Self-Insurer Oct 2012

October 2012

32ND ANNUAL NATIONAL

EDUCATIONAL CONFERENCE & EXPO OCTOBER 1-3 • 2012

JW MARRIOTT INDIANAPOLIS, IN

www.sipconline.net

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© Self-Insurers’ Publishing Corp. All rights reserved.

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OctOber 2012 | Volume 48

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

FEAturES

Editorial Staff PuBlIShINg DIreCTOr James A. Kinder MANAgINg eDITOr erica Massey

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SeNIOr eDITOr gretchen grote

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

From the Bench

18

ART Gallery: ART influencing NAIC from within

20

Final regulations Impose reinsurance “Contribution” on Fully Insured and Self-Insured Plans Starting in 2014

32

Positioning Your Insurance Investment Portfolio 2012-2013

by Mike Ferguson

CONTrIBuTINg eDITOr Mike Ferguson

DIreCTOr OF ADverTISINg Shane Byars

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the Summer of Stop-loss

DeSIgN/grAPhICS Indexx Printing

DIreCTOr OF OPerATIONS Justin Miller

ArtIclES

InduStry lEAdErShIp looking Forward: the Implications of health care reform for the SelfInsured dialysis Market

by Lisa Greenblott

4 President’s Message 40

SIIA Chairman Speaks

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

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A Blank check for healthcare charges

by David Lubowitz JD/MBA and Sandy Hamilton MSW

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The Self-Insurer | October 2012

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PreSIDeNT’S MeSSAge Grassroots advocacy – a game we can all play

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ttendees of our national conference in Indianapolis this month will hear a lot about “the game” as we follow the theme of “raising the game” in our mission to protect and promote self-insurance and alternative risk transfer.

Of course, we’re talking about the political game in this pivotal election year. It has never been more important for SIIA to exert its strength during a time of national healthcare reform and increasing pressure on our industry from state legislatures, insurance regulators and the vastly more wealthy competitors in the traditional insurance industry.

Several SIIA members had an up-close-and-personal experience in the political game recently in Washington, D.C. I was privileged to be among a Montana delegation that visited the office of Montana’s esteemed Senator Max Baucus who is always named among the most influential members of the upper house in matters of health care.

Along with Dirk visser, CeO of The Allegiance Companies in Missoula, rod Kastelitz, Vice President of Employer Benefit Managements Services of Billings, and SIIA Chief Operating Officer Mike Ferguson, we explained why Congress, and specifically the Senate by and through Senator Baucus’ leadership in the Finance Committee, should be interested in current federal regulatory activity that could adversely affect the ability of smaller employers to self-insure and/or participate in employee benefit captives.

As we sat down with his key policy advisors I was reminded of the importance of “showing up.” Our industry is complex and not widely understood in the legislative and regulatory sectors. We need to “show up and be heard.” I am proud to call Senator Baucus a friend and we appreciate the willingness of his senior staff to listen and learn.

This was a capsule view of SIIA in action and a great example of our grassroots political advocacy. SIIA has long involved members in meetings with their senators and representatives, and that effort has ramped up during recent years and will continue to accelerate.

The key point is that you don’t have to be a high-ranking officer of our organization, or the CeO of a major employer, to gain an audience with your elected representatives. That opportunity is open to all SIIA members who will take the time to visit Capitol hill or meet their representatives in their home district offices. Either way, SIIA staff will make the appointments, provide your briefing materials and – for meetings in the Capitol – accompany you.

There is no substitute for face-to-face, person-to-person contact to create a meeting of minds that can influence public policy. For SIIA, this is the way we can play on an equal field with the giant insurance interests who outnumber us in lobbyists and outspend us in political contributions – by millions of dollars.

employer-sponsored health plans. So we have the numbers on our side.

Plus, the other great advantage is that, compared to commercial insurance, self-insured plans are more cost efficient – because the profit motive is not a factor to employers – and more flexible to meet the needs of specific employer groups through erISA federal preemption.

Now we need to step up our grassroots political efforts both on Capitol hill and in the state capitols where both legislatures and insurance regulators continue to chip away at our natural advantages.

If we can match up a SIIA member with each one of the 535 members of Congress, we can make sure that our message is heard and understood.

And beyond Washington, SIIA will guide members to influence their representatives when specific state bills warrant our attention.

The way we can protect our industry’s future is for all our team to get off the bench and get in the game.

See you in Indianapolis. n

We have two great advantages in pressing our case in the political arena. The self-insurance industry supports the health benefits of about 70 million American employees and dependents – the majority of all employees who are covered by

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The Self-Insurer

| October 2012

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The

Summer of

StOP-LOSS

by Mike Ferguson

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The Self-Insurer

© Self-Insurers’ Publishing Corp. All rights reserved.

Editor’s Note: The following story was recently published on the Self-Insurance World Blog, where SIIA Chief Operating Officer Mike Ferguson offers original reporting and commentary on legislative/ regulatory issues affecting companies involved in the self-insurance/alternative risk transfer marketplace.

The blog can be accessed on-line at http://selfinsuranceworld.blogspot.com

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hile this blog took the summer off, we have been keeping a close eye on the numerous developments related to stop-loss attachment point regulation.

Now that most of these developments have slowed down, at least for now, some exclusive reporting and commentary should be useful as those in the self-insurance industry (including those involved with employee benefit captives) take a collective breath.

Pushed and prodded by a collection of health care reform advocates, federal regulators invited interested parties to submit written comments regarding the smaller insured group health plans facilitated by stop-loss insurance with “low” attachment points.

About 150 comment letters have been submitted to date and the talking points are largely predictable.

For the critics of self-insurance, the usual canards are widely repeated. This request for information (rFI) process signaled a clear focus on self-insurance unlike anything that has been seen in recent years. But the path forward remains unclear.

That’s because the Affordable Care Act does not provide any explicit statutory authority for regulators to promulgate new rules relating to stoploss insurance arrangements… yet that may not preclude action that could achieve the same objective.

The hhS, DOl and/or Treasury Department (tri-agencies) could potentially rely on their general rule-making authority under erISA or the Public health Services Act, to play with definitions or to engage in other revisionist rule-making mischief.

The most likely scenario is that a new definition of a self-insured group health plan is crafted based on risk retention/risk transfer arrangements – thereby allowing the feds to indirectly regulate stop-loss insurance.

So how serious is this potential threat? The answer is complicated.

In a private meeting with self-insurance industry representatives over the summer, a senior DOL official downplayed the prospects that any action is imminent or even likely, explaining that they felt the rFI was necessary for the agencies to get a better understanding of how the self-insurance marketplace operates in the real world.

But conspicuously absent from the meeting, despite previously confirming their attendance, were senior HHS officials involved with the stop-loss RFI process. This was notable because it is believed that hhS has the most aggressive regulatory agenda when it comes to self-insurance. The Treasury Department was represented at the meeting but that agency has remained guarded about its interest and intent.

Any of the three agencies could initiate a rule-making process, but it is less likely if there is not a consensus among the three.

So with that in mind, industry lobbyists have been making the rounds to congressional oversight committees to encourage that they become engaged on this issue and request that the agencies stand down now that the rFI process has been concluded and there is no “smoking gun” which would justify new regulatory action.

The most substantive meeting took place just a few weeks ago with the senior policy advisors for the Senate Finance Committee. given that the committee is chaired by Democratic Senator Max Baucus, who has been supportive of selfinsurance in the past, it is best positioned to intervene.

The biggest push back by committee staffers was centered on the fact that the ACA does not require that self-insured employers cover essential health benefits (ehBs). They argued that because of this “loophole” there is incentive for smaller employers to self-insure, facilitated by stop-loss insurance with low attachment points, in order to be able to offer skimpy health care coverage as a way to save money.

Industry experts at the meeting, including executives from two leading TPAs, explained why this fear is unfounded for practical reasons. It was then pointed out that while self-insured employers are not required to cover ehBs, they will be subject to “minimum value” requirements, which essentially accomplish the same public policy objective.

But a final argument seemed to box in the Senate staffers. Even if you concede the ehB “loophole” (which this blog does not), the fact is that the law was drafted in a very deliberate way to distinguish self-insured group health plans from health insurance carriers. In this regard, any proposed changes should come back to Congress in the form of legislation as opposed to letting unelected regulators arbitrate substantive policy issues.

The discussion was concluded with a formal request that Chairman Baucus consider exercising the committee’s oversight authority and communicate to the Treasury Department accordingly. We understand that the request is still under consideration, so be sure to check back with this blog for updates.

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| October 2012

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Of course, the focus on self-insured plans with stop-loss insurance extends beyond Washington, DC. Many of our friends at the National Association of Insurance Commissioners (NAIC), have been led by the nose over the past year by health care reform advocates to take action on making it more difficult for smaller employers to self-insure through tighter stop-loss attachment point regulation.

At the NAIC summer meeting held a few weeks ago in Atlanta, the erISA (B) Working group considered a proposal to endorse “guideline amendments” to the current stoploss insurance model act related to attachment point requirements.

Clearly aware of the blowback that would be directed at the NAIC if it took aggressive action that was seen to be disruptive to the health care marketplace, Working group

Chair Christina goe of Montana tried to diffuse concerns by explaining the proposal is only advisory in nature and that the NAIC does not intend to formally amend the model act for a variety of procedural reasons.

And for good measure, committee members made it clear that they did not overstep their charge and attempt to redefine stop-loss insurance as health insurance.

Well, it is certainly nice to hear this self-awareness of the limitations to their “charge,” but multiple federal court rulings have already confirmed that stop-loss insurance cannot be defined as health insurance, so no real favor here.

And as far as considering a guideline amendment versus an amended model act, it’s a distinction without a meaningful difference.

Of the 26 states that currently regulate stop-loss attachment points,

only a few have adopted the model act without variation. So it is unlikely that an amended model act would take root across the country any time soon. No matter, as a simple NAIC recommendation on how states should regulate stop-loss attachment points could accomplish the same objective (restricting the ability of smaller employers to self-insure) much quicker.

That is because individual insurance commissioners who are already inclined to push stop-loss legislation in their states will use the NAIC recommendation as justification for action. given the technical nature of this issue, it’s easy to understand how this would be enough to persuade most state legislators to go along without asking too many questions.

The NAIC working group deferred action on the proposal until its winter meeting, which in hindsight was predictable because insurance

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| October 2012

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commissioners, like all political creatures, normally put off major policy decisions when election Day looms. let the dust settle after November 6 and get ready for more action.

This brings us to California.

As this blog has previously reported, the state’s insurance commissioner, Dave Jones, is a political creature who is interested in beefing up his credentials within the Democratic Party. So it should not be surprising that he has come out as a major proponent of health care reform, and more specifically the establishment of California’s health insurance exchange, which is expected to come online in 2014.

Self-insurance therefore became a target for political reasons every bit as much as for misinformed policy reasons in order for Commissioner Jones and his allies in the legislature to claim credit for protecting the viability of the state’s health insurance marketplace as the exchange begins to be implemented. A nice populist message for sure.

One health care broker in California perhaps summed it up best when he referred to SB 1431 as the “California health Insurance exchange Protection Act of 2012.”

Now that it has been confirmed that SB 1431 has been shelved, at least until a special session this December, we can look at the past as prologue.

equally unfortunate is that many stakeholders who will oppose SB 1431 “2.0” will likely concede the central principle once again of whether stoploss attachment points should be regulated at all and immediately begin negotiating the numbers and formula.

Yes, political realities often dictate short term lobbying strategies based on compromise, but the longer view should not be ignored in this case.

It’s been a long hot summer for stop-loss insurance indeed, which has ended without much certainty for the future of the self-insurance marketplace.

We will see whether the coming autumn chill cools off the debate or if partisan health care reform advocates continue to overplay their hand. n

The same stale arguments are certain to be dredged back up when some version of SB 1431 is brought back for consideration after the November elections, and the political posturing will be predictably crass.

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The Self-Insurer

| October 2012

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bench From the

by Steven T. Polino

tpA Breach of Fiduciary duty: A lesson learned the hard Way

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lthough third party administrators (“TPA”), are generally not erISA fiduciaries, the courts will not hesitate to find that they are when a TPA comingles funds or uses plan assets for its own purposes. This fact situation is not new. Published opinions of this type, warning of

instances in which a TPA can be held to have acted in a fiduciary capacity, have existed as early as 1997. Since then, thirteen (13) Federal District Court opinions and sixteen (16) Federal Circuit Court opinions have been decided following the same holding. What is surprising is that after all this precedent; some TPA’s are still making the same mistakes.

In a recent case decided in August of 2012 based on facts which occurred in 2010 and 2011, a TPA was held to be a functional fiduciary when it exercised control over claims funds sent by various employer clients to pay claims. Guyan International, Inc. v. Professional Benefit Administrators, Inc., Cause No. 11-3126 (6th Cir. Slip Op. August 20, 2012). The TPA comingled such funds with the TPA’s bank account contrary to its respective services agreements with each employer-Plan Sponsor and then used the claim funds for the TPA’s own purposes, causing hundreds of thousands of dollars worth of claims to go unpaid. The case does not state exactly what the TPA did with the money. Only that it failed to deposit the funds in segregated accounts and failed to pay claims with such funds.

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A. case Background Four separate Plan Sponsors each established an employee benefit plan under erISA. each employer client entered into a Benefit Management Service Agreement (“BMSA”) with the TPA. The relevant provisions of each BMSA required the TPA to pay medical providers for claims incurred under the respective Plans and included identical provisions. each agreement: 1. required the TPA to establish a segregated bank account for each Plan into which it would deposit the funds that it received from the corresponding Plaintiff for paying the medical claims; 2. authorized the TPA to pay medical claims by writing checks from such segregated account;

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3. required that the TPA would not commingle plan funds with the TPA’s own assets; and 4. required that the TPA not use these funds for its own purposes.

As previously mentioned, despite these promises, the TPA not only failed to use funds supplied by the Plan Sponsors to pay the claims incurred under the corresponding Plan, but it commingled and misappropriated those Plan funds for its own purposes. When the TPA received complaints from medical providers or Plan participants, the TPA would then withdraw funds from its main, commingled account and put that money into the respective employer accounts to pay the claim(s) in question. however, the TPA did not pay all of the claims, despite receiving money for payment of those claims from the respective Plan Sponsors. The total amount of funded but unpaid claims exceeded $1.3m.

When the TPA received Plan funds from Plan Sponsors and deposited them into an account of its choice, the TPA exercised control over those Plan funds.

B. Fiduciary Status and liability under ErISA In relevant part, erISA provides that “a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control, respecting management or disposition of its assets.” 29 u.S.C. § 1002(21)(A) (emphasis added.) The term person is defined broadly to include a corporation. Id § 1002(9).

Fiduciary status is not an all or nothing concept. The relevant question is whether an entity “is a fiduciary with respect to the particular activity in question.” Briscoe v. Fine, 444 F.3d 478, 486 (6th Cir. 2006).

The Briscoe case involved a scenario in which a TPA was held to be a functional fiduciary by exercising control over funds in a Plan bank account, among other things, to pay the TPA’s administrative fees. The Court in Briscoe reasoned, based upon § 1002(21)(A)(i), that although an entity must exercise discretionary control over managing a plan in order for that entity to become a fiduciary, an entity that exercises any authority or control over disposition of a plan’s assets becomes a fiduciary. Id. at 490-91 (emphasis added).

The threshold for becoming a fiduciary is lower for entities handling plan assets than for entities managing a plan. An entity such as a TPA becomes an ERISA fiduciary when it exercises “practical control over an erISA plan’s money.” Briscoe at 494.

In the present case, the TPA was a fiduciary under ERISA because it exercised authority or control over Plan assets. The case makes the unfortunate finding that the TPA was a fiduciary because it had the authority to write checks on the Plan account and exercised that authority. All TPA’s have authority to write checks on a plan account and are expected to do so when the Plan Sponsor funds the claim. The court should have limited its holding to those acts whereby the TPA commingled Plan assets by depositing these funds into its accounts and used those Plan funds for its own purposes.

The fact that the TPA used Plan funds in ways contrary to how it had agreed to use such assets demonstrates that TPA exercised practical control over Plan Funds.

c. contractual disclaimers of Fiduciary duty are not Enforceable.

The TPA attempted to shield itself from fiduciary liability by pointing

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to portions of its agreements that expressly state that it is not a fiduciary.

Based on the Briscoe decision and other cases, the court held that limiting language in a Administrative Services Contract does not “override [a thirdparty administrator’s] functional status as a fiduciary.” Briscoe, 444 F.3d at 492 (citing IT Corp v. general Am. life Ins. Co., 107 F.3d 1415, 1421 (9th Cir. 1997)).

conclusion Extending fiduciary status to any entity that exercises control over plan funds is consistent with Congressional intent. The plain language of 29 u.S.C. § 1002(21)(A)(i) confers fiduciary status on any entity that exercises any authority or control over plan funds.

Interpreting the statute to include entities that comingle plan funds or use plan funds for their own purposes does not implicate ordinary ministerial functions of TPA’s when paying claims from a claim fund account. erISA prohibits a fiduciary from “deal[ing] with the assets of the plan in his own interest or for his own account.” 29 u.S.C. § 1106(b)(1). The respective TPAs in the guyan, Briscoe and IT Corp cases blatantly violated these statutory commands. n Steven T. Polino is the Managing Member of the Law Offices of Steven T. Polino, P.L.L.C. Mr. Polino performs a wide variety of regulatory compliance, contract review, preparation, consultation, Plan document preparation and compliance, ERISA consultation, litigation and managed care litigation. He was formerly National Coordinating Counsel in more than twenty-six states concerning medical stop-loss and excess workers compensation litigation. Mr. Polino can be reached at (817) 992-6359 or stplaw@ sbcglobal.net.

The Self-Insurer

| October 2012

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looking Forward:

The Implications of health Care reform for the

Self-Insured Dialysis Market

by Lisa Greenblott

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W

e all know that the dialysis market has been an oligopoly since the very large for-profit, publically traded enterprises (“large dialysis organizations “or” “lDOs”) took control of the market around 2005. We also know that selfinsured plans represent an important source of profits to LDOs. In the 12 years that I have been supporting the self-insured industry I have had hundreds of conversations with folks who all share the same frustrations about this issue. Most are looking for the “silver-bullet” on how to deal with this complex, very expensive but life-sustaining treatment. While the ideal silver-bullet would be a more cooperative approach which balances the LDOs desire for profits with plans’ need to preserve assets and no doubt serve all parties better, the history and economics of the dialysis market offers only limited hope for such a solution.

With health care reform moving forward the self-insured plan landscape is changing yet again, in ways in which may make self-insured plans an even more significant target for profit-seeking. Given the adversarial approach the lDO’s have taken to the self-insured sector, cost containment strategies with the framework of health care reform are therefore likely to become even more important.

analysis, benefit caps, and plan provisions directly addressing the threat to plan solvency. Some strategies have worked better than others; benefit caps tend to be inflexible, and derivatives of Medicare are controversial at best given recent case law which challenges these methodologies. Some methodologies fit better with some plan provisions than others, but it is clear that there are legitimate cost containment strategies using sound claims analysis, careful administration of claims and appeals, and well-drafted plan language which enables plans to pay at lower rates. If properly managed and with the help of consulting experts who understand the complexities of these issues, these payments decisions will not be reversed by the courts.

Changes once again have come to the Medicare dialysis payment standards and to the self-insured health benefits plans which are likely to make plans’ ability to limit payments for out-of-network claims even more important. In particular, Medicare reimbursement is being changed to limit providers’ ability to manipulate injectable drug prices, and therefore perhaps make self-insured plans an even more important profit center in the view of the LDOs. At the same time, dialysis is likely to become a mandatory benefit subject to strict limits on plans’ ability to exert most cost controls.

The new system for Medicare payment for dialysis payments began in 2011 and will phase in during a four year period. During this period dialysis centers may choose to be paid at a new “bundled” rate or at a “blended rate”. The new “bundled” rate will be a fixed rate for all goods and services provided during the dialysis treatment, including laboratory services and injectable (and other) drugs. The initial bundled rate will be two percent below the rate dialysis providers would have received under the previous Medicare payment system. Beginning in 2012, the base bundled rate will be adjusted annually for inflation based upon a “market basket” index tracking inflation across the bundle of goods and services, minus one percent.

HEALTHCARE PORTALS AND APPLICATIONS

In response to this increased lDO market control, self-insured plans, administrators and their consultants have developed cost containment strategies that do not rely on provider-controlled factors. Strategies include specific inclusion of Medicare and commercial rates in “usual, customary and reasonable charges” (“uCr, sometimes also “usual and customary” or “usual and reasonable,” etc.) determination, increasingly sophisticated methodologies for claims

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The Self-Insurer

| October 2012

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This reformed system is intended to both eliminate incentives to overprescribe drugs, and create incentives to provide care more efficiently. While there will no doubt be various ways for a smart provider to “game” such complex new rules, in the short-term at least it is likely to substantially reduce Medicare reimbursement for dialysis, and for injectable drugs in particular.

While it is possible cost reductions will help make up the inevitable shortfall in profits, there will no doubt be increased pressure on alternative profit centers – such as the self-insured market.

At the same time that changing Medicare payment rules will increase financial pressure on self-insured plans, the health care reform mandates from the Patient Protection and Affordable Care Act (“PPACA”) have brought new limitations to plans’ ability to control such costs.

While self-insured plans apparently will not have to offer a set of required “essential health benefits,” new restrictions seem likely to eliminate or compromise some cost containment strategies. Plans will be required to comply with a variety of individual and group market and coverage reforms.

Some of these, such as prohibitions on rescission and on lifetime benefits limits, will apply to all plans, while a few do not apply to “grandfathered” employer group health plans. A “grandfathered” plan is one in which at least one individual was enrolled as of March 23, 2010.

In general, plans will be prohibited from imposing annual or lifetime limits on benefits and from discriminating against otherwise qualified health care providers. These prohibitions will at least eliminate benefits limit as a strategy, and may interfere with the ability to use networks which “discriminate” against providers who are not willing to offer discounts (the language is not very

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clear), except on the basis of “quality or performance measures.”

Being grandfathered probably does not give a plan additional leverage in this area, though it may be important to plans for other reasons.

The problem is that a grandfathered plan loses this status if it eliminates a benefit which existed, as of March 23, 2010. grandfathered plans therefore cannot implement new benefits limits either, though existing ones apparently are not affected. uCr for out-of-network providers does not, however, seem to be affected.

PPACA does impose limitations on “cost-sharing” which is defined to include “deductibles, coinsurance, copayments, or similar charges… any other expenditure required of an insured individual which is a qualified medical expense [but] not…premiums, balance billing amounts for nonnetwork providers, or spending for non-covered services.” This exception should permit plans to continue use of uCr, and the addition of plan provision which affects only the way payments are determined for out-of-network claims does not seem to be one of the actions which lose a plan grandfathered status. It therefore may be that the only cost containment strategies remaining for self-insured plans will be elimination of dialysis benefit altogether – that does seem to be permitted - the use of uCr, and development of quality and performance measures allowing selection among providers. eliminating dialysis benefits altogether seems like a drastic solution, given the importance of the treatment for those who need it.

“win” not only for plans but for patients.

But it is likely to take some time to develop and implement appropriate programs of this kind, and will require cooperation by dialysis providers and major changes to their business models.

This is not likely to be a short-term dialysis cost containment solution.

For the time being, then, it appears uCr is not likely the only legally acceptable cost containment strategy under health care reform; it may be self-insured plans’ only viable “silver-bullet” strategy. It will therefore continue to be a point of contention, particularly with lDOs facing new restrictions on their ability to manipulate governmental payments and trying to preserve important profit levels. Perhaps in the end, however, the push-back uCr makes possible will help motivate them to move to new business models which are less adversarial and better serve not only the providers but also plans and patients. n Lisa Greenblott is President and CEO of DCC, Inc. the leader in dialysis cost containment consulting and also Founder and President and CEO of Renalogic LLC a newly launched Chronic Kidney Disease (“CKD”) management firm focusing on delaying the onset to dialysis by utilizing intervention tools, wellness programs and educational services specialized for identified CKD patients. Lisa can be reach at lgreenblott@dccinc-us.com or lgreenblott@ renalogic.com or to learn more go to www. dccinc-us.com or www.renalogic.com.

Quality-and performance-based payment seems like a very desirable solution, especially if it addresses preventive care and interventions which identify individuals at risk of kidney failure and minimize risk of progressing to it; this would clearly be a

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www.A

(866) 614-4244 n www.AmericanHealthHolding.com

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The Self-Insurer

| October 2012

17

Art gAllerY

by Dick Goff

ART influencing NAIC from within

I

could be wrong (don’t laugh, it happened – once!) but it appears the ArT world is becoming more effective at stating its case within the National Association of Insurance Commissioners (NAIC) process to regulate aspects of alternative risk transfer and self-insurance.

This doesn’t mean we’re winning the war, but at least we’re on the same battlefield.

The NAIC’s working groups and task forces could still ram through so-called “model acts” for presumed adoption by states that would put self-insurance and ArT at a considerable competitive disadvantage.

A point of clarification: this column will not dwell on the fact that the NAIC has no governmental authority. It is only a professional trade association comprised of state insurance regulators, but by the leverage of its accreditation process, it can force states to adopt certain standards of insurance regulation. We think this is unlawful, unconstitutional and generally despicable, but for the purpose of this column we will refrain from haranguing our readers on those points.

In recent weeks developments have indicated a heightened degree of pushback by the ArT community. For the memorable past, NAIC’s

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standards-setting process appeared to be biased against captives and self-insurance because of many state regulators’ resistance to federal preemption by erISA and the liability risk retention Act. A notable example: the NAIC’s ERISA (B) Working Group – and please don’t complain to me about mysteriously officious titles; I don’t make them up – put off voting on a revision to the current stop-loss model act that would have raised attachment points on self-insured employee health plans from $20,000 to $60,000.

SIIA, among other organizations, raised objections to raising stoploss attachment points as being detrimental to the employee benefit plans of small to mid-size employers, and a violation of erISA federal preemption of state interference.

During floor discussion that was described as “spirited,” several speakers voiced opposition to the increase.

The working group concluded that members need more time to study the subject and would revisit the matter at the next meeting.

“That was encouraging,” said Kevin Doherty, SIIA’s representative to the NAIC. “It was clear there was substantial opposition to the change.

But in reality only a relatively few states have adopted the existing model act, and to make a rule part of the accreditation standards requires a majority vote of all the states, which seems unlikely to me.” “however, one rumor that surfaced indicated the working group may vote

on this matter during a subsequent phone conference, which I hope would not happen.”

Kevin is the founding president of the revived Tennessee Captive Insurance Association and attorney with Nashville firm Burr & Forman LLP. “I sense that the captive domicile states are working together more effectively now within the NAIC structure, and that gives me some optimism about how captives and self-insurance will be treated.” he also points out that Julie McPeak, Tennessee Insurance Commissioner with long experience with captives, now serves as chair of the NAIC’s life (A) Committee, a highly prestigious position.

Within another NAIC group, the risk retention group Task Force, the future fate of federally-sanctioned risk retention groups still largely hangs on an old argument on whether or not rrgs must adapt to statutory accounting for reports to their domiciliary state.

Kevin Doherty says the glacial deliberative process hasn’t visibly accelerated, but that he believes the NAIC will continue to move toward regulating rrgs on the same standards as traditional insurance companies, which would limit their effectiveness in flexibility and multi-state reach.

Another observer, larry Mirel, the former District of Columbia Insurance Commissioner now associated with Wiley rein in DC, watched closely the proceedings of the NAIC’s Captive and Special Purpose vehicle use Subgroup as it studied solvency requirements that would be stringent to captives.

© Self-Insurers’ Publishing Corp. All rights reserved.

Part of the deliberative process was an exchange of views between Joseph Torti, the rhode Island Insurance Commissioner who chairs the subgroup’s full e Committee, and William White, the District of Columbia Insurance Commissioner, both of whom had been invited by the subgroup to speak to the issues. Aside from the expected opposing substance of their remarks, Mirel was drawn to their balance: “The exchange of views showed they recognize the need for smart regulation to protect against real risks,” larry reported. “The NAIC should not propose regulations for the sake of regulating, but to support a robust insurance market while protecting consumers.”

Mirel also observed that a good number of regulators and captive bureau managers from captive domiciliary states are now included in the NAIC standards-setting process, with hopes that the feared bulldozing of captive interests may not occur.

All of this points to the principle of changing a system by becoming part of that system. I’m still not a fan of the NAIC but I’m glad that some enlightened people are helping to influence its decisions. n

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Dick Goff is managing member of The Taft Companies LLC, a captive insurance management firm and Bermuda broker at dick@taftcos.com.

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Contact Us today to see the model in action! www.wspactuaries.com | Email: info@wspactuaries.com

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The Self-Insurer

| October 2012

19

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

Final regulations Impose reinsurance “contribution” on Fully Insured and Self-Insured plans Starting in 2014

T

he Affordable Care Act (ACA) provides for a State-based transitional reinsurance program to help stabilize premiums for coverage in the individual health insurance market during the first three years of operation of the exchanges (2014-2016). The program is designed primarily to transfer risk from the group market to the individual market. The program is funded through “contributions” from fully insured and self-insured plans. The statute sets forth the aggregate amount to be collected – $12 billion in 2014, $8 billion in 2015 and $5 billion in 2015. The aggregate amount is divided among plans subject to the fee as provided by the Department of health and human Services (hhS).

On March 16, 2012, HHS issued final regulations regarding the reinsurance program (the “Final regulations”). Among other provisions, the Final regulations provide that the contribution requirement will be imposed on a per capita basis based on the number of enrollees and that the contribution is payable to hhS by health insurance issuers and third-party administrators on behalf of self-insured plans (called “contributing entities” in the Final regulations). The per capita amount, as well as other details relating to the program, will be set forth in future guidance

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© Self-Insurers’ Publishing Corp. All rights reserved.

that is scheduled to be issued by hhS no later than October of this year in the form of federal “benefit and payment parameters.” Initial projections are that fees could well exceed $60 per covered life per year so covered plans should begin now to assess their exposure and budget for the expense

Background – the reinsurance program The transitional reinsurance program is one of three risk-spreading mechanisms that are provided under the ACA that together are designed to mitigate the potential impact of adverse selection and provide stability for health insurers that issue individual and small group health insurance policies. Adverse selection occurs when each new health insurance purchaser understands his or her own potential health risks better than health insurance issuers do, and health insurance issuers are therefore less able to accurately price their products. As described by the hhS, the reinsurance program is designed to reduce the uncertainty of insurance risk in the individual market by making payments to insurers for high-cost enrollees in the individual market. Theoretically, this will reduce individual market rate increases that might otherwise occur because of the immediate enrollment of individuals with unknown health status, potentially including those currently in State high-risk pools.

Payments under the reinsurance program are funded by contributions payable by health insurance issuers and third-party administrators on behalf of self-insured group health plans. under the statute, a total of $25 billion will be collected for the three-year period 2014-2016, $20 billion of which will be used to fund the reinsurance program and $5 billion of which will be paid into the general funds of the u.S. Treasury. In addition to these statutory amounts, States may impose additional contribution requirements to fund administrative expenses associated with the reinsurance program and/or to provide for additional reinsurance payments. each State decides whether to establish a reinsurance program or whether to have hhS administer the reinsurance program for the State. If a State establishes a reinsurance program, the program must be operated through a reinsurance entity that meets certain requirements.

Application of the contribution requirement to Group health plans Contribution amount. under the Final regulations, the contribution requirement will apply on a per capita basis with respect to each individual covered by a plan subject to the contribution requirement (such individuals are referred to in the Final regulations as a “reinsurance contribution enrollee”). As noted above, the amount of the per capita contribution, as well as other details, will be set forth in future guidance to be issued by HHS in the form of “benefit and payment parameters.” The HHS benefit and payment parameters are expected to be issued

by October 2012.

Plans subject to the contribution requirement. The contribution requirement is imposed on health insurance issuers in the case of fully insured individual and group health plan coverage and on third-party administrators on behalf of self-insured plans, including governmental plans. The contribution requirement does not apply with respect to plans that provide coverage solely of “excepted benefits” as defined under HIPAA (e.g., coverage for a specified disease or stand-alone vision or dental coverage). The per capita requirement will impose an especially onerous administrative and financial burden on plans such as employee assistance programs (eAPs) and health reimbursement arrangements (hrAs) that

© Self-Insurers’ Publishing Corp. All rights reserved.

do not qualify as excepted benefits if the program or arrangement does not currently keep track of covered dependents and/or provides limited reimbursement benefits. There is no exception to the contribution requirement for grandfathered plans.

Payment process and timing.

In the case of self-insured plans, the third-party administrator is responsible for paying the contribution on behalf of the group health plan. When an insurer is acting as a third-party administrator under an ASO contract, the insurer should be responsible for payment of the contribution as a third-party administrator on behalf of the plan, not as an insurer.

The proposed regulations defined “third-party administrator” to mean the claims processing entity for a self-insured group health plan. The preamble to the proposed regulations provided that, if a self-insured group health plan processes its own claims, the self-insured plan will be considered a third-party administrator for purposes of the reinsurance program.

The final regulations do not define the term “third-party administrator,” leaving this to future guidance.

The final regulations provide that the required contribution is to be paid as follows: • Contributions on behalf of selfinsured plans are paid by the third-party administrator directly to hhS. • If a State does not establish a reinsurance program (so that the reinsurance program is run by hhS), all contributions (including by insurers for fully insured plans) are paid directly to hhS. • If a State establishes a reinsurance program, then the State determines how contributions with respect to fully insured plans will be collected – i.e., the State can provide that contributions

The Self-Insurer

| October 2012

21

with respect to fully insured plans will be paid by the insurer to the reinsurance entity that administers the State program or paid to hhS. • Special rule for additional contributions: The final regulations authorize States to impose additional contributions in excess of those required under the statute either for administrative costs or for additional reinsurance payments. Additional contributions for administrative costs are paid either to hhS or to the applicable State reinsurance entity in the same manner as the contributions specified in the statute. If a State imposes additional contributions to fund additional reinsurance payments, such additional amounts (whether imposed on fully insured or self-insured plans) must be paid to the applicable

State reinsurance entity (that is, hhS will not collect any additional contributions to fund additional reinsurance).

The Final regulations provide that contributions payable to hhS must be paid on a quarterly basis beginning January 15, 2014. States have flexibility to determine the timing of contributions payable to applicable reinsurance entities. Insurers and thirdparty administrators are required to provide to hhS or to the applicable State reinsurance entity data required to substantiate the contribution amounts in the manner and timeframe specified by the State or HHS. If contributions are paid to hhS, hhS is responsible for determining the proper amount to apply to reinsurance payments for a State, the amount to be transferred to the u.S. Treasury and the amount, if any, to be used by a State for administrative expenses of the reinsurance program. If contributions

are paid to a State reinsurance entity, the reinsurance entity is responsible for making these determinations.

Enforcement of the contribution requirement. The proposed regulations provided that all contributions, including those on behalf of self-insured plans, would be paid to the applicable State reinsurance agency.

The preamble to the Final regulations indicates that the final rule requires payments on behalf of self-insured plans directly to hhS due to concerns regarding the States’ lack of authority and oversight over self-insured plans.

The Final regulations do not address enforcement mechanisms that hhS may use with respect to self-insured plans.

For example, it is not clear what action hhS may take regarding a third-party administrator that does not collect a contribution from a self-insured plan or a self-insured plan that does not pay the contribution to the third-party administrator for remitting to hhS. n

Attention CFO’s & Plan Fiduciaries On a consistent basis, claims processors use plan assets to pay employee hospital bills, WITHOUT EVEN SEEING THE ITEMIZED STATEMENT, which contains the details of every charge.

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888-866-7940

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The Self-Insurer

| October 2012

23

A

BlANK CheCK

for

Healthcare charges

by David Lubowitz JD/MBA and Sandy Hamilton MSW

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© Self-Insurers’ Publishing Corp. All rights reserved.

costs are Escalating and checks are Being Written

O

ver the past years, we have certainly seen significant changes in the health insurance and healthcare marketplace and there is certainly more to come. The increase in million dollar plus claims and the increase in health care spend is staggering. Some point to change in the industry as the catalyst for the surge in cost. Within the last few years, the industry has seen the pre-existing condition clause eliminated, a cap on benefits removed, as well as a greater focus on preventive care and mobile technology. All of these factors may be contributors to the rise in healthcare spending.

Although Americans benefit from many of the investments in healthcare, the recent rapid increase in cost, coupled with an overall economic downturn has placed great stress on the systems used to finance healthcare, including private employer-sponsored health insurance coverage and public insurance programs. government programs, such as Medicare and Medicaid, account for the majority of healthcare spending, but they have increased at a slower rate than private insurance, which has risen dramatically over the past two decade.1

systems. It is a fact that all costs are increasing across industry lines and this also applies to the operations of medical facilities attracting competent staff and maintaining quality standards and reputation.

Aging and Growth of our Society: Our society is faced with the reality that people are living longer and population is growing, therefore the aggregate cost of benefits continues to rise at an alarming rate. An increasingly significant issue for hospitals is the increase in the number of patients covered by the public sector, which now accounts for 60% of all admissions.4 The utilization of healthcare and demand continues to follow that growth.

Blank checks are Being Issued

Total = $2.3 Trillion Many theories and hypotheses have been identified as the reason for escalating healthcare costs including: Technology: Perhaps some of the greatest and most costly changes have been the medical procedures being offered and the technology used to treat patients. With new and improved lasers, robots, x-rays, CT and PeT Scans, MrI’s, and new drugs hitting the market, the medical field has undergone a very expensive transformation. New technologies, such as the robotic surgery, are becoming more common. More than 36% of hospitals already perform robotic surgery.2 These hospitals compete against one another by advertising and publicizing their new equipment to encourage the demand.

Hospital care: hospital care accounts for nearly one-third of the nation’s annual health care expenditures.3 According to the American hospital Association, factors driving up hospital costs include the rising cost of goods and services used for patient care such as workers, equipment and information

© Self-Insurers’ Publishing Corp. All rights reserved.

Often, blank checks are being issued on claims without review or scrutiny. Who is watching the bottom line of the payer of healthcare claims? The system has grown so huge that simple accuracy questions go unanswered. Is this reasonable, is the service itemized and billed correctly, is the bill appropriate for the diagnosis and care received?

Claims paid erroneously result in an increase in the cost of healthcare, affecting all payers, including self-funded employers, individual healthcare groups, and reinsurance companies. higher expenses lead to lower profits and/or higher premiums.

Companies and consumers have all fallen victim to hospital stay overpayments and often times are unaware of it. “... 90% of the roughly 31 million hospital bills processed in the u.S. contain errors” according to a study released by harvard law School and harvard Medical School.

“Overcharges make up an estimated 66% of these errors”, as reported in Money Magazine.5 In a system as complex as medical billing, errors are bound to be made.

The Self-Insurer

| October 2012

25

Sometimes they are honest human errors that occur when someone accidently keys in the wrong code.

Catching that error is often difficult to impossible due to the automation of the claims paying process. even the simplest medical procedure can cost tens of thousands of dollars. One error could add several thousand dollars to an already hefty bill. even if insurance covers the entire bill, the excess cost will eventually be passed along in the form of higher insurance premiums, therefore it’s in everyone’s best interest to detect and correct hospital billing errors. experimental procedures, bundling and unbundling, medical necessity, quality of care and Medicare never events can be included in claims’ itemization. The list goes on and with that the price goes up.

the check Stops here…

Many companies offer cost containment services and solutions

to assist payors as well as individual patients in reviewing, auditing, scrubbing, negotiating, and repricing medical claims. Both prospective and retrospective claim review services are described below and can be offered as a whole, in part, or stand alone depending on the company.

Bill Review Software – is an automated/computer generated review of medical bills. Without the oversight of medial professionals, many potential edits and the recognition of quality of care issues are often lost.

The professional medical scrutiny of claims uncovers the validity of a bill.The following list shows common categories of medical billing issues uncovered during inspections and would otherwise go uncovered without the probing of a professional reviewer. When choosing a reviewer it is important to determine their credentials and experience as results can vary.The American Association of Medical Audit Specialists (www.AAMAS. org) provides information on Certified Medical Audit Specialists.

Bill Review – is an evaluation line by line of itemized medical bills, preformed by a physician, nurse or coder to define and adjust line item charges on all medical bills. A Healthcare professional identifies issues in the bills that are not consistent with medical protocols. Some examples are the identification of errors, multiple charges and quality of care points, and the validation and/or correction of charges within the bill.

• Duplicate Billings: Detailed review of bill uncovering duplicate charges which were categorized under different billing elements, such as operating room, anesthesia or supplies.

• Incorrect Billing for implants and experimental devises: The identification of unused or faulty devices billed or for experimental devices that have not yet been approved by the FDA.

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© Self-Insurers’ Publishing Corp. All rights reserved.

Think IHC Risk Solutions At IHC Risk Solutions, our goal is to be the key to your success. As one of the nation’s largest medical stop-loss direct writers, we also understand that our producer partners don’t want to be surprised by coverage gaps. From the rst RFP submission through the renewal and everything in between, we strive for an uncomplicated and effortless process.

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The Self-Insurer

| October 2012

27

www.IOARE.com 610-940-9000 Medical Stop Loss - Provider Excess - HMO Reinsurance Workers Compensation & Personal Accident Reinsurance

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© Self-Insurers’ Publishing Corp. All rights reserved.

• Incorrect room Charges: Private room rates charged for semi-private rooms, private room billed at private room rate when semi-private accommodations were not available, and charges for a higher level of care when patient was at a lesser level. Often the bill does not reflect appropriate step down levels of care.

• upcoding: review medical records to verify accuracy of services billed.

• Keystroke errors: Common in manual adjudication and can be costly.

• Bill review of Medical records- Following a Bill review, a call for medical records may be warranted. The medical records are then compared to the itemized bill to assure compliance and appropriateness of services.

Bill Audits On-Site – This service provides for a healthcare professional, usually a nurse, to visit the hospital and complete a personal audit of the bill. On site audits may also uncover discrepancies by the facility as to undercharges and are required to be included in the final report.

Peer Reviews – These are “high level” reviews that are provided by a specific physician who specializes in this area of medicine, whereby an expert opinion is usually required for legal testimony.The peer review specialist reviews the bills, as well as the medical records and offers a “medical expert” perspective on the status of the bill.

Repricing – When the medical bill is sent through a network or paradigm of networks (primary, secondary or wraps) that automatically apply a discount.These bills usually have not been reviewed for errors or medical issues because of the automation.

Although this methodology can often produce large discounts due to per diems and cases rates, the downside is that often discounts are smaller and do not allow for a reasonable reimbursement unless the claim had previously been reviewed and validated or adjusted. Additionally, network repricing is often not secured in writing in order to avoid any future balance billing issues.

Negotiations – experts in the health and legal areas offer personal contact with the providers to clear all bill concerns and secure a “clean claim” for payment.The best and most secure accomplishments are often in writing with a sign-off by the provider as acceptance of the agreed upon claim payment.This service is best preformed by a legal or medical professional.

Charges Down Negotiations – Otherwise known industry wide as a “traditional” negotiation by requesting a discount or additional write offs based on the provider’s charges, as billed on the claim.

Cost up Negotiations – By utilizing the hospital’s own cost data as filed with the federal government, this strategic negotiation process is transparent and is easily defensible when communicating with the provider to settle the claim for the fair and reasonable value of the services. This type of negotiation generally produces much larger savings than the traditional Charges Down negotiation.

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The Self-Insurer

| October 2012

29

David Lubowitz, JD/MBA Managing Director and Founder, Assent Medical Cost Management

Cost Up Vs. Charge Down

Sandy Hamilton, MSW Senior Business Development Executive, Assent Medical Cost Management

50% 40% 30%

45%

20%

Assent Medical Cost Management is a leading cost containment company with experience in the domestic and international markets, which specializes in solutions for in and out of network medical claims in order to control medical cost. For more information, contact Sandy Hamilton, MSW at shamilton@ assentmcm.com, 877 882-8289, ext.

572, or visit www.assentmcm.com.

19%

10% 0%

Cost Up

Charge Down

Selection of a cost containment partner

Martin A.B. et al., “growth In uS health Spending remained Slow in 2010; health Share of gross Domestic Product Was unchanged from 2009,” health Affairs, 2012

1

Choosing a vendor(s) who will assist your healthcare plan to uncover and secure savings that have been left on the table, should be an on-going process. While each claim is unique so are each company’s strengths and challenges. Professional vendors should operate in an honest and upfront manner with both providers and payers.

The goal is to practice in an environment that provides fairness, transparency and longevity for all parties. Finding a vendor that is able to obtain secure, legitimate, reproducible, consistent, and favorable results is vital to all at risk. reviewing the negotiation results obtained by your cost containment company should be done on a regular basis to evaluate the effectiveness.

6 reasons healthcare costs keep going up By Parija Kavilanz CNNMoney July 12, 2012

2

Kaiser eDu.org health Policy-uS health Cost

3

Kaiser eDu.org health Policy-uS health Cost

4

Needhelppaying bills.com, Fraud guides.com

5

If you have a vendor that appears to be too good to be true, they probably are.

Negotiation companies offering guaranteed successes that are huge and average savings that are unbelievable cannot always be trusted. While there are times when a bill has a duplicate charge and the correction of the bill drives the percentage of savings through the roof, beware! All bills will not provide the same return.

That being said, Cost Containment vendors are very critical to maintaining leverage on healthcare spending. While each and every bill need not be reviewed and negotiated, all out of network bills should be “touched” and all in-network claims, at a certain threshold, should be pended for review.

Your best defense is a good offense, therefore setting up your protocols to stop automated processes and review a bill is the best offense. Protect your customer and protect your fiduciary responsibilities by protecting the bottom line. n

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© Self-Insurers’ Publishing Corp. All rights reserved.

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| October 2012

31

positioning your Insurance Investment portfolio 2012-2013 by Carl E.Terzer

I

nto this autumn of 2012, we continue to read contradictory headlines and statistics on the economy and securities markets

and most often are left to guess at the possible unique implications for insurance portfolios. This article will briefly examine some of these conflicting signals and attempt to direct attention to considerations that are most appropriate for insurance executives hoping to limit downside risks without completely forsaking any upside opportunities that the market may present.

uS Economy direction(s) After some slow and uneven economic progress and a relatively

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good summer for the stock market, much of what you may be reading has been particularly gloomy. For example, consider the following headlines from reuters (9/4/12): • “Manufacturing shrank at its sharpest clip in more than three years in August, the third month of contraction in a row, and firms hired the fewest workers since late 2009, a survey on Tuesday showed.

• The Institute for Supply Management said its index of national factory activity fell to 49.6 in August from 49.8 in July. The reading fell shy of the 50.0 median estimate in a reuters poll of economists. A reading below 50 indicates contraction in the sector.

• The index’s employment component fell to 51.6, the lowest since November 2009, from 52.0 in July.

• New orders, a forward-looking sub-index, fell to 47.1 in August, the worst showing since April of 2009. It stood at 48 in July.

• The exports index ticked up to 47 last month from 46.5 in July but remained in contraction territory as recession in parts of europe and slower growth in Asia sapped demand for u.S. goods.”

Notwithstanding the depressing picture painted by these statistics, there is little talk of recession at the time of the writing of this article. Data from the Center

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for research on economic and Financial Cycles (CreFC) seems to also allay such fears. The graph below left indicates a low probability of recession, albeit with a potentially meaningful time lag. The CreFC graph below shows that perhaps there should be less concern about the health of our economy and correspondingly, a less defensive position for insurance portfolios might be warranted. however, it should be noted that the indicator can change very rapidly as happened between March and April of 2011.

Can the global economy continue its bumpy road to recovery? When can the securities markets deliver returns approaching historical averages?

buying or selling environment? The chart below indicates a mildly positive trajectory of corporate earnings growth for trailing twelve month earnings (TTM).

If we were to use low P/e ratios as a gauge to the stock market as underpriced, an increasing “earnings” denominator of the TTM P/e ratio, as indicated from the chart above, may signal a “cheap” equity market. however, when using the TTM P/e’s arguably more refined measurement, called the Cyclically Adjusted Price earnings ratio, abbreviated as CAPe1, a conflict emerges. The CAPE refinement includes the 10-year average of “real” (inflation-adjusted) earnings as the denominator. here are the current market statistics2 for both measures.

• TTM P/e ratio = 15.9 (15.9) • P/e10 ratio = 21.5 (21.6)

Market Behavior The fixed income (bond) market had been in or near an interest rate and bond yield environment that is at historical lows. In fact, “real returns” (inflation adjusted) are negative for many bonds …and that’s not even the bad news! The bad news will come when a change in Fed policy occurs to allow for the normalization of interest rates. This inevitable situation may cause great pain for many bond holders. For now, it appears that speed and magnitude of normalization will be an issue to contend with in or around 2014. In the meantime, it seems apparent that bonds will continue to bounce around with low single digit returns now that the 30 year bull market is dead. On the other hand, the uS stock market situation is far less clear. Notwithstanding the fairly strong showing this summer, and some believe that there is more life to this bull, there is an increasing amount of speculation around a correction, perhaps of major magnitude, this fall.

An indication of direction may be embedded in the answer to the more vexing question: are stocks over- or under-priced? That is, are we in a

© Self-Insurers’ Publishing Corp. All rights reserved.

This presents a conflicting picture and so, the question remains as to whether or not the uS equities market is under- or over-priced from a historical perspective?

Making sense of the statistics?

In setting investment policy based on objectives and risk tolerance, insurance executives also consider external factors and sort through economic information and market data and determine what is probable, possible, irrelevant or really meaningful as it relates to their investment programs. More importantly, they need to understand the implications of possible events or trends on their portfolio and what actions, if any, are needed to capitalize on market opportunities or avoid pitfalls.

To attempt to make sense of this information, one might attempt to

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separate the bigger, more important topics from the noise of the details, a few of which we have addressed above.

Without completely ignoring the short term, tactically oriented, often conflicting market that we hear or read daily, let’s evaluate the more important macro issues facing investors over the next several quarters. Arguably, the short list of these longer term market issues should include: 1) the impact of possible outcomes of the uS election; 2) the “fiscal cliff ” and US tax policy in general; 3) uS monetary policy; 4) the euro situation and 4) slackening global manufacturing and its implications for economic growth. examining these topics to gain an understanding of possible strategies that will successfully defend portfolio values and, if possible, also position portfolios to benefit from any market upside is a worthy exercise.

First, let’s briefly look at the

upcoming election and tax policy.

Many believe that any impact from the election will be muted since the correlation between the political party(s) in power and economic/ market performance is not clear. The “fiscal cliff ”, a combination of tax increases and spending cuts set to go into effect in January 2013, could have a significant impact. However, consensus opinion seems to indicate, that when push comes to shove, politicians will not allow our struggling recovery to be impeded or damaged by a matter so obviously under their direct control.

It is anticipated that as the deadline is neared, Congress will incorporate temporary measures, during the lameduck session, to carry us into 2013 and allow the incoming, newly elected government to do the heavy lifting of finalizing the negotiations.

Therefore, focusing on monetary

policy will be a key issue for insurers.

With predominantly fixed income (bond) portfolios, damage control in a rising interest rate environment will be a key concern. Insurers and their investment managers should closely monitor portfolio duration. Duration, measured in years, indicates the sensitively of the portfolio’s market value, to changes in interest rates. each year of portfolio duration equals the percentage change in portfolio market value for a 1% change in interest rates.

For example: • Insurer’s portfolio duration = 5 years • Interest rate increase = 1% • Bond portfolio market value declines = 5% The extent of the problem becomes more apparent if rates normalize quickly and settle in at 3, 4 or 5%. Ideally, portfolio durations should

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be matched to the insurer’s liability durations, sometimes called bond portfolio immunization, a basic tenant of asset/liability management (AlM). however, consideration should be given to shortening portfolio durations ahead of anticipated interest rate increases to limit potential portfolio market value declines. In addition to the threat of rising interest rates, insurers should be cautious about the credit quality of the portfolio since rising rates will take liquidity out of the market. This process may pressure weaker companies in need of raising cash through bond offerings. This situation can potentially move the economy into a less favorable part of the credit cycle, typically one of increasing default rates. The Fed’s easy money policies can shield weaker companies by providing them easier access to cheap funds. These policies, along with Federal deficits may cause yet another significant issue: future inflationary pressures. Bonds of longer maturity will suffer greatly under inflationary conditions. Finally, equity portfolios should benefit in a rising interest rate environment. Stocks are inversely correlated to bonds, thereby illustrating a basic benefit to asset diversification in fluctuating markets. looking at the euro situation is more complex due to the set of variables and the amalgamation of political, demographic and economic issues involved. The current recession in euro-land, if prolonged, can lead to the much-discussed potential for a daisy chain of Sovereign defaults and/ or force a collapse of the euro as a currency. Such events, risks which are arguably at least partially priced into the markets, have the potential of causing a lehman-type calamity. Adding to the grim outlook, caused primarily by the heavy debt load of several countries, are socialist policies that clash

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with demographic trends. An aging population supported by fewer workers will make the road to recovery significantly steeper, if even attainable given the “welfare state” of many of these countries. On this matter, we would suggest that insurance investment portfolios avoid speculating on the timing of any potential recovery in Euro land. More specifically, we suggest focusing investment in non-European Sovereign or corporate securities of multi-nationals that are not predominantly dependant on euro economies for earnings growth.

Finally, slackening uS and global manufacturing is a clear sign of a slow-down in the global recovery. Since economic and market performance across countries is more highly correlated in an economic downturn than in upturns, it would be generally advisable to be: 1) conservatively positioned if the global recovery stalls, or worse; 2) well diversified to take advantage of global market performance inconsistencies in the event of continued global growth or acceleration and 3) positioned in stronger, less speculative markets if the slow recovery continues at pretty much the same speed.

Strategies for Insurers For insurance “reserve” portfolios, assets that back liabilities and an insurer’s claims-paying ability, “caution” is the word. In short, insurance executives will have to learn to become comfortable with lower returns from their bond portfolios.

They should avoid the temptation of instructing or allowing investment managers to “reach for yield” by increasing maturities and/or decreasing credit quality. rather, they should look to complement a high quality bond reserve portfolio with other

© Self-Insurers’ Publishing Corp. All rights reserved.

bond or bond-like asset classes such as high yield, convertibles, preferreds and perhaps reITS to their allocations to optimize risk adjusted returns if their risk tolerance permits.

Similarly, for “surplus” portfolios, insurance executives should consider broadening the allowable asset classes to include non-uS equities and alternative investments. For example, the somewhat typical 75% core bond/ 25% S&P 500 equity allocation of many P&C insurers will not be the best performing strategy in the markets that lay ahead. Better risk adjusted returns will be attained through additional diversification. Allocations to emerging markets, hedge funds, alternative investments and securities uncorrelated to the markets (e.g. cat bonds) might be considered. With regard to equities, increased capitalization diversification (e.g. all-cap mandates vs S&P 500), or

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for larger insurers, select sector mandates (e.g. technology, healthcare, energy) will probably serve insurance portfolios best. For those wishing to be conservatively postured in equities, avoiding eTF’s/index funds and actively managed mutual funds would also be recommended. Since these vehicles cannot hold cash, or are severely restricted from doing so, investors will typically bear the full force of any downturns in the equity markets. In defense of good active managers, and without endorsing market timing as an alpha generation strategy, many managers will produce superior risk adjusted returns for clients over a business cycle. This is accomplished by correctly timing investments and putting cash into the market to capture rising market returns or disinvestment, holding some powder dry for better buying opportunities, to avoid downturns. n this concept originated with Benjamin Graham but more recently reintroduced and refined by Yale professor Robert Shiller

1

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Carl E. Terzer is Founder and Principal of CapVisor Associates, LLC, an SECregistered investment advisor, that specializes in providing advisory services consisting of highly customized investment management programs to the alternative risk markets. He brings more than 27 years of insurance asset management experience, over 12 of which have been focused on working with Captives, Self Insurers, RRG’s, etc., to the task of correlating clients’ investment strategy with their business objectives and optimizing their investment programs.

Data through September 4, 2012

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Do you aspire to be a published author? Do you have any

stories or opinions on the self-insurance and alternative risk transfer industry that you would like to share with your peers?

We would like to invite you to share your insight and submit an article to The Self-Insurer! SIIA’s official magazine is distributed in a digital and print format to reach over 10,000 readers around the world. The SelfInsurer has been delivering information to the selfinsurance/alternative risk transfer community since 1984 to self-funded employers, TPAs, MGUs, reinsurers, stoploss carriers, PBMs and other service providers.

Articles or guideline inquiries can be submitted to Editor Gretchen Grote at ggrote@sipconline.net.

The Self Insurer also has advertising opportunities available. Please contact Shane Byars at sbyars@sipconline.net for advertising information.

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SIIA ChAIrMAN SPeAKS Alex Giordano

If you’re a first-timer at SIIA

W

elcome to the 32nd Annual SIIA educational Conference & Expo! If this is your first SIIA conference you will likely remember it vividly, because your first experience at an organization event sets your expectations and goals for all the rest to come. I’m going to repeat some of my points from last year’s Self-Insurer column in the conference issue – and I can do that because this conference’s first-time attendees didn’t get to read that sage advice.

We have a good size rookie class for this conference, and they include an impressive number of executives from the top levels of the insurance industry who believe SIIA’s educational efforts are important enough to contribute their expertise and credibility. Many CeOs, Presidents and other top tier executives are leading seminars during their first SIIA experience.

This is SIIA’s first national conference to be held in Indianapolis, and so even the veteran members anticipate something new here. Our organizing committee aims to present a good balance of education, exhibits and good old one-on-one networking opportunities. I hope you take a fistful of business cards with you to help stimulate your business.

If you have registered for the golf tournament on Monday you’re in for a real treat. The Brickyard Crossing golf Course is one of the most interesting courses in the country because several holes are within the two-and-a-half mile paved oval of Indianapolis Motor Speedway, still the world’s greatest auto racing track. Best of all, the tournament supports the good work of the Self-Insurance educational Foundation, SIIA’s educational partner that is spreading the gospel of self-insurance among important people such as members of the u.S. Congress.

Sometime this week it will likely occur to you that you have joined a unique organization that I believe is unlike any other business group. That’s because we are shot through with missionary zeal for self-insurance that raises our industry to the level of public service. And because we have shared goals, the members of SIIA tend to appreciate one another more than you might think for the usual trade association.

Our gatherings over the years become more like a fraternal or college homecoming but without the dance. I hope you have that same feeling as your conference participation builds through coming years.

Monday afternoon’s schedule includes SIIA’s annual membership meeting and pre-conference educational sessions. Then the exhibit hall will open for the first time for a gala Networking Reception from 4:30 to 6:30. You’ll be astounded by the broadest possible array of self-insurance products and services, and many exhibit booths will have interactive engagement features to help you get acquainted.

After a pause for dinner on your own or with new friends, SIIA-approved hospitality suites in the hotel open at 8 p.m. and stay in business until 11.

Counting all the receptions and hospitality events, you’ll experience a marathon of networking conviviality.

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On Tuesday and Wednesday mornings the networking continental breakfast is served at 8 a.m. and the general Sessions begin at 8:30. You won’t want to miss either of these, as dual headlining keynote speakers are on tap: famed entrepreneur and former Apple CeO John Sculley on Tuesday and political commentator Stephen hayes on Wednesday.

The real meat of the conference occurs in breakout seminars including the pre-conference sessions on Monday afternoon and two full days of sessions on Tuesday and Wednesday, with breaks that include networking luncheons in the exhibit hall. Seminars are conveniently organized into tracks serving SIIA’s specialty sections: Alternative risk Transfer, health Care, Workers Compensation and International Business. I absolutely guarantee that you will learn new concepts and techniques that you can put to work immediately back in the home office.

Capping off the proceedings will be our annual conference party on Wednesday evening, aptly titled “SIIA’s Oktoberfest.” heck, we may have our homecoming dance after all, even if it’s a polka.

That’s it for your orientation. After this first conference you’ll be a veteran member and hopefully on your way to full participation in SIIA events via committee memberships and leadership roles. And next you’ll be able to help initiate the rookies at the 2013 annual conference. n

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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

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regular Members company name/ Voting representative Tina lucchesi, President, Accelera health, Alameda, CA

CHAIRWOMAN, HEALTH CARE elizabeth Midtlien, Senior vice President, Sales Starline uSA, llC Minneapolis, MN

Julie Short, Carrier Integration, BeniComp Advantage, Fort Wayne, IN randy Wright, President, CWI Benefits, Inc., greenville, SC

CHAIRMAN, INTERNATIONAL greg Arms, Global Head, Employee Benefits Practice Marsh, Inc. New York, NY

haveen roy, executive Director, Data Marshall Inc., Albertson, NY Connie Bednar, vice President, TPA Services, geisinger System Services, Danville, PA lori Brown, vP, Maxor Administrative Services, llC, Amarillo, TX

CHAIRMAN, WORKERS’ COMPENSATION Skip Shewmaker, vice President Safety National St. louis, MO

Jim lacoste, Managing Partner, MlA International, llC, greenville, SC Jaime Abreu, executive Director/CeO, Orange Co. Foundation for Medical Care, Irvine, CA

directors

Dan Kuhn, CeO, Selected Market Insurance group, Orange Park, Fl

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

Dick Sigwarth, vP Operations, SISCO, Dubuque, IA

ronald K. Dewsnup, President & General Manager Allegiance Benefit Plan Management, Inc. Missoula, MT Donald K. Drelich, Chairman & CEO D.W. Van Dyke & Co. Wilton, CT

Wendy Dine, Senior Account Manager, Strategic risk Solutions, Concord, MA Kevin Manthorpe, President, TransAtlantic Insurance, Charlotte, NC Michael Tuomey, Business Development & Vendor Relations, WlT Software, Clearwater, Fl

Employer Members

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

lyn Collins, HR/Benefits Administrator, Agl Welding Supply Co., Clifton, NJ Joyce Bitner, hr Manager, holland Colours Americas, richmond, IN Patrick harrington, Plan Administrator, Michigan retail hardware Assoc., Inc. (MrhA), lansing, MI Dennis rees, President, rees Consulting, Inc., St. louis, MO

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Corp. All rights reserved.

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