 one panelist reported. • voluntary wellness programs now offer participants co-pay discount incentives • One employer is considering either a contracted in-house health care center or a full-time staff nurse. • regarding possible regulation by states of minimum stop-loss attachment points, a panelist said that could change the employer’s attitude toward self-funding their plan. • A panelist noted that it is more cost effective to maintain their plan than

The Self-Insurer

| November 2012

Dugan, President and CeO, North America Administrators. Moderator: liz Midtlien, Starline group. The gist: • health reform is playing out differently in different markets. • State exchanges will provide business opportunities for TPAs to provide services. • TPAs are flexible and innovate in various areas and have expertise in dealing with complex claims and cost issues.

pay the government penalty for not providing a plan and, in fact, may bring more employees into its plan rather than into a state exchange with resulting lower costs to cover younger employees. • When state exchanges begin an employer predicted that it would

maintain its plan in order to continue attracting good employees. health Care reform and Other hot Topics – the TPA Perspective – Panelists: Andrew Fujimoto, CeO, AmeriBen; Dirk visser, CeO, Allegiance Benefit Plan Management, Inc.; Mark Schmidt, CeO, Meritain health; Daniel

• TPAs must quantify their value with analytical information rather than just raw data. • employers of 50 or fewer may opt out of their plans and a large number of people may be going into state exchanges to take advantage of subsidies, with major implications on costs. • One panelist commented, “I’ve

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been going out of business since hillarycare and I’m still here.” That TPA has grown by one-third in the last two years with 70 percent of new business coming from fully-insured plans. • health reform is not a threat to one TPA which has remained independent and joined a national network “so we can complete with the BuCAs.” • under health reform, one TPA will maintain its strategic direction but change some tactics focusing on network discounts along with improved outcomes. • Human resources and benefits executives have to be educated about how their employees will be better off by reducing healthcare costs: “If we don’t do this, in five to seven years we will have real national health care.” health Care reform and Other hot Topics – The Stop-loss Insurer/ Mgu Perspective – Panelists: Michael Meloch, President TPAC underwriters, Inc.; heather lavalle, President, Employee Benefits Distribution, ING Employee Benefits; Paul Fallisi, President, Munich Stop-loss, Inc.; Michael Sullivan, President & COO, hM Insurance group. Moderator: Peter robinson, reSource Intermediaries, Inc. The gist: • Increased exposure through covering adult children and uncapping lifetime limits should prompt increased rates, “but we can’t do that,” one panelist said. • The issue of better information is critical in order for plans to instill discipline and cost containment. • Some new business is coming from brokers instead of TPAs with a resulting falloff of claims information. • Dependent coverage hasn’t been a major factor, but the

November 2012

The Self-Insurer

Stephen Hayes, Fox News exposure to unlimited claims is real: a claims increase of 10 to 15 million in one database. • PPACA wasn’t healthcare reform so much as it was insurance reform. • underwriters must dig into claims with provider networks to assure the claim is in line with policy language – an “ounce of prevention” strategy. • unlimited maximum is the wild card: “eventually one of us is going to get burned with a 10 to 15 million dollar claim – I can see us setting up a cat pool to kick in at $5 million.” • Support of captives was split. Pro: A panelist said he is looking at captives and is bullish on them. Con: “going in with a group of other employers exposes you to a lot of unknown risk. If an employer wants to take more risk he can raise the deductible.” • An audience member pointed out that the California bill to raise stoploss attachment points would protect its future exchange while stifling self-insurance. A panelist responded: “Those with access to state insurance commissioners should be in front of them now with SIIA’s position.” Captive Manager Panel Discussion – Employee Benefit Captives – Panelists: Brady Young, President & CeO, Strategic risk Solutions, Inc.; Kathleen Waslov, Senior vice President, Willis North America, Inc.; Kirk Mooneyham, Managing Director, Captive Management Services, Wilmington Trust SP Services, Inc. Moderator: les Boughner, Willis North American Captive & Consulting Practice. The gist: • This session occurred just after the Department of labor suspended its “exPro” process for applicants to receive fast-track approval of otherwise “prohibited transactions” involving captives insuring employee benefits. • A panelist said the DOL standards for approving a benefits captive has been clear plan benefit enhancements and establishing an independent fiduciary to assure the plan is in the interests of participants. • A panelist said the “hottest” use of captives now is by small to mid-size employers of up to 500 employees.

• Among corporate organizations a captive can generally serve as a shock-absorber between losses sustainable by the local organization and the corporation. • One barrier to captive formation was described as the lack of interest by a potential fronting carrier that would rather lower its rates and insure directly.

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• “Things have to align” to make a captive feasible, one panelist said, citing startup costs and the current soft market as possible barriers. • “Taking some risk makes sense for many organizations,” a panelist said, adding that captives’ premium payments are an immediately deductible cost. • A panelist said the IrS is preparing an opinion about whether a health benefits stop-loss captive comprises required third-party risk: “If yes, it would open the floodgates to captive formation,” another panelist added. • Captives are still forming and uncer tainty doesn’t seem to be slowing them down, a panelist added. • A multi-hospital group captive was cited as an influence to restrain medical costs as providers become insurers and in some cases own their TPA. “Resulting efficiencies and improved outcomes will actually reduce both their revenues and costs,” a panelist noted. Top 10 Things Self-Insured Workers’ Comp Payers Can learn from the Self-Insured group health Plan World to Better Control Costs – Panelists: Jennifer Christian, MD, President Webility Corporation; David Iskowe, Founder and Chairman, enable Comp; Jason Davis, vice President, u.S. Division, global excel Management, Inc.; robert Jackson, COO, Stratose, Inc. Moderator:

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November 2012

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Steven link, Midwest employers Casualty Company. The gist: • Discussion was so spirited among panelists and attendees that only five of the planned “Top 10” were covered by the closing bell. • #10: understanding the strategic differences between the two systems: group health’s main motivation is focused on controlling medical costs and reducing hospital time while WC’s motivation is functional recovery of the patient to return to work which may costs more. • #9: high-risk, vulnerable patients drive costs in both systems: how are such patients identified so more of what they need from a care standpoint is provided to ensure a high quality outcome?

market firms as well as multinational companies for their international (non-US) benefit programs are all in the game. Healthcare reform is contributing to the increased interest, particularly for mid-sized firms who may seek to self-insure employee medical plans for the first time and pool part of their claims cost with the added protection of medical stop-loss coverage. It has been 12 years since the first life captive program under ERISA was approved by the u.S. Department of labor. Since then there have been approximately 30 large employers who have taken this route, which has slowed in recent years, in part to the relatively low interest rate environment. In addition to life coverages, disability and retiree health have also been incorporated in such captive solutions. On the international side, there are more than 70 captive benefits arrangements in force, the majority with global 1000 companies. In most instances, the captive solution has evolved from an existing multinational pooling program which links together on a financial basis the local group insurance coverages of single employers across multiple countries. There are more than 3500 pooling programs in force today, generating in excess of $7 billion of insured premiums.

• #8: Selecting the “right provider” to deliver appropriate care is a cornerstone of both systems… But how are such providers identified? • #7: What role do mental health services play in delivering quality care and a quality outcome to the injured worker in both systems? • #6: Drug costs are the fastest growing component of health care and workers’ compensation costs. how are these costs contained effectively? hot Topics in International SelfInsurance/Alternative risk – Presented by greg Arms, Co-leader, Mercer Marsh Benefits, Global Leader, Employee Health & Benefits Practice, Marsh Inc.

After the educational sessions concluded, the conference wrapped up with a fun social event. The Oktoberfest party, sponsored by Stratose, was held at the local german restaurant The rathskellar. Attendees enjoyed a relaxing evening with german food and entertainment from a local band. For more information on future SIIA events, including next year’s National Conference & expo in Chicago, please visit www.siia.org. n Additional Oktoberfest pictures on the next page.

greg’s summary: More companies are showing interest in alternative risk financing and captives than in recent years in order to help optimize their corporate employee benefits spend. large self-funded employers, middle

The Self-Insurer

| November 2012

Stratose group

November 2012

The Self-Insurer

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The Self-Insurer

| November 2012

Art gAllerY by Dick Goff

the Next Big thing

e are all familiar with near-weekly announcements of The Next Big Thing by consumer products companies as they introduce the i-this and the hybrid-that. By contrast, the insurance industry usually doesn’t provide such TNBT excitement. I believe The Next Big Thing in ArT is being brought to us by America’s First State, as Delaware proudly proclaims itself, because it was the first to ratify the u.S. Constitution. There is an ArT structure there known as Series llC captives – envision a train whose locomotive is a parent captive pulling any number of cars which are mini-captives known as series business units (SBu). All of the cars in this train together pay one premium tax to Delaware and all are included in one annual audit and every three to five years or so are subject to a regulatory review. Delaware’s series llC captives are similar to other states’ protected or incorporated cell captives but with greater efficiency, economy and regulatory flexibility. This concept began as a super-flexible series llC corporate structure in corporation-friendly Delaware,

November 2012

The Self-Insurer

and was adopted by the state’s Department of Insurance and added into its captive statue a year or so ago. Small to mid-sized companies are joining Delaware series llC captives because this structure represents a new way to manage enterprise risk for which coverage is either not available or is too quirky for traditional insurance companies to bother with.

examples are as numerous and unique as the number companies that have formed SBus or are in the process: The manufacturer of medical or technical products whose business could be hurt by the loss of a specialized distributor. A large medical practice with a significant proportion of Medicare patients whose economic value could be adversely affected by national health care reform or other regulatory intervention. A government contractor who could lose a significant portion of its revenue because the feds can vacate contracts without recourse. Those are simply three examples of actuarially priced coverages that are underwritten by Delaware series llC captives, and there are plenty more just as unique. Additonally, possible byproducts of enterprise risk management for owners of SBus are favorable tax and estate planning opportunities. I think the design and intent of the series risk funding structure is the most forward thinking, creative, user-friendly ArT funding structure to be introduced into the captive arena to date. I also think that Delaware is not going to be able to remain the exclusive source of series llC captives moving ahead.

At this time, I’m not aware of the far-flung ART community fully grasping the series structure’s flexibility in utilization. Actually, some domiciles may be looking at the series llC structure as one that could reduce premium taxes because of the allin-one premium tax that Delaware receives. But this would, in my view, be shortsighted because if Delaware’s experience could be projected to other domiciles, they would make up the lost revenue on volume. Also Delaware SBu owners probably wouldn’t have formed a captive elsewhere because of the higher economic thresholds. It is unfortunate that Delaware’s captive regulators are currently restricting the utilization of series llC captives to only 831(b) captives with their inherent financial limitations. Without this current regulatory restraint, I can see series llC captives

becoming utilized across the entire ArT spectrum to include insurance companies, general agents, retail agencies and many others. There’s no reason such captives couldn’t be adapted for most property and casualty coverages funding, as well as those coverages within the employee benefits arena. Access could be provided to all of corporate America, small to midsize employers and not to forget, associations and affinity groups of all sorts.

series llCs. As an example, Tennessee is among a handful of states whose corporate statutes currently allow this structure – in fact its recently revitalized and aggressive Captive Bureau reportedly is taking a hard look at series llCs. Watch out Delaware, competition is coming! n Dick Goff is managing member of The Taft Companies LLC, a captive insurance management firm and Bermuda broker at dick@taftcos.com.

The series llC risk funding model, regardless of type of coverage, represents greater efficiency and negates the economic redundancies of the protected cell and incorporated cell captives cited above. Any captive domicile could apply the series ArT funding model, particularly those states whose corporate statutes already allow

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The Self-Insurer

| November 2012

We can’t stop misfortune. We can stop loss.

Becoming a top tier Stop Loss carrier doesn’t just happen. For 35 years, our dedication to creative solutions has made us the top choice for our clients. Not all Stop Loss carriers are created equal. Today’s businesses have unique needs that demand expert-level service. That’s been the foundation of our Stop Loss offering from the beginning. We know it’s not just the plan; it’s the team behind it. Your business is unlike any other. It’s time for a Stop Loss carrier that’s unlike any other, too.

For more information, contact your local ING sales representative or call us at 866-566-2316.

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November 2012

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Maximize the Value of Your Healthcare Plans with the FAIR Health Employer Toolkit

AIR Health offers a wealth of resources to make your healthcare benefit plans work

harder for you. Take advantage of free tools or ask us about customized options. Cost estimators for medical and dental procedures Employee education materials Workshops for HR staff Benchmark claims data and custom analytics FAIR Health tools help you empower employees to make informed healthcare expense decisions, save on administrative costs and guide plan design and claims adjudication strategies. FAIR Health is an independent not-for-profit organization whose mission is to bring fairness and transparency to health insurance information.

Download a free Employer Toolkit at http://www.fairhealth.org/resources For more information, contact FAIR Health at info@fairhealth.org

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The Self-Insurer

| November 2012

PPACA, HIPAA and Federal Health benefit mandates:

Practical

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

Q&A

New Guidance Regarding Employer Shared responsibility (i.e., “pay or play”) rules and 90-day Waiting period limitation

eginning in 2014, “applicable large employers” are subject to penalties under new Code Section 4980h in certain situations where such employers fail to offer minimum essential coverage to their full-time employees, as defined by new Code Section 4980H, or fail to offer minimum essential coverage to full-time employees that is both affordable and provides minimum value. The requirements set forth in Section 4980h, which was added by the Patient Protection and Affordable Care Act (“ACA”) are often referred to as the “employer shared responsibility” or “pay or play” requirements. The ACA also added new Section 2708 to the Public health Service Act (“PhSA”), which prohibits most group health plans from imposing a waiting period in excess of 90 days. The 90-day waiting period limitation is effective with plan years beginning on or after January 1, 2014. The IrS recently issued two notices related to the Code Section 4980h penalties and the Section 2708 waiting period limitation. First, the IrS issued Notice 2012-58, which describes a safe harbor method for applicable large employers to use to identify full-time employees for purposes of Section 4980h (“4980h Safe Harbor”). The IRS also issued Notice 2012-59, which clarifies certain aspects

November 2012

The Self-Insurer

of the Section 2708 waiting period limitation, including but not limited to the interaction of Section 2708 with Section 4980h.

employer status. The IRS has yet to issue guidance regarding the definition of applicable large employer.

This article provides a brief overview of the rules set forth in Code Section 4980h and PhSA Section 2708 and the related guidance from the Notices.

Full-time Employee Defined in Code Section 4980H

Overview of code Section 4980H Beginning January 2014, New Code Section 4980h prescribes two different penalties related to coverage that an applicable large employer offers or fails to offer to its full-time employees and their dependents during a month. Practice Pointer: PHSA Section 2708 allows a group health plan to impose a waiting period of 90 days or less. No penalties are assessable during months that coverage is not provided to a fulltime employee during a permissible waiting period. employers who are not applicable large employers are not subject to the Code Section 4980h penalties (but plans sponsored by employers that are not subject to the 4980h penalties may be subject to PhSA Section 2708).

Applicable large Employer An applicable large employer is any employer who employed on average at least 50 full-time “equivalents” on business days during the preceding calendar year. Full-time equivalents are the sum of full-time employees as defined by Code Section 4980H, and an additional number equal to the total hours of service during a month of those who are not full-time employees divided by 120. Practice Pointer: The 4980H Safe Harbor does not apply to the determination of applicable large

A full-time employee for purposes of Code Section 4980h is any employee who, on average, is employed at least 30 hours of service per week during a month. Calculating full-time status each month and ensuring that the appropriate coverage is provided for each such month creates significant administrative burdens for many employers. Consequently, the IrS has created the 4980h Safe harbor. Practice Pointer: The 4980H Safe harbor is just that – a safe harbor. Employers are not required to use the 4980H Safe Harbor to determine fulltime status of its employees.

the 4980h Safe harbor described in Notice 2012-58 The 4980h Safe harbor provides an optional method for applicable large employers to use to determine full-time status for purposes of Code Section 4980h. The 4980h Safe harbor generally operates on the following principle: applicable large employers will establish a “measurement period” chosen between 3 and 12 months during which an employee’s hours of service are measured and each employee that averages 30 hours of service per week during that measurement period must be treated as full-time (regardless of hours actually worked), and offered qualifying coverage, during a subsequent stability period (same as measurement period but generally not less than 6 months) to the extent that such employees remain employed during the stability period. Practice Pointer: For purposes of

Code Section 4980H, employers will no longer be able to rely on conventional or historical definitions of “full-time” status and must instead define fulltime employee for purposes of the applicable large employer and penalty determinations according to Code Section 4980H. The manner in which the 4980h Safe harbor is applied differs slightly depending on whether the employee is a new employee or an ongoing employee.

Applying the 4980h Safe harbor to New Employees There are essentially two types of new employees for purposes of the 4980h Safe harbor: an employee who is reasonably expected on the date of hire to work full-time (“New employee Class #1”) and employees for whom it cannot be determined on the date of hire that the employee is reasonably expected to work full-time during the “initial measurement period” (“New employee Class #2”). employees in New employee Class Category #2 include employees whose hours may fluctuate over the course of the initial measurement period chosen by the employer or who are expected to work full-time only during a limited duration (e.g. a “seasonal employee”). employers must determine which of the two “Classes” the new employee fits. Practice Pointer: Code Section 4980H provides a definition of “seasonal” employee for purposes of determining applicable large employer status and identifies how seasonal employees impact that determination. However, neither the statute nor the guidance provides an official definition of “seasonal” employee for purposes of the 4980H Safe Harbor; however, the guidance indicates that employers may use a good faith interpretation through at least 2014.

The Self-Insurer

| November 2012

administrative period associated with the standard measurement period for ongoing employees).

If a new employee is in New employee Class #1, the employer must offer coverage that will begin following any waiting period adopted by the plan that complies with PhSA Section 2708 – i.e. within 90 days, at the latest. If an employee is in New employee Class #2, the employer may establish an “initial measurement period” during which the new employee’s hours are measured. No coverage is required to be offered to such employees during the initial measurement period. The initial measurement period may be anywhere from 3 to 12 months and may begin on the date of hire or, alternatively, the employer may establish an “administrative period” that precedes the initial measurement period, subject to certain limitations discussed more fully below. For example, the employer may begin the initial measurement period on the first day of the month following the date of hire. If it is determined during the initial measurement period that the employee is full-time, then the employee’s stability period must be no shorter in duration than the initial measurement period but not less than 6 months (the same rule that applies for ongoing employees), and it must begin either as soon as the initial measurement period ends or, following an administrative period, subject to certain limitations described more fully below. If it is determined during the initial measurement period that the employee is not full-time, then employee may be treated as other than full-time throughout the stability period for such employee (i.e. there is generally no penalty for failing to offer such employee coverage during the applicable stability period). In this case, the stability period for such employee cannot be more than 1 month longer in duration than the initial measurement period and in no event can it extend beyond the standard measurement period applicable to ongoing employees (including any

Special Rules for Administrative periods employers who choose to establish an administrative period must be aware of the following special rules: The total administrative period (i.e. combined period before and after the initial measurement period) cannot exceed 90 days in length. In addition to any other applicable rule, if an employee is determined to be full-time during the initial measurement period, then the administrative period and the initial measurement period together cannot extend beyond the last day of the first calendar month beginning on or after the employee’s first anniversary of the employee’s start date.

Applying the 4980h Safe harbor to ongoing employees Ongoing employees are defined in the guidance as employees who have been employed for one entire standard measurement period, which is the static period chosen by the employer used to measure the hours of service for existing employees. As with the initial measurement period, the standard measurement period may be anywhere from 3 to 12 months.

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If an employee is determined during the standard measurement period to work full-time, then the stability period must be no shorter in duration than the standard measurement period but not less than 6 months, and it may begin immediately following the standard measurement period or following an administrative period of not more than 90 days. Practice Pointer: Employers will likely

November 2012

The Self-Insurer

Stop Loss / Disability Income / Life / Limited Benefit Medical

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The Self-Insurer

| November 2012

establish a standard measurement and subsequent administrative periods to facilitate the employer’s annual enrollment period and plan year start date.

• Salaried and hourly employees

If an employee is determined during the standard measurement period to be other than full-time, then he or she may be treated as other than full-time during a stability period that follows the standard measurement period (i.e. there is no penalty for failing to offer coverage during that stability period). In this case, the stability period for such an employee cannot be longer than the standard measurement period.

• Future guidance regarding the 4980h Safe harbor

Varying Measurement and/or Stability periods employers may use measurement periods (both initial and standard) and stability periods that differ in length and/or starting and ending dates for the following categories of employees: • union and non-union

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• employees of different entities • employees located in different states

Notice 2012-58 indicates that Treasury and the IrS intend to issue regulations in the future that address the 4980h rules, including but not limited to the calculation of full-time status. Nevertheless, employers may rely on the 4980h Safe harbor with respect to measurement periods that begin in 2013 or 2014 and the associated stability periods. employers will not be required to comply with any subsequent guidance that is more restrictive until at least January 1, 2015. Practice Pointer: The employer shared responsibility requirements begin in January 2014; therefore, it appears that applicable large employers who wish to utilize the 4980H Safe harbor will have

to establish standard measurement periods that begin in 2013 so that coverage can be offered to full-time employees beginning January 1 2014.

PHSA Section 270890 day Waiting period limitation PhSA Section 2708 prohibits certain group health plans from imposing a waiting period in excess of 90 days. PhSA Section 2708, which was also added to erISA and the Code, applies to any group health plan other than a plan that provides excepted benefits, as defined by the hIPAA portability rules, and plans that do not have at least 2 active employees participating in the plan on the first day of the plan year. Practice Pointer: PHSA 2708 is not limited in application to full-time employees or to applicable large employers as the Code Section 4980H rules are.

The

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November 2012

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PhSA Section 2708 is applicable to both grandfathered and nongrandfathered plans with plan years beginning on or after January 1, 2014. • Notice 2012-59 • Notice 2012-59 provides the following guidance regarding the waiting period limitation in Section 2708: • Notice 2012-59 clarifies that a waiting period is the period of time that must pass before coverage for an otherwise eligible and enrolled employee and/or dependent begins. Being eligible for coverage means having met the plan’s substantive eligibility conditions (e.g. full-time or parttime status, hourly or salaried). however, eligibility conditions based solely on the passage of time is a waiting period and is limited to 90 days. Notwithstanding the above, a cumulative hours of service requirement not to exceed 1200 hours is not considered to violate Section 2708 as long as coverage begins on the 91st day after the employee satisfies the cumulative hours requirement. If a group health plan conditions eligibility on working a specified number of hours or working full time and it cannot be determined that a new employee is reasonably expected to work the requisite hours, Section 2708 is not violated if the employer imposes a measurement period to determine eligibility provided that the coverage for an eligible employee is made effective no later than 13 months from the employee’s start date or if the employee’s start date is not the first day of the month, the first day of the calendar month that begins more than 13 months from the employee’s start date. n

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The Self-Insurer

| November 2012

SIIA ChAIrMAN SPeAKS Alex Giordano

Our Sponsors, Good Sports All!

ur National educational Conference and expo last month in Indianapolis with its sports theme “Raising the Game” fit neatly with that city’s iconic sports venues. SIIA President John Jones said in his opening remarks, “This is the Super Bowl of the self-insurance industry” comparing our event to the NFl Super Bowl played in Indy’s lucas Oil Stadium – just a couple of blocks from the JW Marriott – last February. A starting field of SIIA golfers played to benefit the Self-Insurance educational Foundation (SIeF) on the 18 holes of Brickyard Crossing, the golf course that transits the world’s most famous auto racetrack, Indianapolis Motor Speedway.

here they are, for one last “shout-out” with our thanks for their support: Business Insurance (www.businessinsurance.com), the outstanding media source for business news, sponsored the exhibit hall signs. eMDeON (WWW.eMDeON.COM), provider of claims payment, clinical exchange and fraud-abuse management, sponsored the hotel key cards. ethiCare Advisors, Inc. (www.ethicareadvisors.com), medical claims settlement specialists, sponsored the welcome reception. healthFair (www.healthfair.com), the Joint Commission Accredited mobile-unit based health care provider, sponsored the exposure value package. healthx, Inc. (www.healthx.com), developer of self-service communications and data integration portals, sponsored the schedule of events pocket guide. hines & Associates, Inc. (www.hinesassoc.com), personalized managed healthcare provider accredited in case management, utilization review and disease management, sponsored the health care education track. hM Insurance group (www.hminsurancegroup.com), a recognized leader in stop-loss insurance, sponsored the official conference program. INeTICO, Inc. (www.inetico.com), provider of medical and dental cost containment solutions, sponsored the conference notepads and pens. ING Employee Benefits, (www.ing.us/individuals/products-services/ employeebenefits) offering stop-loss, accident, critical illness, life and disability income insurance, sponsored the badge lanyards and the registration counters. Maverest Dental Network, llC (www.mavarest.com), preferred provider dental network, sponsored Tuesday’s exhibit hall luncheon.

Sports-related games and special features were also detected in many of the presentations in the chock-full exhibit hall. But unlike your run-of-the-mill sports events, our 32nd annual National Conference produced no losers, only winners. In my opinion, the total conference experience was one of the most outstanding events SIIA has produced. A large measure of the conference’s success is due to the support of the companies that stepped up to the plate (we can’t leave out a baseball reference) to pay for many of the special features and events that made the conference such a great experience. 32

November 2012

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MDlive (www.mdlive.com), providing patients with on-demand access to board certified doctors and licensed therapists, sponsored Tuesday’s Keynote Speaker, John Sculley.

protect employers with self-funded medical plans, sponsored the name badge holders.

Midwest employers Casualty Co. (www.mwecc.com), provider of excess workers’ compensation coverage to self-insured employers, sponsored all directional signage.

Now, just for a moment try to imagine how your conference experience would have been changed without all these important sponsored services, and you’ll realize our debt of gratitude to all our sponsors. n

MultiPlan (www.multiplan.com), provider of healthcare cost management solutions, sponsored the conference newsletter. Optum (www. Optum.com), provider of Optum health, Optuminsight and Optumrx, sponsored Wednesday’s featured speaker Stephen hayes. Presidio reinsurance group, Inc. (www.Presidiore.com), with services including hMO, medical and ACO reinsurance, sponsored the alternative risk transfer education track. QBe North America (qbena.com and qbeah.com), provider of reinsurance, employer stop-loss, hMO reinsurance and other coverages, sponsored the wireless internet service. Safety National (www.safetynational.com), provider of excess workers’ compensation coverage to self-insured employers and groups, sponsored the conference tote bag and workers’ compensation education track. Seven Corners (www.sevencorners.com), provider of administrative, insurance and white-label services to u.S. and international employer groups, sponsored the Tuesday evening reception. Stratose (www.stratose.com), provider of proprietary data analytics and handson claims review, sponsored Wednesday’s conference-concluding Oktoberfest. Sun life Financial (www.sunlife.com/us), provider of stop-loss solutions to

The Self-Insurer

| November 2012

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

2012 Board of Directors ChAIrmAN of ThE BoArD* Alex giordano, vice President of Marketing elite underwriting Services Indianapolis, IN PrESIDENT* John T. Jones, Partner Moulton Bellingham PC Billings, MT VICE PrESIDENT oPErATIoNS* les Boughner, executive vP & Managing Director Willis North American Captive + Consulting Practice Burlington, vT VICE PrESIDENT fINANCE/ChIEf fINANCIAl offICEr/ CorPorATE SECrETAry* James e. Burkholder, President/CeO health Portal Solutions San Antonio, TX

committee chairs ChAIrmAN, AlTErNATIVE rISk TrANSfEr Andrew Cavenagh, President Pareto Captive Services, llC Conshohocken, PA ChAIrmAN, GoVErNmENT rElATIoNS Horace Garfield, vice President Transamerica Employee Benefits louisville, KY

| Self-Insurer The Self-Insurer November 2012 | The

regular Members company Name/ Voting representative Michael McCollom, vP Sales & underwriting, Automated Benefit Services, Sterling heights, MI

ChAIrwomAN, hEAlTh CArE elizabeth Midtlien, Senior vice President, Sales Starline uSA, llC Minneapolis, MN

gerard Szatkowski, President, Bases loaded, Inc., Charlotte, NC Tom McCaw, President, Capitol Administrators, roswell, gA

ChAIrmAN, INTErNATIoNAl greg Arms, Global Head, Employee Benefits Practice Marsh, Inc. New York, NY

greg rudisill, SvP of Strategic Partnership, Careington Benefit Solutions, Frisco, TX grace lee, Castlight health, San Francisco, CA

ChAIrmAN, workErS’ ComPENSATIoN Skip Shewmaker, vice President Safety National St. louis, MO

Patricia O’Keefe, Director of Operations, Community health Plan, Monterey, CA Mary-Margaret Dale, Director of Marketing, DAvID Corporation, San Francisco, CA

Directors

Scott Fuqua, President, DiaTri, Mokena, Il

ernie A. Clevenger, President Carehere, llC Brentwood, TN

Mark Fiechter, National Sales Manager, europ Assistance uSA, Bethesda, MD

ronald K. Dewsnup, President & general Manager Allegiance Benefit Plan Management, Inc. Missoula, MT

Sam Perera, Shareholder, Mayer hoffman McCann P.C, Irvine, CA Jeff greene, CeO, Medencentive, Oklahoma City, OK hessy Ahokovi, National Benefits Administrators, honolulu, hI

Donald K. Drelich, Chairman & CeO D.W. van Dyke & Co. Wilton, CT

Brian goertz, Chairman & CeO, Zebrahealth, Inc., Kirkland, WA

Steven J. link, executive vice President Midwest employers Casualty Company Chesterfield, MO elizabeth D. Mariner, executive vice President re-Solutions, llC Wellington, Fl

SIIA New Members

Employer Members edward Johnson, ChrO, Christian Care Companies, Phoenix , AZ

David Craig landin, Administrator, virginia Commerce group Self-Insurance Assn., richmond, vA

contributing Members valerie edwards, Partner, Koeller, Nebeker, Carlson, & haluck, llP, Phoenix, AZ

The Self-Insurer

| November 2012

November 2012

The Self-Insurer